Factors Affecting Impairment Loss Measurement In BHP Company Essay.

You will need to answer questions addressed in the instruction document. In order to find the acquisition and relevant information provided in the annual report, you should obtain information not only showing the original record for the acquisition, but also the reporting after the acquisition. Therefore, you will need to read annual report from 2011 to 2017 to find information relevant to the acquisition.

You will need to find supporting evidence from the annual report, especially notes of the financial statements. Also you should identified paragraphs from relevant AASB that support your argument and evaluation. However, don’t copy and paste from other sources into your report. The turnitin will show you the originality report and the similarity index accepted normally is less than 30%. The reference should be shown in alphabetical order. It includes the annual report, relevant AASBs etc

BHP's Fayetteville Project

Businesses come to know of impairment when their financial statement that carry the amount from asset groups or long lived asset exceeds the fair value and cannot be recovered. Any carrying amount becomes unrecoverable when it gets greater than undiscounted cash flow sum that is expected from the use of the assets as well as the eventual disposal. FASB has defined impairment loss to be the amount in which the value carrying exceeds the fair value of the asset. CPAs should thus to check on every asset any entity owns after each of the reporting periods. In this case, when circumstances undergo changes and indicate that the carrying amount cannot be recovered, CPAs need to test the impairment for the asset (Spence, 2017, p. 387).

By February of 2011, BHP announced that it was acquiring the Chesapeake energy corporation’s oil reserves and interests for the Fayetteville natural oil and gas shale in the U.S. This included the midstream system of pipeline for US $4.76 billion (American Association of Petroleum Geologists, 2014, p. 30). The company expects to offer from the cash resources of the group. The acquisition was consisted with the company’s strategy that involves invests on large, low cost and long life assets which show a significant growth volume from the future development. It is also supportive of the company’s diversification goal by customer, geography and products. Thus the company became one of the largest operators of the Fayetteville oil reserves and interests in the natural oil and gas field.

The Fayetteville shale assets in Chesapeake included an approximate of 487,000 acres of property that involved leasehold as well as producing assets of natural gas property which were located at the Arkansas in USA (Johnson, et al. 2018, p. 5501). The position has second largest fields of gas in the world. The acquisition increased the net resource base and reserve of the BHP by 45%. By then the assets could produce more than 400 million cub/ft. of gas in a day. This included the prospect of development options supporting a 40 year substantial higher production in operating life. The company also agreed to sign a service agreement of 12 months that helped a safe operations transfer to the company.

The BHP is a company that has experienced continued growth and profit making for quite some time in the natural oil and gas extraction. However, in some of the projects the company experienced harsh market prices leading to losses that made it close some of the operations including the Fayetteville oil rig drilling. The various factors that affected the impairment loss measurement in the project include the following (Hagström, and Adams, 2012, p.99). One is the strength of the diversified investing portfolio of the company of tier one resources of natural oil and gas. For quite many years the company has been implementing their strategy of investing in long life, large and high quality assets that have given the company huge growth and superior margins of profits all thorough the economic cycle and thus creating a long term value of share value. In this case it became quite hard to prospect any significant losses in some of the projects such as the Fayetteville (Zimmerle, et al. 2017, p.73). The performance affected their being able to notice losses since the growth reflected overall asset quality. The company strategy involved maximizing production while being committed to obtain the prices for their products in the market. In every year, the company reported production records for various commodities that include consecutive records in the iron ore production and this unable to keep note of any single commodity profile.

Factors Affecting Impairment Loss Measurement

The other factor is the robust demand that was underpinned by the industrialization and urbanization of china and several other developing nations on the scale that lifted thousands of people in the areas out of poverty. In this case, the company focused on investing in several projects of natural gas and oil without minding on better methods of reporting. The resources became fundamental of the company and economic growth in areas of operations (Kelton, 2013, p. 211). With present growth and continued profit making, the company failed to test for loss impairment for quite some time until the market prices for oil and gas deteriorated. In this case, it always important for companies to test for impairment among the many assets before it is too late. The other factor involves the use of the wrong method of accounting. Companies especially those in the development and exploration of natural gas and oil have two options that help then choose the approach of accounting to use (Lynch, 2013, p.69). These include the SE or successful efforts method and the FC or the full cost method. The two differ in how specific operating expenses get treated in relation to the extraction of new gas and natural oil reserves. In this case, the accounting method that the BHP used might have affected how they obtained their cash flow and net income numbers that were reported in the end year financial reports.    

