Discuss about the Bhp Billiton Limited Company for Strategy Choices.
BHP Billiton Limited Company is a public dual-listed company in Australia. It is one of the largest business companies in Australia listed in the Australian Stock Exchange Market. BHP Billiton was formed in 2001 after the merge of Australian Broken Hill Proprietary Limited (BHP) and Anglo-Ditch Billiton plc. which ended making it an Anglo-Australian multinational Company. The company’s headquarters are based in Melbourne, Australia as well as in in London, United Kingdom. However, it has branches in almost every part of the world, e.g. United States, Chile, Australia, United Kingdom, Canada, Mexico, Brazil and Colombia among others. In these countries, the company’s branches are located in most of their major towns. It specializes in mining and production of metals and minerals like petroleum, Nickel, Manganese, coal, iron ore, Aluminum, potash and copper. Recently, the business has been expanding its operations all over the world through mergers and business acquisition methods (Floris et al, 2013). I addition to that, being listed in the Australian Stock Exchange market, it has the opportunity to attract more investors and shareholders than a business that is not listed (“Our Structure”. BHP Billiton. Retrieved 18 August 2010). This means that it is owned by a large number of shareholders who help the board of directors and management team to carry out their roles effectively and efficiently.
Being an international company, it must use current and modern accounting and financial policies in its operations. In addition to that, the managers should also use the improved reporting measures and technique to deliver their accounting and financial reports (Harris and Arnold, 2013). The company is one of the top most rated businesses in Australia with very high margins of annual revenues received. In that case, this report will address the current accounting and reporting strategies and policies that BHP Billiton Company is using nowadays. The report will address these measures and techniques by looking at the managers reports as well as accounting officers reports. Furthermore, the report will address the key financial reporting standards and techniques being used by the company. There will be comparison to be done between the company’s accounting policies and those of its competitors. The report will also address the flexibility, quality, reliability and validity of the strategies used by the company’s management team during the implementation of these accounting policies and measures. The report will also analyze the company’s reports for the last two years.
Accounting policies are the specific principles and rules that govern a company’s financial statement preparation and reporting. They include the tools, techniques and methods used to evaluate and analyze the value of a business’s asset. They include the IFRS and the IAS standards. In that case, every business organization has its own accounting policies that help it conduct its financial statement operations (e.g. determine the depreciation methods, goodwill recognition, business revenue and cost analysis and determination, assets valuation, investment options among other things) (Rafael de et al, 2012). However, it is important to note that different accounting policies are used for different business types and sizes. Therefore, it is the responsibility of the organizations management team and the accounting officers or financial advisors and experts to determine which policy is best for the business operations. In that case, from my analysis of year 2015 financial report, BHP Billiton Company uses the following accounting policies for its business operations:
This is basically the profit realized when a business’s products are sold or services paid for. When the company’s products are sold or when assets are disposed, the revenue received is recognized only when there is the existence of sales or disposal evidence. However, there are also other requirements for the sales revenue to be recognized in a financial statement preparation (Cortese et al, 2010). For instance, the business accounts should be able to realize the transfer of the product’s risks and rewards to the customer. In that case, BHP Billiton’s sales revenue can only be recognized when a product’s title if completely and officially passed on to the new customer and evidence (in most cases a form containing the sales agreement details) provided to the accounting officers (Blainey, 2010).
These are classified as some of the company’s assets. The value of any property, plan or equipment owned by the company is depreciated on their estimated value at that exact time, i.e. the residual value over their estimated useful lives. In the end of the business year, the company estimates its assets value after their useful lives and period, and estimate their depreciation value after that period of time. The depreciation charges are recorded and documented in the financial statements of that year. On the other hand, the actual depreciation estimation commences on the exact date of asset commissioning. However, the major property, land and equipment categories are depreciated on a straight line basis and/or according to their unit or production. Furthermore, since the business begun leasing some of their assets (e.g. buildings, land, plant and equipment, mineral rights and petroleum interests etc.), the principle was that, if the asset is not readily transferable, the asset depreciation value for the remaining time period will be lesser than the asset’s useful life (Cortese et al, 2009).
