BHP vs. Rio Tinto: A Detailed Comparison of Fair Value Accounting

This report provides a comparative analysis of fair value accounting practices adopted by BHP Billiton and Rio Tinto, focusing on their approaches to fair value determination and asset valuation. It highlights the debate surrounding fair value accounting, particularly in relation to market efficiency and the impact of new accounting standards. The report identifies similarities in their valuation methods, such as the use of the fair value hierarchy and depreciation practices, while also contrasting differences in asset grouping and the valuation of financial instruments versus financial assets and liabilities. The analysis references the annual reports of both companies and academic literature to support its findings, offering insights into how these two major corporations apply fair value accounting principles in their financial reporting.

CORPORATE ACCOUNTING

FAIR VALUE
 Fair value reposting allows users to take
substantial investment related decisions
 Fair value determination is a three-tier
process (McDonough & Shakespeare, 2015)
 Using fair value is a benefit as it adds more
utility to the financial information provided in
the financial statements (Leo, 2011)

 Fair value is the price at which a liability
could be settled or an asset that could be
exchanged between the parties (McDonough
& Shakespeare, 2015)
 Development of a new model
 FVA has become a subject of debate ever
since the financial crisis that took place in
2008

WHY A DEBATE FOR FV?
 The efficiency of the market solely
determines the fair value of an older
transaction
 Efficient the market, passing the tests shall
be easier and vice versa (Needles & Powers,
2013)
 criticism revolving around fair value
measurement is minimized owing to the
introduction of new AS (McDonough &
Shakespeare, 2015)
 As per IASB/ FASB, FVA is inconsiderate of the
price inefficient market conditions.

SIMILARITY
BHP VS. RIO
fair value - both the companies adopted
valuation method as the key strategy
Level 1 fair value hierarchy - both the
companies have based their fair value
valuation on unadjusted quoted prices (BHP
Billiton, 2017)
In relation to Level 2 hierarchy, both
companies have valued the same based on
inputs
level 3, both companies have chosen valuation
based on inputs that are not observable in
the market.

 Primary focus on tier one assets
 classes of assets, both the companies have
believed in having a world class base of
assets
 both the companies have depreciated their
assets like property, plant, and equipment
(PPE) on a straight-line or production unit
 trades and receivables - both the companies
have identified the same at their respective
fair values

CONTRAST
BHP VS RIO
 BHP Billiton, it can be seen that the company
has tier one assets all around the world. On
the contrary Rio Tinto, even though it has
focused on tier one assets as well, yet the
assets are distinct from BHP (BHP Billiton,
2017)
 Rio has not grouped its assets like that of BHP
 Fair value hierarchy - Rio Tinto has primarily
valued its financial instruments like assets and
derivatives whereas BHP have valued its
financial assets and liabilities apart from
financial instruments (Rio Tinto)

REFERENCES
BHP Billiton. (2017). BHP 2017 Annual report and accounts.
https://www.bhp.com/media-and-insights/reports-and-
presentations [Accessed 12 September 2018]
Needles, B.E. & Powers, M. (2013) Principles of Financial
Accounting. Financial Accounting Series: Cengage Learning.
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
McDonough,R.P & Shakespeare, C.M .(2015) Fair value
measurement capabilities, disclosure, and the perceived
reliability of fair value estimates: A discussion of Bhat and
Ryan. Accounting, Organizations and Society. [online] vol.
46, 96–99. DOI: 10.1016/j.aos.2015.05.003
Rio Tinto. (2017) Rio Tinto Annual Report and accounts 2017
[online]. Available from:
http://www.riotinto.com/documents/RT_2017_Annual_Report
.pdf
[Accessed 12 September 2018]