Accounting Treatment For Impairment Loss: A Case Study Of BHP Company

Principles of Measurement

1. The recognition as well as measurement regarding acquirement of the “US Fayetteville Oil and Gas shale” can be analysed as per directives as well as decree of standards proposed AASB. As suggested by Chen et al. (2017), pertinent standards declared by Australia Accounting Standards Board-AASB for firm acquirement is AASB 3. The current report refers to the operations of the firm BHP Billiton. In essence, BHP Billiton had purchased the “Fayetteville Oil and Gas Shale” particularly on 11th March categorising investment as particularly business combination. Essentially, principle of recognition for this type of principle needs to be founded on acquisition date of the firm BHP Billiton Company. BHP Billiton RH has the need to identify the assets/resources of the target firm individually from goodwill of the firm (Errunza and Ta 2015). Besides this, identifiable assets acquired during procedure of acquirement must meet the criteria so as to become a part of firm’s assets/liabilities of the firms must satisfy certain specific terms as well as conditions as reflected by structure for preparation as well as presentation of pecuniary data and accounts. For the purpose of qualifying according to the standard directives and situations, it is important that firm’s assets as well as liabilities of target firms need to be in control of acquiring else the target firm (Chang and Yen 2015). This need not create outcomes of any business transactions. Also, the firm BHP Billiton else wise acquiring enterprise must take account of assets of target firm by means of model set of laws and directives. Furthermore, there needs not be double counting in the process of identifying resources/assets of the firm.  This needs to be such that acquirement has considered this previously. For instance, goodwill as well as other intangible assets of the business firm need not be taken into account by the firm BHP Billiton in case if the same is not detected by the acquire firm in balance sheet (Gackstatter and Möller 2016). Particularly, business transaction can direct the way towards generation of goodwill between two different enterprises but these need to be acquired and at the same time documented according to standards prescribed by AASB-Australian Accounting Standard Boards. In essence, accounting standard boards also provide course of action of identifying operating assets as well as liabilities of business concerns.

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Principle of measurement as per standards of AASB 3 mentions that the firm BHP can enumerate net identifiable assets along with liabilities of the firm according to fair value of assets/liabilities of the firm at the date of acquirement of assets. In essence, it is recommended by standards of accounting that the firm BHP Company have the need to compute assets/resources of acquiring firm at fair value otherwise liquidated value of firm’s assets. In addition to this, the business concern utilizes measurement basis undertaken by BHP Company for the purpose of business combination the purchase method earlier until the year 2009. Particularly, the purchase technique engages recognizing net assets/resources of the target firm (Dickinson et al. 2016). Again, the business combination for particularly the financial year was documented by appropriate implementation of an acquirement mechanism of accounting, firm’s net identifiable assets/liabilities are documented at fair value at acquirement date.

Analysis of Enumeration of the Enterprise

2. Analysis of enumeration of the enterprise Fayetteville Oil and Gas Corporations was carried out by acquirement mechanism by the enterprise BHP Company. Essentially, net assets possessed by the target enterprise need to be valued at market price for the current period. Thereafter, there can be a re-examination of balance sheet of target firm. In addition to this, fair value ascertained of the target firm can then act as the foundation for current market of the acquiring firm plus target price (Chen et al. 2009). In addition to this, the firm BHP Company presented business transaction using method of business combination else wise acquirement mechanism. Again, under corporation’s assets as well as liabilities of target enterprises are fused and combine with acquiring corporation by correct percentage risk (Chang and Yen 2015). The acquiring company applies and the rest of the portion is determined as minority interest in the target company’s balance sheet. The balance sheet of the firm BHP recommends that enterprise had reported goodwill of just about USD 552 million. In essence, this was a division of firm’s goodwill in the acquirement of firm “US Fayetteville Gas Company”. Essentially, the entire amount of additional payment is because of goodwill identified in mainly balance sheet of acquiring firm. In general, the total amount is enumerated as the additional potential that the target firm can recompense in normal course of the corporation. Carey et al. (2014) suggests that accounting suppositions and determination of fair value assets/resources of the firm can be considered to be important concerns of the enterprise and need to be analyzed. Again, the accounting supposition and ascertainment of true potency of the firm of “US Fayetteville” can also be regarded to be violent. Furthermore, the enterprise had expended around USD 30 bn in the acquirement deal. Essentially, the enterprise had the need to charge impairment on additional assets amount that the firm had disbursed after reduction in prices of oil. The amount of impairment was observed to be 105 out of the deal value of approximately 2.8 bn dollars.

