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Question:

Discuss about the Contemporary Issues in Accounting ?
 
 

Answer :

Introduction

The rule of corporate world is standing on the business transaction, wherein every transaction differs in terms of quantity, quality, process and price. In this contemporary world, businesses started to transact across the borders, which also increased immense level of competition in the global market. Thus, it became necessary to maintain all the financial processes in line and track all the investment, transactions and profit or loss (Babu, 2012).

To illustrate the theoretical concepts associated with financial statements of BHP Billiton Limited, the study concentrates on outlining general purpose of financial reporting and different financial performance measures along with its relationship with accounting theoretical concepts. BHP Billiton Ltd is a leading global resource companies with the mission to create value for the sustainable stakeholders by developing natural resources. The company is categorized into two companies namely British BHP Billiton Plc and Australian BHP Billiton Limited, which are listed in Australia ASX Top 100 listed companies with different shareholders, but both are controlled by identical board of members (BHP Billiton, 2015).

Accounting Theoretical Concept

The basic theoretical concepts of accounting are largely related with the conceptual frameworks of finance, which demonstrate the required information through statements.

 

Determining the Monetary Amounts

Determination of monetary amounts is one of the important processes and theoretical frameworks through which BHP Billiton is able to maintain its viability in this competitive market. According to the company monetary amounts represented below, it is apparent that the production of copper has been increased by 9%, whereas overall revenue decreased by 21% from the previous years (BHP Billiton, 2015).

                                                                           Figure 1: FY2015 Performance Summary

                                                                                Source: (BHP Billiton, 2015)

With the help of monetary amount or outcome of financial statements, the management determines the financial position of a company. The above depicted monetary amount clearly indicates that BHP Billiton needs to reassess its work process along with strategic implications as the performance has drastically been decreased from previous year.

Elements of Financial Statement

Financial statements include several elements such as assets, liabilities, equity, income and expenses among others, which help to identify the financial position of companies along with the annual expenses and income as compared to other competitors present in the market (Accounting Simplified, 2013). The assets of BHP Billiton can be categorized into two part namely current assets and non-current assets. Current assets include Cash, trade and other receivables, whereas non-current assets include inventories, property, plant and equipment and intangible assets among others. Figure 2: Assets of BHP Billiton, 2015Source: (BHP Billiton, 2015)On the other hand, the expenses of the company, as depicted in the below mentioned financial statement (Figure 3), include raw materials and consumables used, employee benefits expense, external services, third-party commodity purchases, net foreign-exchange, fair-value, government royalties payable, depreciation and amortization expenses, exploration and evaluation expenditure among other.

                                                   Figure 3: Expenses of BHP Billiton, 2015Source: (BHP Billiton, 2015)

Recognition

Revenue recognition is one of the accounting principles that acts according to the accounting principles and determines specific conditions of revenue. It maintains a record on business transactions, wherein loss is recognized as the 'lower of cost' (Alexander & Archer, 2008). Considering this framework, in BHP Billiton Interest income are recorded on accruals basis and Dividend income is recognized based on the subsidiaries' declaration (BHP Billiton, 2015). Apart from this, the concept of probability is utilized in recognition to understand the degree of uncertainty and future economic benefits. In addition, the reliability concept of recognition measures the qualitative characteristics of financial elements (Alexander & Archer, 2008).

Selection of the Particular Basis of Measurement

Based on the information obtained from determination of monetary amounts, certain elements can be outlined such as financial statements and recognition criteria for understanding of the company’s economic conditions (Alexander & Archer, 2008). Considering the situation of BHP Billiton, it structures its income statement or balance sheet for understanding the present economic position (BHP Billiton, 2015).

General Purpose of Financial Reporting

There are several financial measurements in the record of BHP Billiton that are considered as financial statements such as cash flow, remuneration process, valuation of assets, dividends, goodwill, provision, superannuation plan, net cash flow, market risk and balance sheet among others. These calculation processes critically help to implement the most suitable decisions in organizational process for both the management and its stakeholders. Based on these financial processes, creditors and investors can analyze the set of financial statements to predict future performances and its ability to pay the present as well as future debts (BHP Billiton, 2015).

