Financial Analysis Report: Asset Valuations and Impairments

This report provides a comprehensive analysis of accounting treatments related to asset valuations and impairments, focusing on the findings of the ASIC commissioner and the application of accounting standards. The report analyzes the financial reporting of BHP Billiton, a major company in the material and energy sector, and examines its approach to impairment assessment, including the impact of changing market conditions and internal controls. The analysis covers key aspects such as the determination of recoverable value, disclosures, and compliance with accounting standards like IAS 36 and AASB 136. The report highlights the importance of transparency, market-based assumptions, and the role of auditors in ensuring accurate financial reporting. The conclusion emphasizes the company's compliance with disclosure requirements while acknowledging past issues with assumptions and valuations, and it also offers recommendations for improved internal controls and audit procedures.

ACCOUNTING
FINANCIAL ANALYSIS
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In the given assignment, a report needs to be prepared on the topic of accounting treatment
related to the asset valuations and the impairments. The views and the findings of the ASIC
commissioner has also been highlighted which discusses on the annual report findings of the
companies as on 30th June, 2017. For the same, one of the companies listed on ASX 300 Index
relating to “material and energy sector” has been chosen for detailed analysis. At the end of the
report, a recommendation has also been given.
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Contents
Introduction.................................................................................................................................................4
Analysis........................................................................................................................................................4
Conclusion...................................................................................................................................................9
References.................................................................................................................................................11
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Introduction
In the given report, the comments of the ASIC commissioner has been mentioned highlighting
the inappropriate accounting policies being followed by the corporates with respect to valuation
and the impairment of non-financial assets. BHP Billiton, one of the companies listed on
Australian Stock Exchange has been chosen for analysis on impairment (Alexander, 2016). It
serves all over the world and is a multinational in mining, metals and petroleum industry. It is
world’s largest mining company in terms of market capitalization and 3rd in Australia in terms of
revenue. It is also listed on the London Stock exchange and employs more than 65000
employees.
Analysis
a. The role of ASIC as a regulator for all the corporates in relation to financial reporting is
checking whether or not the companies have abide by the laws and regulation and
followed best practices in the accounting arena. They also check whether the companies
have complied with the IFRS, AASB standards and the GAAP such that the requirements
of the users of financial statements are being met and all the necessary disclosures have
been made (Bygstad & Iden, 2017).
Enquiries on 50 companies for 54 matters was conducted by ASIC and it was found that
the directors and auditors still need to focus big deal on the valuation of assets and
impairment of the non financial assets and accounting policies w.r.t. these areas.
Deviations and risks were found to the extent of 4% in financial reports for the period 20th
June, 2010 to 31st December, 2016 and these led to material misstatements. ASIC
recommended to increase the transparency in the reporting and the valuation areas when
material changes were found in the annual reports (Carlin, 2011). The total quantum of
risk and adjustments to profit amounted to $ 750 million and for the same to improve
audit procedures need to be strengthened. The issues include determination of
recoverability value of exploration expenditure, goodwill, PPE, etc. Most of the enquiries
was in energy and extraction industry. The other issues were determination of carrying
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value of CGU, reasonableness of the cash flows and other assumptions, indicators of
impairment, use of fair value and disclosures on same.
b. As can be seen from the extract of the consolidated profit and loss account of the
company BHP Billiton, the impairment loss accounted in the year ended 30th June, 2017
is $ 193 Mn (Carlin, 2010).
The assets which have been considered by the company for the purpose of impairment include
the petroleum, the iron ore, copper, coal, PPE including exploration and evaluation related assets
and other unallocated items pertaining to the group.
The company faced a significant issue with regards to the impairment assessment of the onshore
US assets which was conducted for 2015 and 2016 as it was found to be significantly deviated
from market participant assumptions. Even though there was no material prior period error, but
the company had to file the amended financial statements and annual report in form 20F in 2016.
