Impairment Assessment
In the given report, the company selected is BHP Billiton whose annual report of 2017 has been analysed for treatment of impairment in the books of accounts based on the requirement of the CFO of the company. The company is one the pioneer companies in Australia and listed on the Australian Stock Exchange as well as the London Stock exchange. It employs more than 65000 people and has the presence worldwide (Alexander, 2016). It deals in mining, petroleum extraction and metallurgy industry. It is largest mining company in the world, market capitalization wise and third in terms of revenue in Australia.
Impairment may be defined as the loss in the value of the asset due to which it must be impaired in the financial statements. Impairment is governed by IAS 36 and AASB 136. As per this, all the tangible and intangible assets needs to be assessed for impairment yearly based on the existence of conditions and indicators, if any. The assets should not be carried in the books at more than the recoverable value. The impairment loss is then calculated by the way of deducting the recoverable value estimated from the carrying value in the books(Belton, 2017).
In the given case, the annual report which has been considered for analysis is pertaining to the year ended 30th June, 2018. From the extract of the consolidated profit and loss account which has been shown below for BHP Billiton, it can be seen that the impairment amount for the year is $ 193 Mn (Carlin, 2011).
Being an energy company, the assets are very volatile and can be subject to impairment every now and then. The assets which have been considered for impairment are petroleum. Iron ore, coal, copper, property, plant and equipment including exploration and evaluation assets and various other unallocated items of the group (Carlin, 2010).
The impairment has been done on the basis of several internal and external factors namely continuous changes in the pricing assumptions, the discount rates and the developmental goals. The volatility and weaker gas and oil prices in the recent period also contributed to the impairment even after increase in productivity (Carlin, 2009).
However, the company later on faced the issues with respect to the impairment done in 2015 and 2016 as the factors and the assumptions which were taken were not found to be right and were significantly deviated from the market participants assumptions. Due to this, the company has to revise the value as well as the financial statements and annual report and submit revised 20F statement in 2016. The major reason for this was inefficiencies in the internal control and incorrect valuation of the US onshore assets of the company. The auditor of the company has also missed out on the same while reviewing the accounts (Choy, 2018).
Background on BHP Billiton
The calculation and assessment of impairment is a complex task and involves a number of key issues that needs to be taken care off. On the basis of the publications of Big 4 and other professional bodies like Australian Accounting Standards Board, some of the complexities include
Identification of the internal and external factors that trigger the impairment assessment.
There are some intangible assets like the goodwill and others which needs to be assessed annually for impairment, if any.’In case the single asset is not able to generate revenue, then the smallest possible group of assets which would be able to generate revenue independently would be assessed for impairment and such a group or class of assets is called the cash generating unit(Dichev, 2017).
Besides this, the factors which are being considered may be relative to the industry or market, i.e., one factor may be good enough for a company to go for impairment of assets and the same may not be relevant enough for the other.
Furthermore, the major complexity is involved in the valuation of the assets when the fair valuation or the value in use is being calculated.
Goodwill in case once impaired cannot be reversed in future whereas the other assets needs to be assessed for reversal of impairment loss, if any of such positive situation exists. These are some of the key issues and complexities which exist in the impairment testing, the most complex of which is the cash flows and the rate of discount to be considered when calculating the value in use as there are a lot of chances of discrepancies in the same.
The annual report of the company BHP Billiton has made most of the disclosures which are required as per the AASB standard. Besides the above impairment assessment, the company also assesses the trade and other receivables based on the credit quality. Some of the evidences from the annual report on the assumptions and assessments being done by the company are shown below(Farmer, 2018).
The above table is reflective of the fact that what and how the amount of impairment is being calculated, how the valuation has been done, what are the assets being considered and what are the relevant indicators.
The entity has complied with all the disclosure requirements and has complied with Para 126 of AASB 136 on disclosure of the amount of impairment, the assets being impaired and the reversals, etc. It is also in compliance with the Para’s 127 (grouping of assets of similar nature), 128 (reconciliation of class of assets like in PPE), 129 (segment wise reporting of impairment which has been met by the company), 130 (showing all the material impairment separately which can be found in case of PPE and non-current assets), 131(showing the aggregate of impairment and reversal of the same), all of which discusses on the disclosure with respect to impairment of individual assets and segment wise reporting (Linden & Freeman, 2017).
Conclusion & Recommendation
In the given report, we have discussed extensively on the topic of impairment and also analysed the annual report of the company BHP Billiton. Following are the key findings.
- The company disclosures with respect to the impairment in its financial statements meet the criteria of the generally accepted accounting principles and general purpose financial reporting. It ensures understandabilityof the end user by giving all the detailed information and the basis of assumptions and estimations taken. It has also ensured timeliness in reporting by submitting the annual report at the right time and helping the stakeholders take the decision based on it (Jefferson, 2017).
Recommendation: However, since the company faced some issues due to wrong assumptions and inappropriate methods of valuation, the company needs to be careful in the future and also take into consideration market parameters and what other companies in the same industry are following. It also needs to work out on the internal control so that all the inefficiencies can be removed and a lot more transparent assessment of impairment can be done (Sithole, et al., 2017). Furthermore, the auditors and the valuation experts of the company should adhere to the international standards and report the material misstatements, if any in their report.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Carlin, T. a. F. N., 2010. Resisting compliance with IFRS goodwill accounting and reporting disclosures evidence from Australia. Journal of Accounting and Organizational Change, 6(2), pp. 260-280.
Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific Accounting Review, 23(3), pp. 368-392.
Carlin, T. F. N. a. L. N., 2009. Goodwill accounting in Malaysia and the transition to IFRS – a compliance assessment of large first year adopters. Journal of Financial Reporting & Accounting,, 7(1), pp. 75-104.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
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