Acc00713 : Financial Reporting : Assessment Answers

Requirement 1

It is needed for the business organizations of Australia to comply with all the relevant regulations and standards at the time to conduct their business operations; and the same aspect is also applicable when the businesses acquire another business as they are needed to follow all the regulations related to business acquisition. For this reason, it is the prime responsibility of the business organizations of Australia to comply with all the regulations and standards provided by Australian Accounting Standard Board (AASB) for the acquisition of other businesses. At the time of the business acquisition, the business entities are needed to comply with the guiding principle of AASB 3: Business Combination. According to AASB 3: Business Combination, there are certain principles and standards that the companies are needed to adhered to at the time of the recognition and measurement of the assets, liabilities and other aspects of the business acquisition (AASB 2014).

According to AASB 3: Business Combination, Paragraph 10, after the date of acquisition, it is needed for the acquired to recognize the identifiable assets and liabilities of the acquired company along with the acquired goodwill (aasb.gov.au, pg. 7, paragraph 10). In this context, it needs to be mentioned that in order to qualify to be recognized as a part of the acquisition process, the identifiable assets and liabilities must meet the definition of the assets and liabilities as per the Framework for the Preparation and Presentation of Financial Statements (aasb.gov.au, pg. 7, paragraph 11). The companies are needed to comply with this at the time to recognize the business acquisitions. According to AASB 3: Business Combination, Paragraph 18, it is needed for the acquirer business organizations to consider the measurement of the identifiable assets and acquired liabilities and they are required to use the fair value measurement basis in order to measure these assets and liabilities (aasb.gov.au, pg. 8, paragraph 18). There is not any exception of this fact that it was also required for BHP Billiton to follow the principles of AASB 3: Business Combination at the time of the acquisition of US Fayetteville Oil and Gas Shale (Guthrie and Pang 2013).

It can be observed from the annual report of BHP Billiton that the company has taken into consideration the assets of acquired US Fayetteville oil and gas shale. Some of the major assets from the acquisition of US Fayetteville oil and gas shale are natural gas and liquid reserves, production wells and other infrastructures. It needs to be mentioned that the company has followed the principles of AASB 3: Business Combination for the recognition and measurement of this acquisition. It can be seen from the annual report of the company that BHP Billiton has recognized the assets and liabilities from the acquisition of US Fayetteville oil and gas shale based on the fair value measurement on the date of acquisition (bhp.com 2017). It can be seen in this situation that the company has followed the principle of AASB 3: Business Combinationin the presence of two reasons. First, the company has taken into consideration the assets and liabilities from the acquisition of US Fayetteville oil and gas shale; after that, they have done the recognition as well as measurement of the assets and liabilities of the acquisition of US Fayetteville oil and gas shale (Biancone 2017).

Requirement 2

It can be observed from the above discussion that BHP Billiton has adhered to the requirements of AASB 3: Business Combination for the accounting treatment of the acquisition of US Fayetteville oil and gas shale. In this context it needs to be mentioned that the company has followed some accounting processes for the measurement of the acquisition of US Fayetteville oil and gas shale. It can be seen from the annual report of BHP Billiton that the company has adopted the strategy of fair value measurement for the measurement of the acquisition (bhp.com 2017). It implies that the company has used fair value less costs of disposal for the measurement of the assets identified from the acquisition of US Fayetteville oil and gas shale. In this context, it needs to be mentioned that the company has done the determination of the fair value less cost of disposal as the estimated future cash flow present value that the company is expecting to arise from the useful life of the acquired assets (Jin, Shan and Taylor 2015). In case of these used cash flows, BHP Billiton was discounted them with the use of real rate for post0tax discount as this reflects the current market assessment of the time value of money along with the risk related to te acquisition of US Fayetteville oil and gas shale (bhp.com 2017). It needs to be mentioned that the company has considered the process of fair value measurement as a Level 3 fair value and the company has determined this based on the used inputs in the valuation process. For the measurement of the fair value of the acquisition of US Fayetteville oil and gas shale, the company has used certain assumptions in three major areas; they are production volumes; price of crude oil and natural gas and the rate of discount. In this manner, BHP Billiton did the measurement of the acquisition of US Fayetteville oil and gas shale (bhp.com 2017).

Requirement 3

It needs to be mentioned that BHP Billiton has taken into consideration certain accounting treatment as well as recording for the acquisition of US Fayetteville oil and gas shale and they have followed the rules and regulations of AASB 3: Business Combination for the accounting treatment of US Fayetteville oil and gas shale. In this acquisition process, the first step they have followed was the determination of the date of acquisition. The next step they have followed in the accounting treatment was the recognition as well as measurement of the identifiable assets as well as acquired liabilities from the process of the acquisition (Russell 2017). In this step, the company has considered certain aspects like the relevant principle of recognition, measurement principles, some major exception of the recognition and measurement process and others. The next accounting treatment of BHP Billiton was involved in the recognition as well as the measurement of the goodwill or gain from the acquisition of US Fayetteville oil and gas shale. Some major considered aspects in this situation are bargain purchases, transfer of consideration along with the contingent consideration. In the next step, the company was involved in the application of the additional guidance related to the method of acquisition for different types of financial aspects for the business of US Fayetteville oil and gas shale. After that, the company took into consideration the period of the acquisition. These are the major accounting treatment of the acquisition of US Fayetteville oil and gas shale by BHP Billiton (Bugeja and Loyeung 2017).