The company had to review the internal controls w.r.t. to determination of deferred income tax
balance and the carrying value of onshore US assets and it was found that the assumptions taken
were ineffective and auditor was asked to check the efficiency of the internal controls and
thereby the valuation means (Choy, 2018).
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The impairment has been done based on several factors including the changes in the pricing
assumptions, developmental plans and the discount rates. The volatile and weaker oil and gas
prices in the past year has contributed to impairment assessment even after substantial
improvements in productivity (Goldmann, 2016).
Besides the above mentioned assets, the group also assesses the trade and other receivables for
impairment in case the situation arises based on credit quality.
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The above screenshot shows the disclosures being given w.r.t. impairment like how the amount
is being calculated, the valuation being done, the methods used, the assets considered and the
indicating factors.
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c. Impairment is covered in IAS 36 and AASB 136. As per the standard, assets should not
be carried in the books at more than the recoverable value. There are various factors
which needs to be checked for impairment of the assets, it can be internal as well as
external. There are several necessary disclosures which needs to be made in this regard in
the annual financial statements in this regard (Knechel & Salterio, 2016). The annual
reports of the company has more or less disclosed all the critical information regarding
how the impairment assessment was done and what was the basis of assumption. Later
on, it was found that the indicators being considered and the valuation measures being
considered are not in line with the market base. The entity is in compliance with Para 126
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of AASB 136 which discusses on disclosure of the amount of impairment, the respective
assets being impaired, the reversals, etc. The company is also in compliance with the Para
128, 129, 130 all of which discusses on the individual assets being considered for
impairment and segment wise details (Visinescu, et al., 2017).
The company also fulfils one of the qualitative enhancing characteristics of the financial
statements which is understandability. The company has made best efforts in order to
make the financial statements understandable as it has disclosed all the relevant
information with all the basic assumptions and estimates taken. The company also has
released the annual report at the right time fulfilling one of the other qualitative
characteristics being timeliness (Sithole, et al., 2017).
Conclusion
In the given report we discussed on all the relevant aspects related to impairment of the assets
being done by BHP Billiton and the indicators which were being considered.
d. BHP Billiton has made all the necessary disclosures which are mentioned AASB 136.
These mainly include:
1. The basis of impairment
2. The assets being impaired
3. The assumptions being taken
4. The internal and external conditions which triggered the impairment assessment
5. The amount of impairment
6. The methods of valuation
7. Reversal of impairment loss, if any
8. Management estimates and assumptions
9. Calculation of recoverable value
Therefore, it can be said that the company has complied with all the requirements of the
Accounting Standard and it also aligns with the overall objectives of the General Purpose
financial reporting requirements (Linden & Freeman, 2017). The company did face some issues
with respect to wrong assumptions being used and the inappropriate valuations being considered
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for impairment of US onshore assets and then the company disclosed the same in the financial
statements and also issued the revised and reinstated financial statements for 2016 to ensure
correct reporting is being done.
This main purpose of the financial reporting is that it can be used by the broad group of users and
stakeholders so that decision making can be enabled. The company by disclosing all the
necessary issues and disclosures has enabled the same. However, it also needs to work on the
internal control and the management needs to take control of the inefficiencies being reported in
the past by various committees in the past. It has also been instructed to the auditors to improve
their audit procedures to identify the material misstatements in any, in the future. Also, the
directors of the company has been instructed by the ASIC to be more realistic in approach and to
take market factors into consideration and inputs from the companies in the same industry as
well.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Bygstad, B. & Iden, J., 2017. A Governance Model for Managing Lightweight IT. World Conference on
Information Systems and Technologies, April.pp. 384-393.
Carlin, T. a. F. N., 2010. Resisting compliance with IFRS goodwill accounting and reporting disclosures
evidence from Australia. Journal of Accounting and Organizational Change, 6(2), pp. 260-280.
Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific
Accounting Review, 23(3), pp. 368-392.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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