Contemporary Issues in Accounting Theory of BHP Billiton

Question: Discuss about the Accounting Theory and Contemporary Issues for BHP Billiton. Answer: Introduction BHP Billiton is an Australia based mining company which has a wide portfolio of global mining assets. The company aims to create constant value for its shareholders by enhancing the operating margins and ensuring efficiency with regards to utilization of assets. Iron ore, copper and coal are the major contributors to the income for BHP though it has presence in other minerals as well. The aim of the report is to analyze selective components of the balance sheet along with the concept of prudence along with the debate surrounding its usage. Prudence and resulting debate The concept of prudence is a relatively new addition to the accounting norms and still caught in debate with regards to underlying utility. This concept requires that the management deploys such policies that ensure that no revenue or asset is overstated while ensuring that any expense or liability must not be understated. These statements are essentially required in relation with some transactions and/or events that are not certain (IFRS, 2015). This concept was first introduced in the 1989 Framework as a desirable quality in the field of accounting and was placed alongside neutrality. However, this was removed by the IASB as the principle of prudence was incompatible with the very idea of neutrality and hence violated it to some extent. The Framework project continued and attempts were made by IASB and FASB not to reopen the issue of prudence. However, with intense lobbying from European Financial Reporting Advisory Group, the concept was introduced in 2015 in the exposure draft released by IASB. However, the concept introduced in 2015 was different from that in 2010 as it hailed cautious prudence rather than the earlier version of asymmetric prudence (Wagenhofer, 2015). Cautious prudence requires cautious estimate making by the management in order to ensure that the financial statements and disclosures so produced in the GPFR are free from biases and present accurate representation of the situation. The main argument in favor of introduction of prudence is to check over exuberance on the part of the management especially with regards to application of subjective judgements and estimates. This ensures that the shareholders are able to get the most accurate representation of the financial position (IFRS, 2015). However, the key criticism of this principle is that it deals with only one aspect i.e. not to exaggerate but does not cover the aspect where the management must not underestimate which is the core of neutrality. Also, due to application of prudence and caution, the comparability of financial results becomes difficult as in a particular year the results are normal while in the next year they may be abnormal (ACCA, 2014). Hence, cautious prudenc e is the way forward but with adequate consultation with the relevant stakeholders. Remuneration Report The determination of the variable component of pay of executives is the responsibility of the remuneration committee which ensures that it is closely linked with strategy. The executive remuneration is dependent on extended period movement of share as the rewards in equity terms are typically deferred and takes into cognizance the performance over five years. The base salary of the CEO is $ 1.7 million with the capping of STI (Short Term Incentives) and LTI (Long Term Incentives) at 240% and 400% of the base salary respectively. Hence, the policy seems to focus on long term returns and seems prudent (BHP Billiton, 2015). The relevant screenshot for the remuneration report is shown below. GPFR (General Purpose Financial Report) The GPFR will typically comprise of the following (Deegan, 2014). Income Statement Balance Sheet Cash Flow Statement Changes in Equity Statement Notes to the financial statements The preparation of the above components of GPFR has been done in accordance with the relevant IFRS standards with the mode being clarified by Note 41. There are some management judgments and accounting policies that have been used for the preparation of various GPFR statements (Horngren, 2013). PPE (Property, Plant and Equipment) The PPE has been recorded at cost minus deductions for accumulated depreciation. The total amount of PPE recorded in the balance sheet stands at $ 94,072 million and consists of equipment used in mining besides land and building. The depreciation is applied on the carrying value of PPE taking into cognizance the effective life of asset to eventually touch the residual value expected at the end of the effective life. In case of changes in effective life, the changes are incorporated annually along with their respective effect on the depreciation which is captured in the relevant GPFR. The appropriate depreciation method for host of PPE assets is the straight line method using the effective life of each asset (BHP Billiton, 2015). Also, at times there is a write down in the asset value that is required especially when the carrying value is higher than the net realizable value and is a prudent policy on the behalf of the company (Deegan, 2014). Accounts Receivable Besides representing accounts receivable, the company has given provisioning for doubtful debts to the tune of $ 115 million. By the end of the year, this balance fell to $ 6 million. In the year given, no incremental provision has been taken for any doubtful debt which indicates that the company is realistic in regards of bad debt reporting (BHP Billiton, 2015). Inventory The inventory has been valued considering the lower value of cost and realizable value. The average cost concept has been used for cost estimation while the used inventory cost has been computed by the usage of absorption costing method. The minerals inventory is predicted by deploying several reliable techniques (for example, Assay Survey). However, inventory estimation for petroleum requires more complex techniques as the earlier techniques are not suitable (BHP Billiton, 2015). Contingent Liabilities The contingent liabilities contain various liabilities associated on the back of the commitment and financial resources being extended to subsidiaries, joint ventures and associates. A key contributor to these liabilities is in the form of various legal cases arising on account of tax concerns or other disputes. The contingent liabilities attributed to issues related to tax in FY2015 are $ 1,313 million while commitments in the form of finance and operating leases amount to $ 438 million and $ 2,368 million respectively. The operating lease primarily relates to PPE (Property, Plant Equipment) leasing while finance lease deals with assets that are deployed for power generation and transmission at the mining site (BHP Billiton, 2015). Transfer Pricing The mining operations of the firm is stretched across nations and exposed to differential tax regimes that are existing across nations. Therefore, there is obligation on the company to pay various taxes in relation to profits, royalty etc. Information in this context can be obtained using note 43 and note 44 which bring into notice the pivotal accounting policies and underlying judgements and assumptions used in accounting. Further, using the report of the risk committee, knowledge may be obtained about the various liabilities related to royalty and tax given in Section 3.14 (BHP Billiton, 2015). Conclusion On the basis of the various arguments presents, it is fair to conclude that the financial position reported and performance represented seems fairly accurate as appropriate accounting policies and management judgement has been utilized. The company is in line with the relevant regulations concerning reporting that are in place. Additionally, it may be recommended that in the near future, the company on a voluntary basis should include broader framework such as GRI (Global Reporting Initiative) and Triple Bottom line reporting so as to represent the social and environmental costs associated with the mining business through the GPFR. References ACCA 2014, Prudence IFRS, ACCA Website, Available online from https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf (Accessed on September 02, 2016) BHP Billiton 2015, BHP Billiton Annual Report and accounts 2015, BHP Billiton Website, Available online from https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015.pdf?la=en (Accessed on September 02, 2016) Deegan, CM 2014. Financial Accounting Theory, 4th eds., McGraw-Hill Education Australia, Sydney Horngren, C 2013, Financial accounting, 5th eds., Pearson Australia Group, Frenchs Forest, N.S.W IFRS 2015, A tale of Prudence, IFRS Website, Available online from https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF (Accessed on September 02, 2016) Wagenhofer, A 2015, The Never Ending Story of Prudence and IFRS, IFAC Website, Available online from https://www.ifac.org/global-knowledge-gateway/business-reporting/discussion/never-ending-story-prudence-and-ifrs (Accessed on September 02, 2016).