Part B

Requirement 1

It needs to be mentioned there were some major factors that could have effect on the process to recognize and measure the loss of impairment of the acquisition of US Fayetteville oil and gas shale. There are some aspects that were associated with the financial performance of the companies before the announcement of the loss of impairment such as return for the investors, cash flow per share and market-to-book ratio that could have significant effect on the acquisition of US Fayetteville oil and gas shale (Bepari, Rahman and Mollik 2014). These would have effects on the acquisition process due to the fact that they could have negative market reaction on the acquisition process of the company. After that, it needs to be mentioned that business turnover was another major factors that could have significant impact on the impairment loss of the acquisition due to the fact that there is a negative association of profit with the process of the recognition of the impairment. After that, major loss in the value of the assets could have significantly impacted the acquisition of US Fayetteville oil and gas shale by BHP Billiton. At the same time, it needs to be taken into consideration the fact that successive loss of impairment can lead to the reduction in the confidence and faith of the investors from the company and it had the potential to create a major impact on the recognition as well as measurement of the impairment losses in the acquisition of US Fayetteville oil and gas shale (Bepari, Rahman and Mollik 2014). These are the major factors that could have major impact on the recognition as well as measurement of the impairment loss.

Requirement 2

It needs to be mentioned that there are certain accounting treatments available for the impairment loss of Fayetteville operation. Under this accounting treatment, it is needed for BHP Billiton to do the identification of the impaired assets related to Fayetteville operation. In the next step, it is needed for the company to consider the measurement of the recoverable amount of the assets of Fayetteville operation (Guthrie and Pang 2013). Under this process, the requirement is to measure the recoverable amount of the intangible asset with the identifiable useful life. At the same time, they are needed to take into consideration the determination of the value in use of the impaired assets. The next step for the company is involved in the recognition as well as measurement of the loss of impartment from the Fayetteville operations (aasb.gov.au 2018). In this process, the companies are needed to take into consideration of the determination of the cash-generating units and Goodwill. Some of the other accounting treatment that the company is needed to consider are the identification of the cash-generating units of the impaired assets, allocation of Goodwill to the cash-generating units, time of the impairment tests, determination of the corporate assets and the impairment loss of the cash-generating units. In the last step, the company is needed to take into consideration the reverse of the loss of impairment where the company is needed to consider the reverse of the loss of impairment of the individual assets and the reverse of the impairment loss for a cash generating units (aasb.gov.au 2018).

Conclusion:

The above discussion sheds light on the analysis of various aspects of the acquisition of US Fayetteville oil and gas shale by BHP Billiton. It is evident from the above discussion that BHP Billiton has complied with the requirements of AASB 3: Business Combination for the accounting operations of the acquisition of US Fayetteville oil and gas shale. It can also be seen from the above discussion that the company has used the fair value measurement basis for the measurement as well as recognition of the acquisition of US Fayetteville oil and gas shale. At the same time, the above discussion also states that the company needs to follow the regulations and standards of AASB 138: Impairment of Assets for the determination of the accounting treatment and recording of the acquisition related transaction of US Fayetteville operations.

References:

AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.

Aasb.gov.au. (2018). Business Combination. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 22 Sep. 2018].

Aasb.gov.au. (2018). Impairment of Assets. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf [Accessed 22 Sep. 2018].

Bepari, M.K., Rahman, S.F. and Mollik, A.T., 2014. Firms' compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics. Journal of Accounting and Organizational Change, 10(1), pp.116-149. 

Bhp.com. (2018). Annual Report 2017. [online] Available at: https://www.bhp.com/investor-centre/-/media/bhp/documents/investors/annual-reports/bhpbillitonannualreport2014_interactive.pdf [Accessed 22 Sep. 2018].

Biancone, P.P., 2017. Business combinations under common control (BCUCC): the Italian experience. GSTF Journal on Business Review (GBR), 2(3).

Bugeja, M. and Loyeung, A., 2017. Accounting for business combinations and takeover premiums: Pre-and post-IFRS. Australian Journal of Management, 42(2), pp.183-204.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Hope, O.K., Thomas, W.B. and Vyas, D., 2013. Financial reporting quality of US private and public firms. The Accounting Review, 88(5), pp.1715-1742.

Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35, pp.90-107.

Nobes, C., 2014. International classification of financial reporting. Routledge.

Russell, M., 2017. Management incentives to recognise intangible assets. Accounting & Finance, 57, pp.211-234.