ACCG224: Financial Accounting Statement Analysis Report

This report analyzes the financial accounting statement of BHP Billiton, focusing on impairment testing and the application of professional judgment. It examines the role of professional judgment in accounting, the implications of its absence, and the specific impairment tests performed by BHP. ...Read More

Running head: FINANCIAL ACCOUNTING STATEMENT
Financial accounting statement
Name of the student
Name of the university
Student ID
Author note

FINANCIAL ACCOUNTING STATEMENT
Table of Contents
Executive summary..........................................................................................................................3
Introduction......................................................................................................................................4
Body.................................................................................................................................................4
Answer (a)....................................................................................................................................4
Answer (b)....................................................................................................................................5
Answer (c)....................................................................................................................................6
Answer (d)....................................................................................................................................7
Conclusion........................................................................................................................................7
Reference list....................................................................................................................................8
Appendix..........................................................................................................................................9
ACCG224 S1 2019
SID Page 2

FINANCIAL ACCOUNTING STATEMENT
Executive summary
Main objective of the report is gathering financial information for an ASX 300 listed entity. The
report will specifically focus on impairment treatment done by the entity and the relevant
disclosures as well as judgments applied while written down the assets with regard to
impairment. For this task BHP Billiton will be analysed in context of the disclosures made by it
for impairment, valuation method used for estimating cash flow and basis on which discount rate
is applied
ACCG224 S1 2019
SID Page 3

FINANCIAL ACCOUNTING STATEMENT
Introduction
BHP is an ASX listed entity and have yearend on 30th June 2018. Further, the financial
statements of the entity are prepared in compliance with requirement of Australian Corporation
Act 2001 and in compliance with the IFRS and interpretations issued by IASB. It is engaged in
acquiring, discovering, marketing and developing the natural resources from all over the world
(Bhp.com 2019).
Body
Answer (a)
Role of the professional judgment in accounting
Professional judgement is application of accumulated experience and knowledge that is
gained through relevant accounting training through using the ethical standards that helps is
making the informed decisions regarding course of action, appropriate in particular situation
through observing the accounting principles (Mca.gov.in 2019). Role of professional judgement
in accounting is –
 Ensuring that the regulation related to accounting policies and determining the ways for
improving accounting in the general terms
 Creating the climate of trust among the business managers and the owners of the capital
 Allowing the users of the financial statements in making reasonable decisions on the basis
of the financial information provided
 Serving as the referee among the parties of economic life, specifically the providers of
accounting information and auditors who certify the quality and thereby ensures the
reliability (Aasb.gov.au 2019)
Implication on users of the accounting information, if professional judgement has not
been made in most reasonable manner is as follows –
ACCG224 S1 2019
SID Page 4

FINANCIAL ACCOUNTING STATEMENT
 If proper accounting method has not been followed while preparing the financial
statement it will mislead the users. For example, if the assets is reported at historical cost
rather than at fair values, it will not be possible for the users to know the actual worth of
the company (Komissarov, Kastantin and Rick 2014)
 Though the preparation of financial statements involves application of professional
judgments it shall be applied taking into consideration the economic reality of the
transaction. Greater usage of judgment leads the financial statement to be more
subjective. Hence investment decision taken based on such financial statement will
mislead the investors and may lead to loss of money (Aasb.gov.au 2019).
Answer (b)
As per the disclosure made by the entity in context of impairment BHP performs
impairment test for all the assets if there is an indication that the asset may get impaired, however
goodwill is tested for impairment at least annually. If carrying amount of assets exceeds the
recoverable amount of the assets, the same is impaired and the impairment loss is reported in the
income statement for reducing the assets carrying value in balance sheet and to reduce it to
recoverable amount (Vogt et al. 2016).
The recoverable amount is higher among the fair value of the asset reduced by the
disposal cost and the VIU (value in use). While assessing the impairment, assets shall be grouped
at lowest level for which cash flows are separately identifiable. Fair value of the asset reduced by
the disposal cost is the estimate of amount that the market participant will pay for the CGU or for
the asset. Generally the fair value for the petroleum and mineral assets is determined through
using the independent assumption from the market for computing present value of the future
post-tax cash inflows (Abuaddous et al. 2016). It includes the projected cash flow impact for any
capital expenses for improving the production or for reducing cost and the eventual disposal
where the market participant takes the consistent view. Further the cash flows are discounted
through using the appropriate post tax market discount rate for arriving at the net present value of
the asset that is composed against the carrying value of asset. Further, the VIU is determined as
present value of estimated future cash flows that is expected to be generated from continuous use
of asset in the present form and the eventual disposal. It is determined through applying the
ACCG224 S1 2019
SID Page 5

