Accounting BHP Billiton and Santos Limited

Question: Discuss about the Accounting BHP Billiton and Santos Limited. Answer: Introduction Conceptual framework has been hailed as a significant tool for reducing discrepancy and bringing higher corporate reporting parity. The conceptual framework is an ambitious project which allows for the basic tenets with regards to accounting norms so as to meet the information needs of investors, suppliers and creditors. Considering that the underlying basis of accounting standards prevalent in the respective nations would be derived from the principles outlined in the framework, it would also encourage accounting standards harmonisation while providing flexibility for meeting localised needs (Melville, 2013). The accounting standards in Australia are dictated by Australian Accounting Standards Board or AASB and since these are based on IFRS, hence the various principles outlines in the conceptual framework are also taken care of (Deegan, 2014). Considering the above, the report aims to opine on the adherence of the AASB standards and the underlying conceptual framework by considering the annual report of BHP Billiton and Santos Limited. Both of these are mining companies based in Australia. Also, the report would focus on the conceptual framework revision to reflect prudence and the underlying implications. Additionally, the disclosure made by the underlying comparison and a comparison of the same is also included. Annual reports compliance For the purpose of this report, the latest available annual report in the public domain has been considered to evaluate whether these adhere to the conceptual framework and compliance. Before moving forward, it is worthwhile to consider AASB standards in relation to significant items in the companies that have been chosen. AASB 116 PPE With relation to recognition, measurement and reporting of plant, property and equipment, the relevant directions are provided by the given accounting standard. As per this, only those assets must be recognised which are likely to bring in future economic benefits and also measurement of cost in a reliable manner is possible. With regards to initial measurement of any PPE, AASB 116 directs that to be carried out at initial cost. However, in relation to measurement at a later stage, measurement may be carried out either using initial cost or revaluation as may be deemed fit by the reporting entity. But, it is imperative that the underlying choice must not be limited to singly assets but should encompass the complete asset class (AASB, 2010a). AASB 102- Inventories The measurement of inventories as per AASB 102 must be carried out using either the FIFO or weighted average method only. Also, inventory having same nature must have same method of measurement. Besides, the valuation of inventory must be made at lower of the cost and the actual value realisable at the given time (AASB, 2015). AASB 136=Asset Impairment The underlying assets valuation does not remain constant. Hence, AASB 136 recommends that infinite life intangible assets along with goodwill must be subject to impairment testing on an annual basis. Besides, other intangible assets and all tangible assets should undergo impairment testing in case of existence of any information that may hint towards the same (AASB, 2010b). AASB 137- Contingent Liabilities It is required that the underlying entities in their annual report must capture potential obligations expected to arise in the future that is expected to be outside their control. Additionally, any potential obligation that has arisen in present but has unreliable measurement would also be reflected in the form of contingent liability (AASB, 2010c). BHP Billiton The adherence of the company with the above accounting standard coupled with conceptual framework principles is discussed below. AASB 116 The relevant accounting policy extract is shown below (BHP Billiton, 2016). The above policy is fully in line with the relevant accounting standard. Considering the business model of the company, exploration costs are significant and decision needs to be made as to what could be classified as PPE. The relevant policy extract for the same confers with AASB 6 as shown below (BHP Billiton, 2016). The policy stated above tends to pay consideration to the definition of asset as is contained in the conceptual framework and only recognises the exploration costs as assets when the certainty of existence of reserves is established AASB 102 The companys accounting policy for inventory is identified below (BHP Billiton, 2016). The above inventory accounting policy confers with AASB 102. Also, the outline in the conceptual framework is also adhered to in the policy. Additionally, the fact that inventory measurement reflects the actual value is in line with the associated characteristics of information to be extended to the relevant users (Deegan, 2014). AASB 136 The accounting policy for asset impairment is as shown below. The above policy tends to adhere to the AASB 136 and also the broader approach outlined in the conceptual framework. Also, the above policy ensures that only relevant, complete and accurate information is passed on for prudent decision making by relevant users (BHP Billiton, 2016). AASB 137 The accounting policy for contingent liability is as shown below (BHP Billiton, 2016). The policy adhered to by BHP adheres to AASB 137 and ensures that that the conceptual framework is complied with both in letter and spirit thus ensuring prudent decision making by the relevant users. From the description of the policy and the underlying business mode, it is apparent that these may assume significant proportion. Besides, various events that could potentially give rise to liability are also captured as significant events in the annual report (BHP Billiton, 2016). From the above, it is apparent that BHP Billiton through its significant accounting policies not only adheres to applicable AASB standards but also the conceptual framework principles. The most significant testimony of this is provided by the detailed information provided by the company in relation to the Samarco Dam failure and the potential liabilities that may arise due to the same in the present and future (ICAEW, 2006). Santos Limited AASB 116- PPE The companys accounting policy for PPE is identified below (Santos Limited 2016). It is apparent from the above that AASB 116 is adhered to by the company not only with regards to the acquired assets but also for the in-house assets under development, The asset definition as reflected in the conceptual framework is also fulfilled (Deegan, 2014). AASB 102- Inventory The companys accounting policy for inventory is identified below (Santos Limited 2016). The above inventory accounting policy confers with AASB 102. Also, the outline in the conceptual framework is also adhered to in the policy. Additionally, the fact that inventory measurement reflects the actual value is in line with the associated characteristics of information to be extended to the relevant users (Deegan, 2014). AASB 136- Asset Impairment The accounting policy for asset impairment is illustrated below (Santos Limited 2016). The