ACCTING7023 Financial Accounting | Financial Data of BHP Billiton
a.Services
b.Financial and Insurance Services (e.g., Banks)
c.Health Care and Social Assistance
d.Education
e.Mining
f.Construction
g.Manufacturing
h.Agriculture
b.Particular emphasis will be given to interpretation of key data in the organisation’s segment reporting, and its significant practical implications
c.Address the following points in your report
d.Brief background of the organisation (including the major separate legal entities/reportable segments and their geographical locations)
e.Recent development/change in organisation’s segment reporting/disclosure (if any)
f.Information about major customers/markets
g.Profit (loss) by operating segments
h.Analyse the case organisation’s report and provide a detailed explanation on “why segment data is essential to the investment analysis process?”
A case study / report is a detailed analysis of the empirical data and research, which is used to assess critical thinking, analytical and research skills.
Answer:
Introduction
In today’s business world, it has become the prime responsibility of the business entities to provide all the crucial information about their operational and financial activities through various mediums like company website, annual report and others. This helps the investors and other users in judging the current business as well as financial position of their companies (Weil, Schipper & Francis, 2013). The main aim of this company is the analysis of different kinds of business information of one of the major Australian mining companies, BHP Billiton. Different parts of this report analyze and evaluate different business information of the company related to business segments, recent development and changes, customer as well as market and the analysis of annual report.
Background of BHP Billiton
BHP Billiton is regarded as one of the world’s leading resource companies. BHP Billiton emerged as a major resource company in the year of 2001 as a result of the merger of Broken Hill Property Company Limited (BHP) and Billiton Plc. The company is headquartered at Melbourne, Australia. The main business operation of the company can be seen in extracting and processing minerals, oil and gas with the assistance of more than 60,000 employees and contractors; and this major business operation of BHP Billiton can be seen in the regions of Australia and America (bhp.com, 2018). It needs to be mentioned that BHP Billiton has its presence all over the world; and they sell their product through sales and marketing led through Singapore and Houston, United States. It is interesting to mention the fact that the legal entity of BHP Billiton carries out their operations under a structure of dual listed company that has two parent companies; they are BHP Billiton Limited and BHP Billiton Plc; the main intention of this structure is to carries out operation as a single entity. The presence of a unified Board and Management can be seen for controlling the business operations of BHP Billiton (bhp.com, 2018).
Recent Developments and Changes
As per the 2017 Annual Report of BHP Billiton, the company prepares their financial statements as per UK Companies Act 2006; and presents their financial statements as per the requirements of Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ IFRS 101) (bhp.com, 2018). The company has been following these regulations for years. However, some changes in the accounting principles will be applied from the year 2018 related to some specific financial treatments. The first changed principle will be the adoption of AASB 15/IFRS 15 ‘Revenue from Contracts with Customers’. This modified standard involves determining when to recognize revenue and how much revenue to be recognized. The next standard will be IFRS 9/AASB 9 ‘Financial Instrument’ and this modified standard will include the classification as well as financial assets measurement of the company (bhp.com, 2018). The next principle will be IFRIC 22 ‘Foreign Currency Transactions and Advanced Consideration’ and this modified standard will include the required interpretation for the clarification of the exchange rate to be used for assets, liabilities, incomes and expenses. The last standard will be IFRS 16/AASB 16 ‘Leases’ and this modified regulation will make BHP Billiton to give an explanation for leases under an on-balance sheet model with the difference between finance leases and operating leases removed. These are the recent development and changes in the segment reporting and disclosure of BHP Billiton (bhp.com, 2018).
Information about Major Customers and Markets
The presence of some major customers can be seen in the business of BHP Billiton. BHP Billiton delivers their products to the customers of some of the major countries like China, Japan, Chili, Mexico and United States. BHP Billiton sells iron ore to China for making steel; they sell copper cathode to their customers in Japan and Chili; they sell petroleum to their major customers in Mexico and United States (bhp.com, 2018). It needs to be mentioned in this context that BHP the marketing business segment of BHP Billiton plays a crucial role in understanding the needs of these customers so that the right products can be delivered to them for the maximization of business value (bhp.com, 2018).
The business operations of BHP Billiton can be seen in metals, minerals and mining industry. It needs to be mentioned that this is the largest industry sector of Australian Security Exchange (ASX) with the presence of over 600 companies. This industry contributes largely towards the Gross Domestic Product (GDP) of Australia; for example, this industry contributes 10% towards the total GDP of Australia in 2012-13 (ga.gov.au, 2018). In the year 2012, the mining industry provided employment to 266000 people directly. According to Bureau of Resources and Energy Economic (BREE), this industry resulted to the export worth $107 billion in 2012-13 (ga.gov.au, 2018). Some of the major competitors of BHP Billiton in this industry are Rio Tinto, Newcrest Mining, OneSteel, Alumina Limited and others.