FINANCIAL ACCOUNTING STATEMENT
specific assumptions for continuous use and cannot be taken into consideration for future
development (Banker, Basu and Byzalov 2016)
Key estimates and judgements are used for determining asset’s recoverable amount, in
absence of the quoted market price the estimates are made for computing the present value of the
future post-tax cash inflows. The estimates require to be made on the basis of significant
judgement by the management and are subjected to the uncertainty and risk that may be beyond
control of the entity (Bhp.com 2019). Hence, possibility is there for the changes in the
circumstances that will alter the projection materially and will have an impact on recoverable
value of the asset at each of the reporting date. Further, the estimates shall be made from the
market participant’s prospective and must include the prices, operating costs, future volume of
production, discount rates and tax attributes (Bond, Govendir and Wells 2016).
For the year ended 30th June 2018 the entity charged US$ 333 million as impairment
losses for the following assets –
 Petroleum segment - $ 76 million
 Copper segment - $ 213 million
 Iron ore segment - $ 14 million
 Coal segment - $ 29 million
 Unallocated and group items or eliminations segment - $ 1 million (Bhp.com 2019).
Answer (c)
As per the requirement of AASB, while estimating the cash flows it shall be done on the
basis of the supportable and reasonable assumptions that represent the best estimate of the
management for the set economic condition that will subsist over the asset’s remaining useful
life. In case of BHP, estimates are made on the basis of significant judgement by the management
and are subjected to the uncertainty and risk that may be beyond control of the entity ( Bhp.com
2019). Further the discount rate shall be the pre-tax rate that reflects the assessment of present
market with regard to time value of money and specific risk associated with the asset
(Linnenluecke et al. 2015). In case of BHP, cash flows are discounted through using the
appropriate post tax market discount rate for arriving at the net present value of the asset. Hence,
ACCG224 S1 2019
SID Page 6

FINANCIAL ACCOUNTING STATEMENT
it can be stated that the entity is applying professional judgement while estimated the cash flows
and discount rates for computing the impairment loss (Bhp.com 2019).
Answer (d)
As per the requirement of fundamental characteristic of the useful financial information
the information shall be relevant, presented faithfully and the information shall be complete, free
from error and neutral. It can be identified from the disclosures made by BHP regarding
impairment is relevant for the purpose of the users, presented faithfully and are complete, neutral
and free from error. Further, the proper break up for each item for which impairment charges has
been made is disclosed through notes (Rennekamp, Rupar and Seybert 2014).
Conclusion
It can be concluded from the above discussion that as per the requirement of professional
judgments, estimates for cash flows are made on the basis of significant judgement by the
management. Further, cash flows are discounted through using the appropriate post tax market
discount rate and the recoverable amount is higher among the fair value of the asset reduced by
the disposal cost and the VIU (value in use). Hence, it can be stated that the entity is complying
with all the requirement of financial reporting.
ACCG224 S1 2019
SID Page 7

FINANCIAL ACCOUNTING STATEMENT
Reference list
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
[Accessed 25 Apr. 2019].
Abuaddous, M., Hanefah, M.M. and Laili, N.H., 2014. Accounting standards, goodwill
impairment and earnings management in Malaysia. International Journal of Economics and
Finance, 6(12), p.201.
Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and Assets'
Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2), pp.41-67.
Bhp.com. 2019. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed 25 Apr. 2019].
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Komissarov, S., Kastantin, J.T. and Rick, K., 2014. Impairment of Long-Lived Assets: A
Comparison under the ASC and IFRS. The CPA Journal, 84(5), p.28.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications
for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Mca.gov.in. 2019. [online] Available at:
http://www.mca.gov.in/Ministry/notification/pdf/AS_28.pdf [Accessed 25 Apr. 2019].
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset
impairment reversibility and cognitive dissonance on future investment. The Accounting
Review, 90(2), pp.739-759.
ACCG224 S1 2019
SID Page 8

FINANCIAL ACCOUNTING STATEMENT
Vogt, M., Pletsch, C.S., Morás, V.R. and Klann, R.C., 2016. Determinants of goodwill
impairment loss recognition. Revista Contabilidade & Finanças, 27(72), pp.349-362.
Appendix
ACCG224 S1 2019
SID Page 9