Accounting Policy Choice and Creative Accounting: BHP Case Study

This report examines the intricacies of accounting policy choices and creative accounting practices, focusing on the BHP company's 2017 annual report. It addresses the requirements of accounting policy choice and creative accounting, exploring factors influencing the selection of accounting recognition, measurement, and disclosure policies. The report delves into how accountants may use creative accounting in financial statements, including biased estimates, disclosure strategies, and the timing of transactions. The analysis is grounded in Australian Accounting Standards (AASB 108) and relevant literature. The report identifies examples of opportunistic behavior, such as income smoothing and manipulation of financial data. It also provides an overview of BHP's financial performance, including its mining and metal products and the impact of market changes. The report also discusses the motivation behind such practices, emphasizing the company's goal to generate profit and maintain a positive financial outlook for investors.

Running head: CURRENT ISSUES IN ACCOUNTING 1
Current Issues in accounting
Student’s (Name)
Institution

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Executive summary
This report addresses the requirements of accounting policy choice and creative
accounting (part A). This looks at factors influencing the choice between alternative accounting
recognition measurement and disclosure policies and accounting policy choice and opportunistic
behavior which looks at the factors affecting the decision of policy in maximizing profits
concerning BHP company annual report of 2017.
In the increase of standards and accounting methods there is a need for choosing the best
approach following the company needs, AASB 108requires the choice of accounting policy
should produce financial statements that contain relevant and reliable information, and they are
comparable and understandable.
The report considers the following areas in part (A), accounting policy choice, biased
estimates or predictions, disclosure for influencing interpretation and timing of transactions. This
report presents findings from various reliable and accurate sources such as the annual report for
BHP Company 2017, Australian Accounting Standards and Henderson et al. book on accounting
policy.
Generally, this report identifies and explains examples of how accountants use creativity
in presenting financial statement with reason explaining their choice and use of contracting
process to reduce opportunistic behavior and it examples provided in the analysis of AASB 108
and Harne's et al. 2014.
Introduction

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There has been an increase in the number of accounting standards that have been backed
by the legislature. Every organization is required to have an accounting method depending on its
size and its decision since some financial aspects are not addressed in some accounting
standards, some do not contain the retires for selecting the best among them, and the accountants
are required to make the best choice from the variety of estimates. This need for the option is
outlined in AASB 108. Accounting methods are the rules followed by an organization during the
reporting of its revenues and expenses in its financial statements mostly on a balance sheet
(Jones, 2011). There are two major types of methods are cash accounting basis and accrual
accounting basis, the choice of either of the methods depends on the accounting standards for
revenue earned by a business and the selection of the company itself. Mostly small businesses go
for cash accounting which does addition of cash, checks and fair market value of property of
services during the year and expenses are considered in the year in which they paid, on the
contrary, the accrual method is based on a matching principle where the emphasis is on the
timing of revenue and expenses recognition and expenses are deducted in the balance sheet in
the tear according to contract even when the money will be paid later. Once accompany has
selected an accounting method they cannot quickly change until they receive consent from IRS
body and changes in accounting method will result to improve overall accounting in an
organization. This paper will address the requirement for accounting policy choice and creative
accounting and accounting policy choice and opportunistic behavior in the case study of BHP.
BHP was formerly known as BHP Billiton in Australia. It is a mining and metal company that
provides products such as petroleum iron ore, copper natural gas, nickel, and uranium in the
evaluation of their annual report 2017.
Accounting Policy Choice and Creative Accounting

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An accounting policy is standards that dictate how a company prepares its financial
statements (Mulford & Comiskey, 2011). While creative accounting refers to a situation where
the choice of accounting policy is attempted to produce an impression desired by the people
preparing the statement, it sometimes can be viewed as underhanded means because the
accountants provide a statement that it is biased and unreliable in trying to meet a perception.
This can be achieved in four ways which are choice of accounting policy, biased estimates or
predictions, and timing of the transaction. Below are the identification and explanation of how
accountants in BHP company are ‘creative’ in preparation for their accounting standards
Creative Accounting Example No.1: Estimates or prediction of the future events.
There is a group of accounting of policies that might rely on the estimates or predictions
of the future events and occurrences.There are a group of shareholders and investors who would
like to use the information that is obtained on the annual report in their quest of making
decisions. In this annual report by BHP, it is evident that they are among the best companies that
recorded the most significant profit in the mining industry and they are positive concerning the
future also because of the risk management factors that they have put into practice.