Profit or Loss by Operating Segments
(Source: bhp.com, 2018)
(Source: bhp.com, 2018)
As per the 2017 Annual Report of BHP Billiton, the entity has four reportable segments; they are Petroleum, Copper, Iron Ore and Coal; and the company has provided financial information about all of these reportable segments. According to the above figure, the underlying EBITDA for petroleum, copper, iron ore and coal are $4063 million, $3545 million, $9077 million and $3784 million respectively (bhp.com, 2018). Thus, it is visible that iron ore segment has reported highest underlying EBITDA. After that, the EBIT for petroleum, copper, iron ore and coal are $566 million, $2006 million, $7197 million and $3050 million respectively. Here also iron ore registered highest amount of EBIT. According to the 2017 Annual Report of BHP Billiton, the profit before tax from petroleum, copper, iron ore and coal are $566 million, $1460 million, $6994 million and $3214 million respectively (bhp.com, 2018). Hence, it can be observed that iron ore has been consistent in registering most amount of profit for the company. It can also be observed that none of these reportable segments of BHP Billiton has reported loss in the financial year of 2017. When compared to the 2016 financial results, it can be seen that all the segments have improved figures of profit in 2017 as compared to 2016 (bhp.com, 2018). In 2016, petroleum and iron ore registered loss in EBIT that resulted to the loss before taxation for the company. However, effective financial strategy and good performance of these segments contributed towards profit before taxation for BHP Billiton in 2017 (bhp.com, 2018).
Analysis of BHP Billiton’s Report and Why Segment Data is Essential to the Investment Analysis Process
Users of the financial statements only get an aggregate view of the financial performance of the companies by understanding the information from the consolidated financial statements. It is needed for the business entities to supplement the consolidated financial statements with the information about their various operating segments in order to avoid the issue of information loss. In addition, in the presence of information related to operating segments, the users of the financial statements become able to obtain information about different activities of the business along with their performance and associated risks (Weil, Schipper & Francis, 2013). Operating segment information highlights the financial performance of various parts of the organizations and helps the users in better predicting the future profitability of the organizations. For this reasons, it is needed for the business organizations to comply with the standards of IFRS 8 ‘Operating Segments’ for disclosing information of the operating segments with the help of financial statements and various notes to the financial statements. For this reason, regardless of size, the investors should consider analyzing the financial performance of all reportable segments for getting the actual financial performance of the companies (May, 2013).
It needs to be mentioned that the financial reports of the large companies consist of footnotes to the financial statements where the companies provide the information about different reportable and the same can be found in the 2017 Annual Report of BHP Billiton. According to the 2017 Annual Report of BHP Billiton, the Consolidated Income Statement of the company for 2017 states that the company has registered $10322 million profit before that compared to a loss of $7259 million in 2016. At the same time, the company has registered revenue worth $38285 in 2017. All these figures are convincing for the investors on overall basis (bhp.com, 2018). However, when they consider the segment information for the year 2017, they will see that petroleum segment has reported the lowest amount of profit before tax in 2017 where iron ore registered the highest. They can also see that iron ore has fetched more revenues compared to the other segments. After the consideration segment data, investors might consider investing in the business of iron ore instead of petroleum. It implies that the investors would never be able to know the profitability of each segment by only considering the key financial metrics of BHP Billiton (Bazley et al., 2013). It also indicates towards the importance of segment data for the investment analysis of the investors. In addition, it needs to be mentioned that BHP Billiton has complied with the standards and principles of IFRS 8 ‘Operating Segments’ for disclosing the information for their operating segments (bhp.com, 2018).
It can be seen from the above discussion that BHP Billiton has provided necessary information about their operating segments in the annual report (Callen, 2015). It also indicates that segment data is important for the investors in the investment analysis process as it provides information related to the performance and financial position of different operating segments. In addition, it shows greater accountability of the management of the companies. For all these reasons, segment data is essential to the investment analysis process (Bazley et al., 2013).
Conclusion
The above discussion shows that BHP Billiton is a leading mining, material and minerals company of Australia having major customers in the countries like China, Japan, Mexico, United States and Chili. It can also be seen that the company will bring some changes in financial reporting from the year 2018 by adopting some specific standards like AASB 16/IFRS 16, AASB 9/IFRS 9, AASB 15/IFRS 15 and others. The above discussion shows that BHP Billiton has registered profit in their four reportable segments such as coal, iron ore, copper and petroleum in the year 2017. The study also shows that the investors are needed to consider the financial data of all reportable segments of BHP Billiton for their investment decisions.
References
Annual Report 2017. (2018). Retrieved from https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf
Bazley, M., Hancock, P., Fisher, C., Lovell, A., Berk, J., DeMarzo, P., ... & DeMarzo, P. (2013). Financial Accounting: An Integrated. Thomson Pty Ltd, South Melbourne.
BHP. (2018). BHP. About us Retrieved 14 August 2018, from https://www.bhp.com/our-approach/our-company/about-us
BHP. (2018). BHP. Marketing and supply Retrieved 14 August 2018, from https://www.bhp.com/our-businesses/marketing-and-supply
BHP. (2018). BHP. Structure and strategy Retrieved 14 August 2018, from https://www.bhp.com/our-approach/our-company/strategy
Callen, J. L. (2015). A selective critical review of financial accounting research. Critical Perspectives on Accounting, 26, 157-167.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
May, G. O. (2013). Financial accounting. Read Books Ltd.
Minerals Basics - Geoscience Australia. (2018). Ga.gov.au. Retrieved 14 August 2018, from https://www.ga.gov.au/scientific-topics/minerals/basics
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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