It is quite interesting that the Sewell company had also participated by over 58% to prepare natural oil and gas in Fayetteville’s reserves in Chesapeake. In this case the BHP Company did not assess the reserves independently. In this case it was quite hard for the company to notice any impairment loss recognition based on trust to the Sewell leaving it to do the assessment alone (Calderón, et al. 2018, p.719). The 10 Tcf values of resources as given in the BHP annual report, the value should actually have been reflecting in the Chesapeake annual report of 2010 by 31 of December. However, the document reflected only the value of proved reserves based on the AASB rules. The reason for this could have been that the value had been rounded off from the Chesapeake’s report during the institutional analyst and investor meeting presentation slides.

The Fayetteville growth and operational summary as given to the BHP Company included the following; the company had successfully developed as the second largest position in the oil and gas extraction industry. It had increased the production value to 41% YTD towards more than 260mmcfe in a day. The reserves continues to improve per well as per the geo-steeling, completion and drilling expertise yielding dividends and the average 2.9 bcfe when compared to the targeted 2.4 bcfe in the 2009 YTD (Yacovitch et al. 2017, p.5). The company had also 4,100 as future development drilling locations with a functional 12 rigs from the 19 year inventory. It had also 1.0 tcfe for the proved reserves of natural gas and oil as well as over 9.8 tcfe of unproved and un-risked reserves of the same product.  It is interesting to notice that the proved reserves of the Fayetteville rigs were reflected as just 1 tcfe. The 4,100 new oil wells and the 9.8 tcfe resources needed EUR (estimated ultimate recovery) of about 2.4 bcfe for every well (Rajtar, 2010, p.361).    

Disclosure Requirements for Impairment Loss in Financial Statements

However there were early warnings from the Chesapeake oil shale in Fayetteville. The company claimed that it had over 2.65 bcfe from every well from the Barnett shale in their report (Anderson, 2013, p.1). However the same year of their report art Berman from Houston who was a geologist for gas and oil came up with a published article that indicated declined rates of the products from the fields, facts are things quite stubborn. In the real sense no one gave a listening hear to this fact. By 2011 of august some months after the BHP acquisition of the Fayetteville oil reserves from Chesapeake, there was another published analysis by the same geologist in what he called shale gas of US; higher cost, less abundance in the blog of oildrum (Selzer, 2013, p.46). He confirmed that most of operators in the company especially the BHP used the hyperbolic single curvature for their profiles involving production which results in reduced rates if decline in the later years. This goes up to 50 years indicating huge values of EURs (Beckwith, 2012, p.43). In the real sense, observations indicate that the declines should follow an exponential decline of 2 stages with a 12 year well life against lower EURs. From the analysis of the BHP reports, it can be noted that the company invested in the project just as prices were peaking but then started going down. The trends indicate that from the shale gas decline, EUR value from every well was approximated as one-half of presented value by operators. In this case it means that the Fayetteville shale had only 1.1 bcfe from each oil well.  

During the disclosure for impairment losses in the asset group for an operation, the loss should be allocated to the long-lived assets for the group using a pro rata basis indicating their relative carried amounts. The only exception is when the allocated loss to the individual assets causes a reduction to the carried amount below the fair values. When it is possible for the CPAs to determine the fair values without undue effort and cost, these assets need to be carried at the amount (Berman, and Pittinger, 2011, p.17). The process requires one to add an allocated impairment loss. The carrying value that is adjusted after allocating the impairment loss value is then the new depreciation cost basis or the amortization over the useful life remaining for the asset. According to the AABS code, businesses are required to include impairment loss values to the income from the continued operations just before the line of income taxes on the income statement.