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However, there is an aspect of creative accounting that can be seen in their annual report
most especially regarding the effect of taxes and market changes on their future prediction; the
report indicates stability in the dealing with future liabilities regarding debts. But it has been
established that the company has had problems since 2012 in dealing with bad debts. This could
continue to affect its performance. Other significant issues that have not been addressed in the
annual report that could affect its future are the changes in the market regarding competition.
There has been an increase in the petroleum market. They are challenged by the current
competition. There has also been a reduction in some countries in need of their product. An
example is an ongoing decline in the demand for its products by the Chinese government. In a
statement, the company manager said: “the prices that are obtained from our oil, gas, mineral and
another commodity which are determined by or linked to prices in the world market.” However,
this as a factor that could influence the future of the company is not included in the annual report
which could help any person with the plans of investing in the organization to recognize and
know what they are going up too. Other practices that are key in the future of the organization
that have been observed in showing creative accounting within the organization are fictive sales
that have also been seen in the postponing of the recognized revenues in the attempt of reducing
profit as a way of preparing for the future yet there is the risk of this capital reducing their
market value. Lastly, another practice observed in the making of future predictions based on
several assumptions due to their current robust performance. The projections may be elusive if
not made on the grounds of statistics indicating constants and variables in the future rather than
just in the current performance.
Creative Accounting Example No.2: Disclosure of transaction or events

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As a way of creative accounting, the accountant in the organization who prepares
financial statements may decide to use a material factor in confusing or changing the focus of the
stakeholders and shareholders away from an issue to another (Di Pietr, & Ronen 2016).
This method has been used in BHP Company. The object that has been used to get
everyone away from other factors in the organization that requires being considered according to
the company annual report is the financial growth or status that the company has. In the report,
the company is labeled as the best mining company with a net profit of $5.9 billion an underlying
EBITDA of $20.3 billion with a cash flow of $12.6 million (Karim, Shaikh, Hock, & Islam,
2017). The more significant part of the report is mainly composed of this kind of performance
analysis. This is where the company analysis is majorly in its success and touching very little on
the other issues such as the case in the reduction of the production of iron ore and other minerals.
Also, the fact that the companies market is continuing to reduce. An example is the one of the
Chinese demand. The competition is getting stronger due to the mining products for Asia and the
Middle East. In their strategies, they have failed to include how they are going to deal with the
decrease of the raw material. Instead, they have included oil reserves as their assets as
incorporated in the balance sheet
Creative Accounting Example No.3: Accounting Policy Choice
AASB 108 requires that the choice of accounting policy is relevant and reliable and that
it advocates for transparency of the dealings of the company. On the contrary, accountant maybe
creative in the policies they chose for different reasons. The same is seen in BHP formerly
known as BHP diligence when looking at the accounting policy in the presentations of its
financial disclosure which influence the decision of the investors and shareholders and in its
consolidation of financial accounting (Rajput, 2014).

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Some indication of creativity in accounting policy of the company can be seen in the
following areas. The first one is the disclosures about mineral reserves and resources?. Even
though the mineral reserves are the most valuable assets of a mining industry, they do not appear
as an asset on the balance sheet except to the extent they were purchased. Otherwise, that cost of
mineral reserves is often not disclosed separately from other mining-related fixed assets (Bora, &
Saha 2016). Mineral reserves are as a result of company exploration activities. Even though they
are very vital to the investors and analysts in prediction of the future of the shareholders and
investors since they help in the prediction of cash flow and evaluation of the future of the
company, this is because the quantity of mineral in the earth could not be explicitly quantified in
order to enhance accuracy BHP has disclosed its mineral reserves in the annual report with
various intentions that will be disclosed in the second part. This is a form of creativity that could
help in the manipulation of the balance sheet since the quantity can be varied to produce the
desired outcomes. The AASB 108 requires that accounting policies be disclosed in case of any
changes for transparency for the stakeholders and the shareholders. However, this perhaps has
not been so in trying to recognize or find out the reason behind the policy that is used in dealing
with the taxes of the organization that was a problem in the organization. Other areas where the
statement preparers have practiced creative accounting as seen in their annual accounting
methods are the increasing of their expenses with the excuse of the provision to the environment
which could be a method of trying to adjust the depression. There has been the changing of the
depreciation policy particularly the period (Jain, & Balyan 2015). There is also the selection if
the fixed assets in an aim of increasing the profits expenses of the company have been accounted
for in the basis of percentage of earning that is retained by the organization instead not played
out as dividends of tee company instead of including them in the profit and loss statements. In

