BHP Billiton's Acquisition: An Accounting Essay On Fayetteville Oil And Gas Shale.

 Discuss the recognition for financial instruments including financial asset, financial liabilities and equity instruments according to relevant AASBs.
2) Discuss the measurement of finical instruments according to related to relevant AASBs.
3) Identify different types of financial instruments available in the chosen company. Provide at least one example of each type of financial instrument available in the chosen company and specify recognition and measurement of that financial instrument. 

Part B 
From the perspective of the investors, discuss the potential impact of the adoption of new AASB 9 on assets, liabilities, financial performance and one of selected financial ratios (such as debt/equity ratio) of the chosen company.
You should include the examples that you have identified in part A3) in your discussion.  

Acquisition mechanism and accounting treatment

The discussion deals with the acquisition of the Fayetteville oil and gas Shale by BHP Billiton. The company acquisition refers to a situation that took place when the Australian company of BHP Billiton purchases most or all of another company that is Fayetteville oil and gas Shale shares for taking control. This has taken place due to impairment of non-financial asset and inappropriate treatment of accounts (Angwin 2015).

The acquisition occurred when the BHP Company gets more than 50% ownership in the company of Fayetteville oil and gas Shale that is targeted. As part of the transaction, the company BHP who is acquiring purchased the Fayetteville oil and gas Shale Company’s inventory and other resources, that made the acquiring company to make the decisions regarding the newly acquired assets without the shareholders approval of Fayetteville oil and gas Shale company (Green 2016). 

Part A 

Solution to question 1

            As per the Australian Accounting Standard Board, the AASB, at the time when the entity is acquired, other than where the acquisition is a reconstruction within an economic entity, the identifiable assets acquired along with the applicable liabilities assumed to be measured at the acquisition date at their fair values as at the acquisition date (Bowen and Khan 2014). If there is any distinction between the acquisition cost and the total of the assets fair values acquired, it is needed to be accounted for in according to Accounting Standard AASB 1013 “Accounting for Goodwill”. The acquisition mechanism may consist of the acquisition of the assets group, individual asset or net assets.

The AASB Standard prescribes the accounting for acquisitions of assets and, to the extent they form part of the net assets of an entity or operation acquired, the accounting for the liabilities considered. Due to the crash in the oil prices of Fayetteville oil and gas Shale Company was acquired by BHP Billiton (Goncharov, Riedl and Sellhorn 2014). As per the annual report of Fayetteville oil and gas Shale Company the measurement of the acquisition took place as per the AASB standard by measuring at the acquisition date at their fair values as at the date of acquisition.

Solution to question 2

            There are numerous ways in which the business operations can be measured. The indicators that can measure the operations of the business are Net profit margin, gross profit margin net profit and debt asset ratio. Analysis of yearly report of the firm BHP reveals that the goodwill of approximately USD552 million that increased from the acquirement of the business of Fayetteville gas during the period 2011 was necessarily allocated to essentially Fayetteville CGU (Laux 2016). In particular,

Factors affecting impairment loss

The Fayetteville CGU takes in natural gas reserves of Fayetteville and takes into account resource; wells of gas manufacture and related facilities; and gas accumulating system situated in particularly USA (Chen, Shroff and Zhang 2017). Thorough analysis of the report replicates the fact that goodwill allocated to the firm Fayetteville was entirely impaired during the period 2012. In view of that, a goodwill impairment examination was not necessary to be carried out during the year 2013 (Rani, Yadav and Jain 2016). Reports reveal that the group necessarily acquired different subsidiaries as well as operations during the specified period as presented below:

In addition to this, the company also incurred costs associated to acquisition to oil as well as gas property as mentioned below:

In addition to this, the  as per the financial statements for the year ending 30 June 2011 that includes the provisional fair values disclosure of the identifiable liabilities  and assets of the business of Fayetteville Shale gas that were acquired in March 2011. The fair values were provisional at 30 June 2011 due to the complexity of valuation process. The provisional fair values of the liabilities and assets that were acquired and approximated the amount of consideration paid (US$4,819 million) and hence no bargain purchase gain or goodwill was recognized at 30 June 2011.

