Analyzing PPE Disclosures In BHP Billiton's Annual Report Essay, AASB 116.

Based on the Board's decision, the CFO asks you to draft a business research report addressed to the Board of Directors on the following:

1. Explain in your own words the objective of general-purpose financial reporting and the qualitative characteristics of useful financial information according to The Conceptual Framework for Financial Reporting (covering OB1-OB21 and QC1-QC39). (10 marks)
2. Critically analyse to what extent the latest annual report of your company meets the disclosure requirements for PPE as per AASB 116. (10 marks)
3. Based on your findings in part b, critically analyse to what extent the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of usefulfinancial information. (10 marks)
4. Based on your findings in part c, critically discuss to what extent the disclosures on PPEalign with the objective of general-purpose financial reporting and, as a conclusion, recommend actions for improvement. (10 marks)

The CFO was impressed by your report and has asked you to prepare a video presentation to be played to the Board Committee at the next meeting on 10 January 2019. Your video presentation should include:

1. a summary of the current accounting practice of your company regarding the disclosures to be made under the relevant standard;
2. an analysis of whether the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information; and
3. critical discussion of whether the disclosures meet the objective of general-purpose financial reporting.

Objective of general purpose financial reporting and qualitative characteristics of useful financial information

The objective of the report is to provide faithful and accurate representation of the financial statements, which is crucial for all business organisations owing to the effects on the community status and self-assurance of the investors. The scope of the paper would initially focus on elucidating the objectives of general purpose financial reporting along with qualitative characteristics of valuable financial information. The second section would lay stress on analysing the latest published annual report of an ASX listed organisation to understand whether the same fulfils the PPE disclosures in accordance with AASB 116. For this reason, BHP Billiton is taken into consideration, which is a leading organisation in the Australian mining sector and it is involved in producing metallurgical coal, iron ore, uranium and copper (BHP 2018). Thirdly, the paper would emphasise on ascertaining the extent to which the disclosures on PPE meet the enhancing and fundamental qualitative characteristics of financial information. Finally, the report would shed light on evaluating the alignment of the PPE disclosures of the organisation with the general purpose financial reporting (GPFR) objectives and accordingly, actions for improvement would be recommended.

In accordance with “IASB OB1- OB21”, GPFR is the base of the conceptual framework and it intends to provide financial information to the investors, users, lenders and other creditors so that they could undertake effective investment decisions in an organisation, which is BHP Billiton in this case (Aasb.gov.au 2018). The information obtained from GPFR enables the investors in comprehending and undertaking straightforward methodology for estimating the net cash flows and dividends in future. As a result, the investors could understand the strengths and drawbacks of the organisation by using the liquidity ratio. For instance, any changes in cash and property, plant and equipment (PPE) could have direct impact on the liquidity ratio. With the help of this ratio, it is possible to analyse the existing financial position of the organisation and its ability to generate money. In addition, it provides non-financial information such as expectations of the management and economic resources (Chand, Patel and White 2015).

As per “IASB QC1- QC39”, there are two qualitative characteristics of financial information, which include enhancing and fundamental qualitative characteristics. The enhancing characteristics constitute of verifiability, understandability, comparability and timeliness, which assist in improving the usefulness of financial information. On the other hand, fundamental characteristics include faithful representation and relevance, which are simple and crucial to prepare financial reports (Aasb.gov.au 2018).

In terms of fundamental characteristics, relevance denotes financial information that could affect decision-making in case of omissions or misstatements and it is termed as materiality as well. Secondly, faithful representation implies that the financial reports should be complete, neutral and error-free.

In terms of qualitative characteristics, verifiability implies the faithful representation of information, which would assist the users in reaching agreement within the financial statements. Understandability denotes the characteristics of financial information along with representing information in clear and understandable manner. Comparability enables the users in identifying and gaining overview of the similarities and variations among items and this is beneficial at the time of contrasting a similar item with a different organisation. Finally, timeliness signifies that the organisation needs to complete the financial reports within time for the decision-makers.

Extent to which the latest annual report of BHP Billiton meets the disclosure requirements for PPE as per AASB 116

According to “Paragraph 73 of AASB 116”, the financial statements need to disclose the measurement bases used for its property, plant and equipment in order to ascertain the following:

• Gross carrying amount
• Depreciation methods
• Depreciation rates or useful lives
• Gross carrying amount and accumulated depreciation at the start and end of the year
• Reconciliation of the carrying value at the start and end of the year (Aasb.gov.au 2018)

From the annual report of BHP Billiton in 2018, PPE is recorded at cost after deduction of impairment charges and accumulated depreciation. Cost is treated as the fair consideration value provided for purchasing the asset during construction or acquisition and it comprises of the direct expenses to bring the asset into location along with required operating conditions and the projected future expenses of closure and facility rehabilitation (Bhp.com 2018). The projection of residual lives, depreciation methods and useful lives of PPE of BHP Billiton could be found from its annual report (Refer to Appendix, Figure 1).