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the attempt of reducing the liabilities this company the extra balance financing on account of
branches that are not included in the profit and loss account. Another creative accounting
observed in the annual report of BHP 2017 is that there is temporary inclusion and assignment of
holdings at elevated high market value as compared to their purchase and immediate price in the
market.
The motivation for the use of the types of creative accounting mentioned
The primary purpose of the commercial organization is to generate profit, and this is the
case in the above examples. There are reasons for the practices of creative accounting used, and
they can be seen within these three explanations of choices made a hypothesis:
Creative Accounting Example No.1: Estimates or prediction of the future events.
The primary motivation of this company for using this method is in line with income
smoothing hypothesis. THis is where the company has failed to clearly show in its reports the
effect the debts and market changes which could affect the company negatively. This hypothesis
applies here in that the statement preparers do not want the shareholders to see that this could
lead to looses in the organization shortly. This is because if it does they may not benefit, this
creative practice could also be in line with the capital market motivation where they do not want
to disclose the information on strict competition reducing the market and since it would lead to
pulling out of investors and shareholders that could not be good for the organization.
Creative Accounting Example No.2: Disclosure of transaction or events

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The main reason why BHP has failed to disclose some challenges that are affecting the
company such as decline in some mineral reserve despite generating the report containing their
strategies and ways of dealing with some issues is in line with contractual motivation where the
statement preparers are concerned with the loss that might occur to them considering their self-
interest, therefore, they generate report with good performance ignoring some very fundamental
parts.
Creative Accounting Example No.3: Accounting Policy Choice.
Thi is the main reason for using accounting policies which shows that the company is
increasing the assets and decreasing the liabilities in its operation regardless of the activities that
are undertaken to undertake this objective (Akpanuko, & Umoren 2018). This is due to the
capital market motivation to maintain their gains and remuneration. Thus the shareholders and
managers need to keep their shares in the company.
Accounting Policy Choice and Opportunistic Behavior
Accounting policies and standards are several, and they keep changing in Australia which
prompts for decision making in the choice of the best strategy. Opportunistic behaviors by
managers are where the managers choose accounting policy that is based on a meeting of their
self-interest at the expense of the others which may include the owner (principal).
Opportunistic behavior

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BHP has joint ventures with other organizations which automatically makes them have
interest in the assets and management decisions by those organizations. They have experienced
problems with the management decisions in terms of finance since they produce losses as the
mangers increase their salaries (Bhasin, 2015). When asked the managers to tag this behavior to
the difference in standards which still does not justify their behavior. To control this
opportunistic behavior and create a good relationship between the manager and the owner, a
contact is used that controls the action of the manager which help n regulation of the
opportunistic theory in which these managers are benefiting illegally. To deal with this the
contract could include that part of the salary of this manager could be tagged to the profit hence
the manager would work hard to produce more profit in earning income. They may also use
bonding to limit the manager from the joint venture from engaging in activities that take a lot of
the company money example they could regulate the frequency of air travel of the manager by
commercial chopper.
Conclusion
In conclusion the increase in standards and policies in the country calls for an informed
decision from the management and the accountants in the policies that are most suitable to be
used without going against the available legal obligations and expectations given to them.
Creative accounting methods as survival methods by the mangers in an organization should be
eliminated to encourage transparency, integral and principled carrying out of accounting method
and accounting activities.

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