Advance Accounting : Companies Performances Assessment Answers

Describe about the Advance Accounting for Companies Performances.

Introduction

BHP Billiton Ltd is recognized as one of the largest producers of commodity and a leading company associated with diversification of wealth and resources. Its key purposes include minimization of production costs and maximization of asset life. The majority of underlying incomes of BHP Billiton originates from operations in iron ore activities and other activities in copper and coal. Both BHP Billiton Ltd and BHP Billiton Plc are members of BHP Billiton Group (dual-listed company), headquartered at Melbourne in Australia (BHP Billiton, 2015). These two entities exist as different companies but functions as a combined group under BHP Billiton. For the purpose of this assignment, the annual report of BHP Billiton is taken into consideration.

Remuneration Report

According to the remuneration report of BHP Billiton, the remuneration committee sets out values for determining the results of performance-based remuneration of the executives. This shows that the remuneration policy is linked to strategy. The executive remuneration policy is made to portray the price of shares over an enlarged period and this is be achieved after deferring of equity constituents of STI awards for two years and with TSR that is measured over five years performance. Mr. Mackenzie as the CEO of BHP Billiton receives a remuneration (base salary) of US$1.700million per annum while for 2016, the maximum amount of fixed remuneration that CEO can earn is $2.270million, pension contributions of US$0.425million and benefits of US$0.145million. The STI target values depend on the target performance of 160% of base salary and the maximum amount of STI can be 240% of base salary. Similarly, the normal value of LTI is calculated in accordance with the share price at grant date and the maximum amount of LTI can be 400% of base salary (BHP Billiton, 2015). These levels need to appropriately reflect the contributions and responsibilities of a CEO. To be equivalent with shareholder’s expectations, remuneration levels must portray the overall value and performance of shareholders.

GPFR

General Purpose Financial Report is that report which widely portrays the financial information of the company. It is prepared so that every user needs can be addressed, thereby facilitating in decision-making. From the annual reports of BHP Billiton, it can be seen that its GPFR includes, balance sheet, cash flow statement, income statement, statement of comprehensive income, statement of changes in equity and notes to financial statements (Northington, 2011). The consolidated financial statements of BHP Billiton or GPFR are prepared in accordance with the IFRS standards and the mode of preparation is set out in Note 41 of the Notes to financial statements. The preparation of GPFR also requires the company to frame certain estimates and judgements affecting the amount of asset, liabilities, income and expenses in the financial statements.

Inventory

The inventories and work in progress of BHP Billiton Ltd are valued at net realizable value and lower of cost. This cost is ascertained basically on the basis of average costs. Costs of processed inventories are obtained on the basis of an absorption costing method. Cost of production, cost of buying raw materials, attributed mining and manufacturing overheads are included in the computation of cost. In relation to mineral inventories, quantities are evaluated through assays and surveys. The quantities of petroleum inventories are obtained through tank flow measurement and flow rate, composition and calculation of volume is obtained through sample analysis.

Accounts Receivable

According to the annual report of BHP Billiton, it can be seen that a provision for doubtful debts (PBDD) of US$115million have been made at the beginning of the year but after utilization of US$109million from credit for the same year, the closing balance of provision of doubtful debts have come to US$6million. Furthermore, no provision for doubtful debts (PBDD) has been created by the company in respect of any outstanding values and no expense has been identified in relation to such doubtful debts from related parties (BHP Billiton, 2015).

PPE (Property, Plant and Equipment)

PPE is recorded at cost minus impairment expenses and depreciation. The total PPE of BHP is US$94,072million that includes plant and equipment, land and building, mineral assets etc. The carrying values of such PPE are depreciated to their residual value (approximated) over the approximated lives of particular assets or approximated life of related field or mine, if shorter. These approximations are evaluated annually and any alterations are considered with respect to remaining depreciation expenses. The major PPE are depreciated on a straight-line and/or production unit basis by adopting their estimated lives like, land (not depreciated), buildings (25-50 years) etc. The impairment events that results in a write down of an asset are carrying amount is regarded prudent in the case of BHP Billiton because this can overcome the normal apportioning of a non-current asset’s expenses over its useful life (Melville, 2013).