“Paragraph 77 of AASB 116” states the kind of evidence needed for disclosure during PPE revaluation. BHP Billiton does not use this method; instead, it adjusts the residual value as well as useful lives at the end of each reporting year. Thus, the accounting policy information and representation of balance sheet statement from the annual report of BHP Billiton does not fulfil the necessary disclosure in accordance with this paragraph.

The PPE disclosures of BHP Billiton meet the fundamental characteristics and majority of enhancing characteristics with nearly entire compliance of the accounting standards. The fundamental characteristics contain material and predictive values along with faithful representation without material error (Bond, Govendir and Wells 2016).

At the time of assessing the annual report, the carrying values of PPE at the end of 2018 have been stated clearly in the balance sheet statement (Refer to Appendix, Figure 2). This makes it easy in estimating the future economic benefits of PPE. On the other hand, the financial reports have clear outline of the PPE items of the organisation or disclosure of the depreciation methods used. This implies that BHP Billiton has ensured faithful representation indicating some errors in the 2018 annual report.

When it comes to enhancing qualitative characteristics, the significant ones include timeliness and understandability for BHP Billiton. With the help of timeliness, the investors and users could undertake decisions of whether to invest in the organisation (Crawford, Lont and Scott 2014). As BHP Billiton is perceived as one of the biggest global mining organisations, it is obvious that it would earn enormous amount of profit and it forms the key to the investors. However, it could be accomplished only when the organisation publishes its financial reports timely. From the fundamental perspective, understandability implies easy interpretation of information in the financial reports (Newberry 2015). The PPE format in the balance sheet must be easily understandable and for the accounting policy sections, it provides the definitions with few types of particular accounting terms (Refer to Appendix, Figure 3).

4. Alignment of the PPE disclosures with the objective of general purpose financial reporting and actions for improvement for BHP Billiton:

It has already been analysed that GPFR intends to deliver correct financial information for lenders, creditors and investors for estimation of future economic performance (Perera and Chand 2015). In addition, disclosure of economic resources is crucial as well, as the same would aid the investors in identifying the strengths and drawbacks of the organisation. From the 2018 annual report of BHP Billiton, the book amount of PPE is disclosed and as a result, the investors could compute the liquidity ratio easily to understand the current financial position of the organisation.

From the above discussion, it is evident that BHP Billiton has complied with relevant accounting standards that could be validated by the independent audit report. In addition, it has provided clear explanation of the existing use of depreciation methods and useful life projections. Thus, the only recommendations for the organisation include keeping the audit report in hand at all times and the disclosure of the kind of PPE it obtains in the balance sheet statement.

Conclusion:

To infer, it could be stated that the annual report of BHP Billiton has complied with the PPE requirement of AASB 116 as well as the IASB conceptual framework. The organisation has adopted accounting policies for the depreciation methods along with useful life projections to adhere to the accounting standards. Hence, it could be stated that BHP Billiton is a good example to record and follow the accounting policies for PPE in accordance with AASB 116 and IASB.

References:

Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf [Accessed 27 Dec. 2018].

Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC2_8-90_2001V.pdf [Accessed 27 Dec. 2018].

Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC3_8-90_2001V.pdf [Accessed 27 Dec. 2018].

BHP., 2018. BHP | A leading global resources company. [online] Available at: https://www.bhp.com/ [Accessed 27 Dec. 2018].

Bhp.com., 2018. [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2018/bhpannualreport2018.pdf [Accessed 27 Dec. 2018].

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Chand, P., Patel, A. and White, M., 2015. Adopting international financial reporting standards for small and medium?sized enterprises. Australian Accounting Review, 25(2), pp.139-154.

Crawford, L., Lont, D. and Scott, T., 2014. The effect of more rules?based guidance on expense disclosure under International Financial Reporting Standards. Accounting & Finance, 54(4), pp.1093-1124.

Newberry, S., 2015. Public sector accounting: shifting concepts of accountability. Public Money & Management, 35(5), pp.371-376.

Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting standards (IFRS) for small and medium-sized enterprises (SMES). Advances in accounting, 31(1), pp.165-178.