The company’s inventories are always valued at the lower of their cost and net realizable value, i.e. including the work in progress (WIP). Generally, the cost of the inventories is determined primarily on the basis of their average costs while that of processed inventories is valued according to their absorption cost basis. Basically, the cost of processed inventories include the cost of raw material purchases, transportation costs, production costs, mining and manufacturing overhead costs among others (Tucker and Hoque). On the other hand, the mineral inventory value is assessed and determined through survey. For instance, the petroleum value is determined by assessing the petroleum quantity derived through flow rates or petroleum tank volume whose volume and composition is calculated by sample analysis method.
The company values its intangible assets in terms of the cost realized after acquiring any intangible assets like software systems and licenses. However, the valuation is based on the asset’s fair value but recorded at a cost less accumulated amortization and impairment charges (Cortese et al, 2007). The intangible assets that can be identified and those with limited life span are amortized on a straight-line basis over their expected useful life time. However, it is important to note that, BHP Billiton’s intangible assets are all identifiable and all have finite or limited useful life span.
BHP Billiton’s goodwill is valued in different ways according to the originality or cause of the goodwill. For instance, goodwill realized when the business is paid a fair value of consideration that is more than the company’s group share value is called purchased goodwill. Good will realized when the fair value of the company’s group share of the identifiable assets exceeds the assets’ cost of acquisition is immediately recorded in the income statement of the company as a revenue or income. The company’s accounting rules do not allow the amortization of goodwill. However, the carrying amount and value of goodwill is assessed against its recoverable amount at the end of every business year.
There are other significant accounting policies used by BHP Billiton Company. They include policies like: Impairment and reversal of impairment of non-current assets, taxation policies, exploration and evaluation expenditure policies, policies governing leased assets, development expenditure costs, financial instruments policies to name just but a few.
The flexibility of the company’s accounting standards is possible because of the methods, techniques and measures created and implemented in choosing them. Apparently the accounting standards are provided either by the International Accounting Standards Board (IASB) or Financial Accounting Standards Board (FSAB) organizations. These standards and policies are provided of different types like the IAS, IFRS and Generally Accepted Accounting Standards (GAAP) standards and are meant to be used by any organization that deems them suitable and effective for its business operations (Beuren et al 2008). As for BHP Billiton Company, the current accounting policies and methods are determined by both the board of directors, management team and the financial or accounting advisors and specialists (“Our Structure”. BHP Billiton. Retrieved 18 August 2010). Just as mentioned earlier, the company is headed and managed by a group of board of directors since it was formed. The company’s Board of Directors work closely with the company’s shareholders and other top management team like the Chief Executive Officer, and the Chairman who are referred to as the Group Management Committee. In the first years of its formation up until January 2015, the company’s funding, liquidity, balance sheet management and dividends management issues were conducted and managed by the Group Management Committee. This means that the committee and the Board of Directors were also responsible for choosing the company’s accounting and financing policies and procedures. However, since early 2015, the responsibility was given to the Risk and Audit Committee. However, the responsibility of business investments and divestments was left to the Board of Directors.
BHP Billiton’s Board of Directors is composed of experienced, skilled and experts from different fields of business administration and management. The group is made up of different committees and management groups with different roles and responsibilities. At the end of every year, every group must produce its end of year financial statement (cash flow statement, statement of financial position, profit and loss statement etc.) and deliver it to the accounting department for comparison. The accounting officers compare to ensure that the information on their statements is exactly the same as the one in the groups’ statements. This means that every manager in the company and the Board of Directors team take part in choosing the suitable financial and accounting policies to be used by the company. This is because they are also used and relied upon by the accounting officers to produce correct, valid and reliable financial statement data (Blainey, 2010). On the other hand, if the accounting officers are not exactly sure about a certain statement or information, they pass on the decision to the board of directors and other committees that are in charge. In that case, it is possible for the management team to affect the choice of accounting policies and/or any other information and data that may be related to financial statements of the company. The company’s accounting decisions especially those that relate to investment options, asset purchase and disposal, dividends rewards to name a few are to be approved by the board of directors or the manager in charge of that particular department.
Every business organization has different strategic measures and techniques to deal with each and every operation. In most cases, the business’s management team is the one in charge of making strategic decisions and which means that they also are responsible for and take any strategic risk involved in any business operation (Noël et al, 2010). However, different businesses have different ways of deciding and evaluating their strategic decisions.