3. The treatment of accounting and process of documentation of acquirement of the enterprise Fayetteville oil and gas was carried out by utilizing acquisition mechanism. Using the acquisition system, net identifiable assets as well as liabilities of the target enterprise are identified at balance sheet assertion of the firm. This is necessarily presented at firm’s book value at the historical prices for the business. The re-evaluation of assets/ liabilities of the balance sheet assertions is undertaken for ascertainment of fair value of enterprise’s asset/ liabilities of corporation (Reilly and Schweihs 2016). Fundamentally, the firm BHP Company ascertains acquirement cost for the firm US Fayetteville after early reconsideration of balance sheet of the concern. Again, BHP company re-evaluated 30 bn dollars as extensive worth for the firm’s assets. Particularly, the thing that was considered by the firm was essentially generation of stream of cash by target enterprise. Essentially, the business concern ascertained course of cash creation at the apex cycle of the asset/resource. This necessarily overvalued assets of the target firm and reflected an augmented potency of the firm assets in the system and due course of creation of streams of firm’s cash (Caruso et al. 2016). In particular, the important suppositions that showed the way to overvaluation of assets of the firm and assessment for which goodwill element had a substantial weightage. Particularly, the firm “BHP Company” undertook the impairment during the FY2015 at the time when prices of oil price began decreasing and the re-examination for assets of the firm was undertaken in the current case. Also, proper value of firm’s assets and potency of firm’s assets had drastically decreased. This directed the enterprise to write and charge impairment for firm’s goodwill or additional amount that company had disbursed. The charges for impairment for enterprise were approximately 2.8 billion dollars, which was noted in the financials of the company (Reitmaier and Schultze 2017).

Treatment of Accounting

4. Various factors that exerted impact on recognition as well as measurement of loss from impairment of “Fayetteville Oil and Gas Operation” include altering prices of oil and speedy descend in prices of oil during the period 2015. In essence, the prices of oil have decreased from a tip of approximately $120 for every barrel to a low level of roughly $45 for every barrel. As such, the considerable amount of prices of oil was not anticipated by the firm BHP, that lifted up questions on assumptions of accounting and varied valuation evaluation carried out by the firm BHP. In essence, valuation with suppositions of the company got affected and the enterprise did not anticipate the substantial declined in prices of oil. The treatment for loss of impairment would be undertaken by sticking to the guidelines of the standards stipulated under AASB. In actual fact, the target enterprise can assume cash flow in the future and consider 10% volatility in generation of flow of cash, however, volatility that was in fact observed to be higher than 50%. Also, the accounting treatment for impairment loss can be carried out using corridor system of accounting. In this approach the loss shall at once not have an effect on income assertion of the business (Edwards 2017). Essentially, the loss else wise charges of impairment stemming from revaluation of assets/resources can be restated in firm’s other comprehensive statement of earnings of the firm. Again, the same would necessarily be permitted to be capitalized in case if the loss stemming from can be reversed. Kuter et al. (2018) suggests that the losses otherwise the impairment recorded on date of revaluation of firm’s assets as well as liabilities can be treated as expenditure. Essentially, the same can be detected in firm’s income declaration in case if the same cannot be reversed. A charge for impairment noted by the firm was just about 2.8 bn dollars that reflected drop in overall productive worth of firm’s assets. Stakeholders as well as financiers of the firm are going for acquirement with the firm as assets’ fair value was excessively high (Errunza and Ta 2015). The firm could have carried out varied kinds of evaluation before valuation of firm’s assets as well as liabilities. In this case, trend evaluation alone cannot give considerable base for analysis and ascertain price of firm’s assets as well as liabilities. Additionally, the BHP Company must have carried out scenario evaluation in ascertainment of assets price of firms in cases where fluctuations in prices of assets are observed to be extremely high. The evaluation carried out provides the firm an opportunity to evaluate and analyse assets worth in diverse state of affairs and scenarios of cash flow (Chen et al. 2017)

