This business research report has been prepared to describe the importance of the fulfilment of the objectives of general purpose financial reporting and also to describe the characteristics of useful financial information (according to The Conceptual Framework for Financial Reporting) for the distribution of right kind of information to the stakeholders of the company. In this assignment discussion has been held on to what extent the company named BHP Billiton has fulfilled the PPE disclosure requirements as per AASB 116(Parker,2011).
Objective of general purpose financial reporting
The basic objective of general purpose financial reporting [covering OB1-OB21 of the Framework for Financial Reporting as per IASB,2010] is to distribute most useful financial information to the investors &stake holders(lenders and the creditors) of that company(Costello, 2011).
These crucial decisions involve whether to buy, sell or hold equity and debt instruments of the company or not and these decisions will be taken on the basis of clear and meaningful financial data that will help them to assess the financial health of the company which and to regulate their decisions regarding credit period &investments in that company.
Another objective of general purpose financial reporting is to represent the financial data to the investors creditors and the other stake holders of the company in such a way so that they can easily understand the degree of capability of the management of the company to discharge their duties and according they can vote or reject the managers as per their efficiency or inefficiency as presented in the financial figures of a useful report (Van et al.,2011).
However this report is not prepared for directly inform the value of the report generating company to the stake holders of the company but offers the possible ways through which the investors and creditors can estimate the possible value of the company.
The general purpose financial reports give a clear picture regarding the available sources of fund as well as uses of fund of the company to help the stake holders to identify the possible strength and weaknesses, level of liquidity & solvency of the company and scope of additional investments & fund collection opportunities with respect to the reporting company. The financial data that describes this kind of information help the stakeholders to assess the possible future growth potential of the reporting organization (Zhang, and Andrew, 2014).
The report also describes the basis of accounting followed by the company. Because the stakeholders of the company mostly prefer the accrual basis of accounting where the impact of a cash transaction is recorded and reported under the period in which they occur even if the periods of actual cash receipt & payment differs and thus deliver a clear assessment of the impact of financial transaction over the asset liability position of the company
The cash flow information of the report explains the pattern of cash earning and expenditure and the synchronization between the receipts and payments of cash (Bruce et al.,2010).
The qualitative characteristics of useful financial information[covering QC1-QC39 of the Framework for Financial Reporting as per IASB,2010] requires that the financial information of the financial report should be presented with sufficient amount of relevance and honesty so that the report can bring some differences in the decisions taken by the users of that report with respect to the company. (Beest et al.,2009). The information of the report should be material in nature so that omission of that information will badly affect the decision making process of the user. The information of the report must contain high degree of predictive and confirmatory vale(DeFond et al.,2011) so that the information can be used for making future financial prediction and the data is well conformed by the relevant respondents. The data information of the report should also posses the characteristics of comparability, verifiability, timeliness and understandability which are considered as the fundamental qualitative characteristics that must be present in the information of a general purpose financial report.
Discussion on latest annual report of in relation to disclosure requirements for PPE as per AASB 116
This accounting standard describes the accounting principles that are to be followed while accounting for property, plant and equipment both at the time of recognition and also during the subsequent treatment through the choice of two methods; cost and revaluation. (Hanlon et .al.,2014).
The key reporting requirements of the company are as follows:
- The Assets recognition to be done when the future benefits will flow in to the enterprise and the cost of the asset can be measured with sufficient reliability
- After initial measurement the asset will be measured at cost where the cost will include the followings:
- The cost of preparing the asset ready for its intended use[ delivery, site preparation, installation]
- The cost of restoring a site ( dismantling and removal cost)(as per AASB 137)
- The expense of bearing the interest if the asset is a qualifying asset (as per AASB 123)
- For measurable assets the cost will be considered as the fair value of the asset
- Once the recognition of the asset has been done after that the asset will be measured by using either the revaluation or the cost model
- Under the cost model the following principles will be applied:
- Asset will be carried at cost less of accumulated depreciation and impairment losses
- During the depreciation calculation, each part of the asset will be depreciated separately if possible
- Depreciation cost must be included in the profit and loss account(Champion, 2009)
Requirements of the revaluation model:
Revaluation should be carried at regular in intervals so that the fair value and the carrying amount does not differ
If one asset is revalue then all the assets of this asset class must be measured via revaluation method.
An increase due to revaluation will be credited to the equity under asset surplus and a decrease due to revaluation will be considered as expense(Pilcher, 2009)
For property, plant, and equipment of each class the “basis for measuring the carrying amount”,” depreciation methods including the life and rate of the asset”,” gross carring value of the asset and the accumulated depreciation and impairment losses” are to be disclosed(Tan?Kantor et al.,2017)
Here we are going to discuss that to what extent the chosen company BHP Billiton [ASX listed global resource company operating in the “materials sector”] is meeting the disclosure requirements for PPE as per AASB 116
As per the annual report-2016 of the company both in 2015 and 2016 the property plant and equipment of the company were being recognized at cost less of accumulated depreciation and impairment charges
At the time of acquisition the cost of the asset will be considered as the fair value of the asset
At the time of construction of an asset the cost of the asset will be considered as the fair value of the asset
The cost of the asset includes the followings:
- The direct cost for bringing the asset to the location
- The cost needed for preparing the asset in to the necessary operation
- Estimated future cost of closure & rehabilitation of that asset
From the above discussion it can be seen that BHP Billiton strongly follows the 1,2,3,4,7 of the disclosure requirements for PPE as per AASB 116 (The Conceptual Framework for Financial Reporting, 2010)
Discussion on the fulfilment of the useful financial information distribution in relation to disclosure of PPE as per AASB 116
From the discussion in section-B it can be seen that the disclosure made by BHP Billiton regarding the measurements of property, plant and equipment has got sufficient materiality. As the information describes the whole process of asset valuation in brief and omission of this information will not allow the user to properly understand how the company value their assets and how the cost of the PPE has been calculated for their representation in the balance sheet(asx.com, 2017)
A discussion on to what extent disclosures on PPE align with the objective of general purpose financial reporting
- Disclosures on PPE by BHP Billiton fulfil the following objective of general purpose financial reporting
- The volume of the depreciation and impairment cost will help the investors of the company to understand the future volume of the cost that the business has to incur for maintaining the assets of the company(asx.com, 2017)
- The high depreciation cost with respect to an asset class indicates either inefficient maintenance operation to the part of the company or purchase of low quality asset.
- On the basis of this information the investors will decide how much to invest in the company and the creditors will decide that what should be the most suitable credit period that can be offered to the company
- The investors will be able to assess the possible impact of increase in asset price over the economic resources of the company(The Conceptual Framework for Financial Reporting, 2010)
The improvement of the PPE disclosure report of the company requires the following initiatives:
As per the objective of general purpose financial reporting the method of accounting [whether the cash or accrual basis of accounting] that is followed by the company has to be clearly mentioned.
In order to enhance the quality characteristics of an useful financial information, the company should add comparability, predictability and confirmatory to the report (Stanley and Marsden, 2012).
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