Professional Judgment and Impairment Testing: BHP Billiton Case Study

This report examines the application of professional judgment in impairment testing, using BHP Billiton as a case study. It explores the importance of professional judgment in fulfilling accounting standards and ensuring reliable financial reporting. The report delves into the recognition and measurement of assets, including plant, property, and equipment (PPE), as well as goodwill. It highlights the annual impairment tests conducted by BHP Billiton, the role of ASIC, and the factors considered in assessing asset values. The analysis covers the impact of impairment on the balance sheet, the methods used for measuring impairment, and the actions taken for improvement, such as comprehensive assessments of new standards. The report concludes by emphasizing the significance of professional judgment and relevant disclosures in providing useful information within the context of a constantly changing business environment. References from BHP Billiton's annual reports and academic sources are provided to support the analysis.

APPLICATION OF PROFESSIONAL
JUDGMENT
ON IMPAIRMENT TESTING
BHP BILLITON

INTRODUCTION
 Professional judgment essential to fulfilment
of accounting standard (Deegan, 2011)
 Enables logical steps
 Choosing various other alternatives
 Consistent analysis

ROLE OF PROFESSIONAL JUDGMENT IN
ACCOUNTING
 Analyzing the situation of the organization
 Ensuring proper decisions and strategies
 Leads to maintenance of good relations with
stakeholders
 Recording the transactions
 Ensuring reliability

RECOGNITION AND MEASUREMENT
BHP Billiton
 The impairment test is done on an yearly
basis (BHP Billiton, 2018)
 Applies to goodwill and other assets
 Impairment denotes a permanent reduction
in the assets value (McKaig, 2011)

PLANT, PROPERTY AND EQUIPMENT
 PPE value in accordance with the cost less
accumulated depreciation and impairment
charges (McKaig, 2011)
 Contains all cost associated with the PPE
 Impairment value stands at ($77169)m (BHP
Billiton, 2018)
 No reversals of impairment

 Impairment value
for PPE stands at
($77169)m (BHP
Billiton, 2018)
 no reversals of
impairment in the
present or past year

IMPAIRMENT OF NONCURRENT ASSETS
 Goodwill is tested annually
 Difference between the carrying amount and
the recoverable amount is being charged as
impairment (BHP, 2018)

RECOGNITION AND MEASUREMENT OF
GOODWILL
 Goodwill is not generally amortized
 Measurement is done at cost less any
impairment losses.
 Impairment value ($1134)m.
 intangible assets with finite ages recorded in
the balance sheet through straight-line basis
over their useful life

 The intangible assets that have finite ages
are shown in the balance sheet
 straight-line basis method is used over their
useful life

ACTION FOR IMPROVEMENT
 BHP ensured comprehensive assessment of
the effect of the new standard (BHP Billiton,
2018)
 financial instruments is taken into
consideration
 Impact on the balance sheet
 Identification of the issue done (Peirson et.
al, 2015)

 factors that can affect the objectivity and
independence of the users
 Collection of relevant information
 Communication skills of the auditor
 Identification of the issues and possible
problems (Peirson et. al, 2015)

ASIC
 Professional judgment followed by BHP
Billiton
 ASIC report points the mechanism of
Impairment and Asset valuation
 As per ASIC the business needs to provide
adequate disclosure
 BHP Billiton has adhered to the highlights of
the ASIC

PROFESSIONAL JUDGEMENT SATISFY
THE WRITTEN-DOWN OF IMPAIRMENT
 financial reporting measurement of
performance and financial position effect the
business environment
 various controversies happened in the
industry because of the growing concern
 The process of impairment involves
standards and judgments (Hamilton, Hyland
& Dodd, 2011)
 relevant disclosures and professional
judgment has been used in providing useful
information

CONCLUSION
 Through financial report the organization
measure and abstract all the type of
transactions
 Reports projects a constantly changing
environment in which measurement plays an
important role

REFERENCES
BHP Billiton. (2018) BHP annual reports and accounts 2018
. Available from: https://www.bhp.com/investor-centre/annual-rep
ort-2018 [Accessed 27 April 2019]
Deegan, C. M. (2011) In Financial accounting theory. North Ryde,
N.S.W: McGraw-Hill
McKaig, T. (2011)
Understanding Impairment Accounting: What It Is and When It Is
Used
. Available from::
http://www.financepractitioner.com/accountancy-checklists/under
standing-impairment-accounting-what-it-is-and-when-it-is-used
[Accessed 27 April 2019]
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015).
Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.
Hamilton, K., Hyland, B. and Dodd, J. L. (2011) Impairment: IASB-
FASB Comparison. Drake Management Review. 1(1), p. 55–67.
Available from:
https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee
9cc6632159d8a.pdf