The assets Fayetteville Shale are reported as new and acquired operations until there is a comparison of full-year. The New operations has risen the Underlying EBIT by amount of US$1.2 billion primarily due to steady performance at the BHP Billiton operated Pyrenees oil facility and the inaugural input from the Fayetteville shale assets that were acquired recently.

Solution to question 3

Identification of accounting treatment and recording for the acquisition:

The company has invested in the area of growth either by means of projects within the firm’s assets or else by means of exploration otherwise acquirements. The acquirement mechanism of accounting is mainly utilized to take into consideration business combinations of the entire group. As suggested by (), the Treasurer of the nation Australia sanctioned the merger that are subject to specific conditions. Also the firm has the need to comply with specific conditions specified under Foreign Acquisitions and Takeovers Act of the year 1975 (Kabir, Rahman and Su 2017). According to the annual statement of the firm

it can be hereby mentioned that the company categorizes assets as particularly novel and acquired operations until there is full year period for comparison. Novel and acquired operations lessened EBIT by roughly USD86 million in financial year during 2012. For example, acquirement of iron ore of the business of HWE Mining in particularly Western Australia enhanced underlying earnings of the corporation by roughly USD$97 million. Essentially, this is was offset by a decrease in Underlying EBIT for firm’s Onshore Asset in the US with a loss of roughly USD140 million during the financial year 2012 in comparison to a profit of particularly USD43 million in financial years 2011(Sun and Zhang 2017).

Recognition of impairment loss

Analysis of annual statements, thus, helps in understanding then fact that business combinations are taken into account by implementing acquisition mechanism of accounting. In this, the identifiable assets/liabilities along with contingent liabilities ate enumerated based on fair value particularly at the date of acquirement (Harris 2015). When group’s fair value for different identifiable net assets acquired surpasses acquirement costs, the variance is essentially identified in the income assertion.

Again, amounts disbursed for the purpose of acquirement of particularly identifiable intangible assets are primarily capitalized particularly at the fair value of mainly consideration paid and are registered at cost after deduction of accumulated amortization as well as impairment charges. In essence, specific intangible assets having a finite life are necessarily amortized particularly on a straight-line method over their anticipated economic life that is characteristically no better than 8 years (Chang and Yen 2015). In particular, exploration as well as evaluation action is within a specified area of interests that was previously obtained as an asset acquirement or else in a business combination and enumerated at fair value on acquirement. Also, cost can be considered to be fair value provided to attain the asset during the period of acquirement.

Part B 

Solution to question 4

The impairment loss refers to the fall in the net carrying value, the cost of acquisition subtracting the depreciation, of an asset that is more than the undisclosed cash flow n future of the similar asset. The process of impairment takes place when there is sale of assets when the company does not expects them to benefit operations that are long-run (Huikku, Mouritsen and Silvola 2017). It is separate from writing down of asset since the impairment losses at times may result in a tax deferral for the asset. The stockholders of a publicly held organization may also lose equity in their shares depending on the type of asset being impaired, which results in a lower debt-to-equity ratio. When it comes to the factors that affects the impairment loss, the initial step is the identification the factors that may lead to the asset impairment.

Some factors may include changes in market conditions, innovation in legislation and regulatory enforcement. The turnover in the workforce or decreased asset functionality due to aging may also lead to loss in impairment. In some cases, the asset itself may be functioning, but new techniques or new technology may make the fair market value of the asset fall significantly (Bena and Li 2014). The calculation of fair market is key asset impairment that cannot be recognized without a good approximation of fair market value. Fair market value is the price the asset would fetch if it was sold on the market. This is known as the future cash flow the asset would expect to generate in continued operations of business.

Conclusion

The other term for this value is known as the recoverable amount. Once the fair market value is assigned, it is then compared to the carrying value of the asset as represented on the financial statements of the business (Collett 2015). The carrying value does not need to be recalculated at this time since it exists in previous accounting records. If the calculated costs of holding the asset exceed the calculated fair market value, the asset is considered to be impaired. If the asset in question is going to be disposed of, the costs associated with the disposal must be added back into the net of the future net value less the carrying value.