 

Financial Performances and Cash Flow

Financial measure is known as subjective measure according to the measurement criteria based on which BHP Billiton Limited can identify the financial outcome along with future depiction (Frank & James, 2014). However, to understand the financial performance, BHP Billiton needs a particular accounting measurement for which cash flow is the most suitable statement in evaluating its financial performance (BHP Billiton, 2015).

                                                                      Figure 4: Cash flow analysis of BHP Billiton, 2015

                                                                                  Source: (BHP Billiton, 2015)

Cash flow is an important part of operation, which helps to raise the productivity of the performance and maintain the planning as well as control mechanism of the company as a whole (Frank & James, 2014). Based on the cash flow statement of the company, it can be asserted that the cash generated from the operations in 2014 was comparatively higher than other two years (i.e. 2015 & 2013), which possess a challenge for continuing the business with higher profitability.

Remuneration Process

Remuneration is an index of financial growth provided to the employees of an organization for their efficient works and achievements. There are certain criteria for setting the remuneration for an organization, which are considered under the Remuneration Authority Act 1977, ss. 18, 18A. According to this Act, remuneration must follow a fair policy for the organization (Remuneration Authority, 2016). The Remuneration Report of BHP Billiton includes the elements that are governed by the legislation of the UK and Australia. The Remuneration Committee therefore determines particular remuneration for every member based on the elements that are presented in the below diagram (BHP Billiton, 2015).

                                                         Figure 5: Components of Remuneration for BHP Billiton, 2015

                                                                               Source: (BHP Billiton, 2015)

Incentive and other Employee Benefits

Incentives are utilized as the important drivers that the companies use to encourage the employees to work hard and achieve the target, which also help to retain potential employees based on better pay-rate (MaRS Discovery District, 2016). The Remuneration Committee of BHP Billiton provides certain benefits for the employees such as family health-insurance costs, personal tax return, death and disability insurance for employees and car parking among others. Apart from this, the company pays extra benefits for the CEO through travel allowance, wherein costs related to partner or spouse are also provided by the management. All the benefits are determined by the Remuneration Committee, wherein the benefits need to be within the limit of 10% of the base salary (BHP Billiton, 2015).

Dividends

Shareholders receive payments for owned shares from the particular company, which is known as dividend (Babu, 2012). Few companies avoid to issue dividends, as this can create a problem for them by forcing the companies to pay dividends on the same income amount twice. However, Australia ASX Top 100 listed companies pay dividends according to above stated aspects (Dividends.com.au., 2013). In the year 2015, BHP Billiton Limited paid 62 US cents for each share as final dividend, which further resulted as 124 US cents for each share of FY2015. The company always used to declare the dividend in US dollars as a main currency of the business. However, as mentioned earlier, there are two different entities which used to pay their dividends in different currencies. BHP Billiton Plc declares its dividends UK pounds or US dollars, whereas BHP Billiton Limited declares the dividends in UK pounds, US dollars, Australian dollars or New Zealand dollars (BHP Billiton, 2015).

 

Superannuation Plan

Superannuation plan refers to a company’s pension plan designed for the employees. According to this plan, companies raise funds within the superannuation account, which do not include any tax implications till the employees’ retirement or any withdrawal. In Australia, superannuation plan is compulsory for ASX Top 100 listed corporations (Drew & Stanford, 2003). BHP Billiton Limited ensured the superannuation contributions as 9.5% of fees for the financial year 2015 that has been increased from the previous year (i.e. 9.25%) as per the Australian superannuation law (BHP Billiton, 2015).

Valuation of Assets

As previously mentioned, cash, trade and other receivables, whereas non-current assets include inventories, property, plant and equipment and intangible assets are considered under the asset and listed in balance sheet according to current and non-current assets classifications. These values can be different for several significant purposes and procedures of establishment (BHP Billiton, 2015).