However, NPOs or not for profit organizations should include this loss from their continued operation’s income in the activities statement. When the subtotal like the operational income is presented, the CPAs need to use the impairment loss while determining the amount. The other needed data that companies need to disclose in their notes that involve financial statements include; a well description about the long-lived asset that has impaired as well as the circumstances and facts that led to the impairment (Zhiltsov, and Zonn, 2016, p.29). When not presented separately on the statement face, the impairment loss amount should be given including a caption on the activity statement or income statement that contains the loss. Businesses are also required to give the method that has been applied in determining the asset’s fair value. Lastly, if it is applicable, the segment that reports the impaired long lived asset under the FASB number of statement.

Conclusion                       

From the analysis it clear that the BHP Company acquired the Fayetteville shale of natural gas and oil when the peak was just approaching. At the same time, the company failed to conduct a good evaluation form the pas report of the Chesapeake firm but depended on what the Sewell Company had done. This means that the company was not able to not that the oil and gas reserves had issues. At the same time the company applied the wrong accounting methods while calculating the fair market value for the Fayetteville shale project.

References 

American Association of Petroleum Geologists, Energy Minerals Division pwarwick@ usgs. gov https://emd. aapg. org, 2014. Unconventional energy resources: 2013 review. Natural resources research, 23, pp.19-98.

Anderson, O.L., 2013. Shale Revolution or Evolution: Opportunities and Challenges for Europe. Global Bus. L. Rev., 4, p.1.

Beckwith, R., 2012. Making Sense of the'Overnight'Shale Gas Revolution. Journal of Petroleum Technology, 64(02), pp.42-46.

Berman, A. and Pittinger, L.F., 2011. US shale gas: less abundance, higher cost. The Oil Drum, 5(8), pp.12-36.

Calderón, A.J., Guerra, O.J., Papageorgiou, L.G. and Reklaitis, G.V., 2018. Disclosing water-energy-economics nexus in shale gas development. Applied Energy, 225, pp.710-731.

Hagström, E.L. and Adams, J.M., 2012. Hydraulic fracturing: Identifying and managing the risks. Environmental Claims Journal, 24(2), pp.93-115.

Johnson, D., Heltzel, R., Nix, A., Darzi, M. and Oliver, D., 2018. Estimated Emissions from the Prime-Movers of Unconventional Natural Gas Well Development Using Recently Collected In-Use Data in the United States. Environmental science & technology, 52(9), pp.5499-5508.

Kelton, M., 2013. Symposium: Australia–US Economic Relations and the Regional Balance of Power Australia–US Economic Relations following the 2005 Free Trade Agreement. Australian Journal of Political Science, 48(2), pp.208-220.

Lynch, M., 2013. Uncertainties threaten natgas development. Oil & gas journal, 111(3), pp.66-71.

Rajtar, J.M., 2010. Shale gas-how is it developed?. Wiertnictwo, Nafta, Gaz, 27, pp.355-367.

Selzer, H., 2013. INTERNATIONAL JOINT VENTURES. Petroleum Accounting and Financial Management Journal, 32(2), p.46.

Spence, D.B., 2017. Corporate Social Responsibility in the Shale Patch. Lewis & Clark L. Rev., 21, p.387.

Sun, Z., Shi, J., Wu, K. and Li, X., 2018. Gas flow behavior through inorganic nanopores in shale considering confinement effect and moisture content. Industrial & Engineering Chemistry Research, 57(9), pp.3430-3440.

Yacovitch, T.I., Daube, C., Vaughn, T.L., Bell, C.S., Roscioli, J.R., Knighton, W.B., Nelson, D.D., Zimmerle, D., Pétron, G. and Herndon, S.C., 2017. Natural gas facility methane emissions: measurements by tracer flux ratio in two US natural gas producing basins. Elem Sci Anth, 24:5.

Zhiltsov, S.S. and Zonn, I.S., 2016. Shale Gas Production in the USA. In Shale Gas: Ecology, Politics, Economy (pp. 25-35). Springer, Cham.

Zimmerle, D.J., Pickering, C.K., Bell, C.S., Heath, G.A., Nummedal, D., Pétron, G. and Vaughn, T.L., 2017. Gathering pipeline methane emissions in Fayetteville shale pipelines and scoping guidelines for future pipeline measurement campaigns. Future Energy Supply, pp. 23-105. Springer, Cham, 2019.