Solution to question 5

The recognition of the losses of impairment are either by the model of cost or by the model of revaluation. It depends on whether the amount that was debited was changed with a new, fair market valuation that is adjusted as described in the above section. In case the results of impairment in a small tax benefit for the organization, the impairment realization is bad for the organization as a whole. It generally highlights the need for a rise in reinvestment. There are several requirements for the recognition and measurement of the impairment loss includes the time the amount of recoverable asset is less than the carrying amount, in this case the carrying amount is needed to be reduced to the amount that is recoverable (Bailey 2014).

Therefore, the distinction between the reductions from the previous carrying amount to the recoverable amount is termed as the loss on impairment. The impairment loss should be recognized in the profit or loss immediately unless the revaluation decreases treatment is prescribed in another standard of accounting. In the given case of acquisition of the company of Fayetteville by BHP the loss in impairment is recognized and accrued to revaluation of asset record. As per the annual report of 2012, the asset has been revalued; fluctuations in market value are periodically calculated. The certain intangible assets, such as goodwill, are impairment tested on an annual basis.

For calculation of impairment loss, in case the cost model is applied, then the impairment loss is calculated as: Debit: P/L-impairment, Credit: Asset (allowance account)

In case the revaluation model is applied, then the impairment loss is recognized as:Debit:Equity- Revaluation surplus, Credit: Asset (allowance account).

However, the Fayetteville must be alert because in case there was no revaluation surplus in the equity, in such scenario, they should recognize impairment loss to profit or loss account. Moreover, the company must to adjust the depreciation for the future periods.

Conclusion

In the acquisition of the Fayetteville oil and gas Shale by BHP Billiton has taken place due to impairment of non-financial asset and inappropriate treatment of accounts. The acquisition occurred when the BHP Company gets more than 50% ownership in the company of Fayetteville oil and gas Shale that is targeted. There are several requirements for the recognition and measurement of the impairment loss includes the time the amount of recoverable asset is less than the carrying amount,

in this case the carrying amount is needed to be reduced to the amount that is recoverable. However, the Fayetteville must be alert because in case there was no revaluation surplus in the equity, in such scenario, they should recognize impairment loss to profit or loss account. Moreover, the company must to adjust the depreciation for the future periods

References

Angwin, D., 2015. Mergers and acquisitions. Wiley Encyclopedia of Management, pp.1-3.

Bailey, M.P., 2014. Mergers and acquisitions. Chemical Engineering, 121(8), pp.71-72.

Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), pp.1923-1960.

BHP | 2011 Annual Report, Summary Review and Form 20-F. (2018). Retrieved from https://www.bhp.com/media-and-insights/reports-and-presentations/2011/09/2011-annual-report-summary-review-and-form-20-f

Bowen, R.M. and Khan, U., 2014. Market reactions to policy deliberations on fair value accounting and impairment rules during the financial crisis of 2008–2009. Journal of Accounting and Public Policy, 33(3), pp.233-259.

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.

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Collett, N., 2015. Mergers and acquisitions. Wiley Encyclopedia of Management, pp.1-7.

Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of Accounting Studies, 19(1), pp.210-241.

Green, M.B., 2016. Mergers and acquisitions. International Encyclopedia of Geography: People, the Earth, Environment and Technology: People, the Earth, Environment and Technology, pp.1-8.

Harris, R.S., 2015. Mergers and Acquisitions. Wiley Encyclopedia of Management, pp.1-2.

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Laux, C., 2016. The economic consequences of extending the use of fair value accounting in regulatory capital calculations: A discussion. Journal of Accounting and Economics, 62(2-3), pp.204-208.

Rani, N., Yadav, S.S. and Jain, P.K., 2016. Mergers and Acquisitions. India Studies in Business and Economics ReDIF-Book.

Sun, L. and Zhang, J.H., 2017. Goodwill impairment loss and bond credit rating. International Journal of Accounting & Information Management, 25(1), pp.2-20.