Goodwill

Goodwill is intangible in nature and is classified as the tangible assets and observed in the balance sheet, which cannot affect organizations' net income, but if it turns into impaired then it might affect the substantial (Babu, 2012). The company goodwill is largely associated with US Onshore petroleum from which the revenue generated in 2015 as US$3,026 million that is lower than previous years by US$542 million (BHP Billiton, 2015).

 

Provision

In context of financial accounting, provision is utilized as the account and BHP Billiton include around US$ 1,916 million provisions as depicted in the following statement (BHP Billiton, 2015). Without the presence of provision, ASX top 100 listed corporations’ directors have no right to pay for the services, which clearly indicate the significance of provisions in BHP Billiton (Tomasic et.al., 2002).

                                                                      Figure 6: Provisions in BHP Billiton, 2015

                                                                             Source: (BHP Billiton, 2015)

Net Cash Inflow

The concept of net cash inflow is utilized in determining the short-term financial feasibility concerns of a company. The positive and negative net cash flow outcome is the basic indicator of companies’ viability, wherein negative amount of net cash flow represents the operational and functional problem within the existing process (Babu, 2012). Therefore, it is stated that the company cash flow outcome clearly depicts operational and functional problem in the work process (refer to Figure 4) (BHP Billiton, 2015).

Market Risk

Market risk is a systematic risk of corporate operations, which evolves in case investors experience loss due to certain functional problem factors (Babu, 2012). The major market risks for BHP Billiton is reduced price of commodities, changes in currency and demand in large markets such as Europe or China. Apart from this, the HSEC incidents or other frequent incidents also possess threats to continue the business with higher profitability (BHP Billiton, 2015).

 

Conclusion

From the inference of discussed sections, it can be concluded that each sections of accounting theory, statements and elements are the most important for maintaining the company’s consistency and market hold in the long run. It is evident that with the support of monetary amount BHP Billiton can easily determine the financial position of it, which can also be utilized to attract large number of investors. Furthermore, cash flow, remuneration process, employee benefits, dividends, superannuation plan, goodwill and market risk among others also helped to understand the operational environment of the company organization along with the probable risks that might be raised in future work process. Based on the financial performance of the company for 2013-2015, it has been apparent that the company needs to reassess its policies and strategic priorities as the revenue, profit and cash generation has visibly been decreased within the particular period of time that in turn can have a huge negative impact to maintain a sustainable position for the long run.

 

References

Accounting Simplified 2013, Expense, Elements of Financial Statements, viewed 17 December 2016, <https://accounting-simplified.com/expense.html>

Alexander, D & Archer, S 2008, International Accounting/Financial Reporting Standards Guide 2009, CCH, US.

Babu, G, R 2012, Financial Management, Concept Publishing Company, India.

BHP Billiton, 2015, 'Resourcing global growth Annual Report 2015', Our Structure, 1-320.

Dividends.com.au. 2013, Introducing the five star dividend rating system, Dividends.com.au., viewed 17 December 2016, <https://dividends.com.au/>

Drew, M, E & Stanford, J, D 2003, ‘Reasons for change’, A Review of Australia’s Compulsory Superannuation Scheme after a Decade, no. 322, pp. 2-23.

Frank, B, P & James, O, K 2014, ‘Cash flow and corporate performance: A study of selected food and beverages companies in Nigeria’, European Journal of Accounting Auditing and Finance Research, vol.2, no.7, pp.77-87.

MaRS Discovery District 2016, Incentives: Drivers in attracting the best employees, Employee compensation: Salary, wages, incentives and commissions, viewed 17 December 2016, <https://www.marsdd.com/mars-library/employee-compensation-salary-wages-incentives-and-commissions/>

Remuneration Authority 2016, Remuneration process, Remuneration Authority, viewed 17 December 2016, <https://remauthority.govt.nz/remuneration-process/>

Tomasic, R, Bottomley, S & McQueen, R 2002, Corporations Law in Australia, Federation Press, Australia.

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