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Factors Impacting Recognition of Loss from Impairment

                                                 

5. The treatment of accounting for losses of impairment otherwise charges of impairment has been used on revaluation date of firm’s assets as well as liabilities. Essentially, charges for impairment are enumerated after reassessment of fair as well as true value of resources and liabilities of the enterprise. Also, charges were enumerated after revaluation of assets as well as liabilities of the enterprise BHP Company (Chang and Yen 2015). Charges for impairment enumerated on firm’s intangible assets after a drop in production or else creation of flow of cash from resources is not definite in this case and assets get re-valued. In essence, worth of asset is generated by economic advantages it would deliver to the firm.

                                   

The charges for impairment enumerated can be ascertained by the decline in overall productive assets of the firm (Rennekamp et al. 2014). According to then given case under consideration, drop in overall value of production was roughly 2.8 bn dollars. Again, impairment particularly under present standard and system of accounting mentions that charge of impairment is reversible only when validation for the same is reasonable. In essence, accounting for this can be carried out in two different ways (Gackstatter and Möller 2016). The methods are such that in case if the losses are anticipated to be reversed, then in that the loss can necessarily be capitalized in firm’s income assertion. In case if charges for impairment for the firm are anticipated to be non-reversible, then in that case, expenditures need to be reflected as expend under the income declaration for the subsequent financial year. In essence, categorisation of charges for impairment can be carried out after a careful evaluation of class of asset, future value and anticipated stream of cash to be generated by the business enterprise.  

References:

Gackstatter, T. and Möller, K., 2016. Triggering Events in Asset Impairment Accounting-a Case Study in the Automotive Industry.

Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter? Evidence from China. International Research Journal of Applied Finance, 6(4), pp.197-222.

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.

Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking market-driven goodwill impairment.

Kuter, M., Gurskaya, M., Andreenkova, A. and Bagdasaryan, R., 2018. Asset Impairment and Depreciation before the 15th Century. Accounting Historians Journal, 45(1), pp.29-44.

Errunza, V. and Ta, H., 2015. The impact of investability on asset valuation. Journal of Financial and Quantitative Analysis, 50(5), pp.1135-1163.

Edwards, A., 2017. The deferred tax asset valuation allowance and firm creditworthiness. The Journal of the American Taxation Association, 40(1), pp.57-80.

Reitmaier, C. and Schultze, W., 2017. Enhanced business reporting: value relevance and determinants of valuation-related disclosures. Journal of Intellectual Capital, 18(4), pp.832-867.

Caruso, G.D., Ferrari, E.R. and Pisano, V., 2016. Earnings management and goodwill impairment: An empirical analysis in the Italian M & A context. Journal of Intellectual Capital, 17(1), pp.120-147.

Reilly, R.F. and Schweihs, R.P., 2016. Guide to intangible asset valuation. John Wiley & Sons.

Peasnell, K.V., 2014. On capital budgeting and income measurement. Abacus, 17(1), pp.52-67.

Brent Crude Oil Price | Historical Charts, Forecasts & News. (2018). Retrieved from https://www.focus-economics.com/commodities/energy/brent-crude-oil

Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.

Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter? Evidence from China. International Research Journal of Applied Finance, 6(4), pp.197-222.

Chen, S., Wang, Y. and Zhao, Z., 2009. Regulatory incentives for earnings management through asset impairment reversals in China. Journal of Accounting, Auditing & Finance, 24(4), pp.589-620.

Dickinson, V., Wangerin, D.D. and Wild, J.J., 2016. Accounting Rules and Post-Acquisition Profitability in Business Combinations. Accounting Horizons, 30(4), pp.427-447.