above policy tends to adhere to the AASB 136 and also the broader approach outlined in the conceptual framework. Also, the above policy ensures that only relevant, complete and accurate information is passed on for prudent decision making by relevant users (Santos Limited, 2016). AASB 137- Contingent Liabilities The accounting policy for contingency liability is illustrated below (Santos Limited 2016). The above policy clearly indicates that the policy adhere to AASB 137 and also ensures that future potential liabilities outside the entitys control are also listed. The above analysis of certain segments of significant accounting policies is clearly indicative of the fact that relevant AASB standards are adopted by Santos in the preparation of the annual report. Additionally, the basic tenets of the conceptual framework are also built in which reflects that the information available to the users is timely, accurate and enables prudent decision making. Addition of Prudence The conceptual framework as envisaged originally did not endorse prudence due to the underlying conflict it has with neutrality. Prudence as a concept implies that the management while deploying the various accounting policies and judgement should ensure that revenues are not overstated and liabilities are not understated as there is inherent reason for the company to engage in the same thus inflating profits. The application of prudence is limited to transactions where there are uncertain implications and hence management discretion is needed (ACCA, 2014). Even though the concept itself is not new but its addition in conceptual framework has been mired with controversy and intense debate as on the face it seems incompatible with neutrality. Hence, tweaking has been done in this concept and the same has now been modified to cautious prudence (Deegan, 2014). It is quite likely that prudence as a principle could potentially result in diminishing disparities in corporate reporting as it tends to dampen the aggressive judgement deployed by management in their discretion of certain transactions. Prudence brings about more realism in relation to the management judgement and hence enhances the information quality being released in public. Certain stakeholders have been opposing prudence as they believe that it brings about a negative bias in the financial reporting and thus amounting to misleading the users (ICAEW, 2006). The original concept of asymmetric prudence did have this problem to some extent but the revised concept of cautious prudence requires only cautious judgement from the management and does not endorse negative judgement. Thus, application of prudence ensures reduced deviation in corporate reporting and hence is beneficial to the reporting framework as it assists more accurate decision making by investors and creditors. But the actual benefits of the application of this would only come out when implemented in a manner which ensures a fine balance between neutrality and prudence without violation of either (Melville, 2013). Disclosures Comparison A comparison of the disclosures of BHP Billiton and Santos is as highlighted below (BHP Billiton, 2016; Santos Limited, 2016). In relation to the segmental reporting, detailed information has been offered by both the companies for the various mining assets that these own in the various geographies along with the respective financial results of the same which is highly relevant for the investors. Through the remuneration report, adequate disclosures have been made with regards to the underlying compensation derived by members of the senior management and the respective principles responsible for the awarded remuneration. A significant component of disclosures is the directors report which provides valuable information to the users regarding not only operational and financial performance during the year under review but presents significant takeaways for the future which can be deployed for prudent investment decision making. Based on the financial reports presented, is seems that BHP Billiton tends to more transparent in highlighting more detailed information particularly through notes on management judgment and contingency liabilities. Even though, the management judgement notes to some extent are present for Santos also, but apparently, they are not as frequent and exhaustive as that of BHP Billiton. Conclusion: Based on the above, it is apparent that the current regime in place for reporting of information to relevant users through the application of AASB standards and conceptual framework seem adequate and is also adhered to by the companies chosen for the task. Further, going ahead it is likely that with the addition of prudence, the information reporting may improve further especially for mining companies as there is significant management discretion involved in reporting of various assets and their reserves which has a material effect on the companys valuation. Further, with regards to the underlying disclosures being made by the respective companies, there are not any major differences, but still the overall reporting and detailing for BHP Billiton is comparatively more detailed which to an extent may be linked to the underlying difference in size of operations of the two companies. References AASB (2010a), Property, Plant and Equipment, Australian Accounting Standards Board, [Online] Available at https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf (Accessed December 14, 2016) AASB (2010b), Impairment of Assets, Australian Accounting Standards Board, [Online] Available at https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf (Accessed December 14, 2016) AASB (2010c), Provisions, Contingent Liabilities and Contingent Assets, Australian Accounting Standards Board, [Online] Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf (Accessed December 14, 2016) AASB (2015), Inventories, Australian Accounting Standards Board, [Online] Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf (Accessed December 14, 2016) ACCA (2014), Prudence IFRS, Association of Chartered Certified Accountants, [Online] Available at https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf (Accessed December 14, 2016) BHP Billiton (2016), Annual Report FY 2016, BHP Billiton Website, [Online] Available at https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2016/bhpbillitonannualreport2016.pdf?utm_source=Websiteutm_medium=Organicutm_term=ARDownloadutm_campaign=AR2016 (Accessed December 14, 2016) Deegan, C.M. (2014), Financial Accounting Theory, 4th ed., Sydney: McGraw-Hill Education Australia ICAEW (2006), MEASUREMENT IN FINANCIAL REPORTING, The Institute of Chartered Accountants in England and Wales, [Online] Available at https://www.icaew.com/-/media/corporate/files/technical/financial-reporting/information-for-better-markets/ifbm/measurement-in-financial-reporting.ashx (Accessed December 14, 2016) Melville, A. (2013), International Financial Reporting A Practical Guide, 3rd ed., London: Pearson Education Limited Santos Limited 2016, Annual Report 2015, Santos Website, [Online] Available at https://www.santos.com/media/3310/2015_annual_report.pdf (Accessed December 14, 2016)