Contingent Liabilities

According to the annual report of BHP Billiton, contingent liabilities include amounts from associates and joint venture and subsidiaries and joint operations. The total contingent liabilities as at 2015 are US$3263million. Out of these liabilities, the legal issues for which the company had to pay includes tax-related amounts and significant litigations that have generated several actions against the company (BHP Billiton, 2015). The amount of contingent liabilities of these tax-related matters is US$1313million. In relation to leases, BHP holds a liability of finance leases of $US438million and total commitments under operating leases of amount $US2368million. Finance lease includes lease of transmission assets and power generation while operating lease includes leases of PPE (Choi & Meek, 2011).

Taxation (Transfer Pricing)

BHP Billiton Group has several activities in different countries and the tax regimes differ between countries. The nature of activities of BHP Group triggers taxable responsibilities that include royalty, corporation based tax, production tax, employment based tax etc. For taxation of BHP Billiton, note 43 (significant accounting policies), note 44 of application of accounting assumptions, estimates and judgements in Taxation group under application of critical accounting policies and estimates and under section 3.14.1of the Risk and Committee Report in Significant issues- Tax and royalty liabilities, can be referred (BHP Billiton, 2015).

Prudence

Prudence is one of the latest characteristics updated in the conceptual framework of financial reporting by International Financial Reporting Standards. It requires that companies must adopt policies in such a way so that neither assets nor revenues are overstated nor liabilities or expenses are understated (Brealey et. al, 2011). Accounting transactions and specific events are uncertain in nature and companies are bound to make estimates that require judgement to encounter such uncertainties. Hence, prudence is that key accounting principle which necessitates that while making judgements, management must be prudent and cautious. Reporting can be enhanced by this concept because it removes biasness from financial statements when cautions are given due importance while making relevant decisions 9 Horngren, 2013). However, such understating of assets and overstating of liabilities sometimes lead towards a false impression of the company being in a bad financial position than it actually is. This can put off the investors and proves that financial statements are negative (Brigham & Daves, 2012). It is obvious that prudence is a desirable concept, after all who would opt for an imprudent accounting. Until 2010, prudence was included in the IASB conceptual framework of accounting but it is a matter of doubt why prudence was further revised in 2015. In the revised conceptual framework of accounting of IASB, prudence was reinstated as an essential concept that enhances the usefulness of financial statements. Therefore, it is obvious that the concept of prudence was long identified as an essential virtue or characteristic in everyday life. Sadly, the application of prudence in the accounting world seems difficult than that of an individual’s conduct. It was removed by IASB in 2010 before because of its conflicts with neutrality but the revised concept in the Exposure Draft of IASB, is now included with neutrality (Daves & Crawford, 2012)

Conclusions and Recommendations

The financial reports of BHP Billiton portray a true and fair view of the company’s performance in terms of both financial measures and non-financial measures. The reporting is in accordance with the AASB requirements and Corporations Act 2001. In relation to corporate governance, the company follows ASX Corporate Governance Principles and Recommendations. Apart from these reporting aspects, BHP Billiton also gives due importance to sustainability programs and it has significantly reduced the emissions of greenhouse gases to 6%.

References

BHP Billiton 2015, BHP Billiton Annual Report and accounts 2015, Viewed 16 August 2016, https://www.bhpbilliton.com/~/media/bhp/documents/investors/annualreports/2015/bhpbillitonannualreport2015.pdf

Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Brigham, E. & Daves, P 2012, Intermediate Financial Management , USA: Cengage

Choi, R.D. & Meek, G.K 2011, International accounting, Pearson .

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Davies, T. & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.

Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.

Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK

Northington, S 2011, Finance, New York, NY: Ferguson's.