In the case of BHP Billiton Company, the accounting strategic decisions are made by the management team or committee. To prepare the company’s consolidated financial statements, the management has to make realistic and smart judgments and decisions that are capable of affecting the financial statements’ reports. This means that these strategic decisions influence the values of the assets and liabilities in the statement of financial position and the revenue and expenses stated in the profit and loss statements at the end of that specific business year (Blainey, 2010). In most cases, the management takes a thorough evaluation and analysis of the company’s assets, liabilities, contingent liabilities, revenues and costs in order for them to make effective decisions, estimations and judgments that are used in determining the accounting policies. In addition to that, the management must visit the previous year’s financial statements and reports information to make these decisions. By visiting the historical data, they get to chance to learn from previous cases, decisions and experiences.
The company’s accounting and financial reporting strategies meet the requirements of the strategic reporting required by the United Kingdom Companies Act and Operating of Financial Review required by the Australian Corporations Act. The accounting policies standards used by BHP Billiton Company always meet the requirements listed by the IFRS organization which means that they are simple and easy to understand. In determining which policies to use, the management estimations and judgments are considered. Some of the accounting policies where management estimates, judgments and assumptions are involved include the following: business reserve estimates, exploration and evaluation expenditure, recoverable amount from property, plant and equipment, business development expenditure, closure and rehabilitation provision and taxation among others (Ribeiro et al, 2014). The company’s financial information, effects of accounting policies and financial statement value is mostly determined by the management decisions on value estimations and judgments.
The company’s overall strategy is to own and operate large, long-lasting, affordable product market. Its strategies revolve around ensuring availability and access to any asset needed for business operation. Furthermore, the company focuses on its business growth as well as value creation of any asset available in the company. Its strategies are entirely based on value creation and profit or revenue realization in the end of every business year. Therefore, the accounting strategies are also meant to focus on business growth and asset value creation. The strategies focus on the following key areas: Cost efficiencies by focusing on increased profits, timing projects or investments for value and returns and increasing the value and flexibility of the accounting policies.
Every business organization must have effective and efficient accounting policies to implement during the preparation and reporting its financial statements. Furthermore, the accounting policies and standards have to be of good quality and be capable of inflicting good quality into a business’s financial statements. In addition to that, every business always has a certain period of time to conduct its operations and preparing its accounting and budgeting reports, basically called the fiscal or business year where by every business must give a report on its financial statements (Islam and Dellaportas, 2011). In that case, it is important for this statements to be of good quality for their information to be reliable, valid and effective.
In the case of BHP Billiton Company, its disclosure information has always been of very high quality for the past 2 decades. The company has always prepared its financial statements on time at the end of every business year which means that the information published is always current. In addition to that, it has always published information on its revenues, costs, losses and investment options in its website and other networking sites like Google and Wikipedia. Additionally, the company has published its progress and other information Australia’s business websites and business print media publications. The information available to the public has always been detailed, relevant, reliable, and valid for use by researchers or any other business. Besides being of good quality, the company’s information is usually sufficient and adequate for evaluation and analysis when need be. BHP Billiton’s policies and standards are currently non-standard financial measures. This means that the company investors make most of the accounting policies, whether they will effective or not (Harris and Hargovan, 2010). The reason for BHP Billiton using the non-standard measures is to be able to avoid some of the restrictions involved in the use of GAAP, e.g. underlying profit and earnings. Through the evasion of GAAP they are able to realize benefits like earnings before interest, tax, depreciation and amortization and non-GAAP income (Boyce, 2009).
The company’s potential red flags originate from the challenges and problems that it faces from both the internal and external environment. However, there are other issues like the financial global crisis and economic conditions which are some the main issues that the company has no control over. Issues like climate change has caused a lot of negative changes towards BHP’s performance. His has therefor led to loss of revenue and increase of loss caused to the business. In addition to that, there have been scenarios where the company has expected its liquidity status to be low but turns out to be high whereby the company is said to have more cash to pay the debts and shareholders rather than to invest. The company sometimes also faces certain changes in asset ownership whereby the government can decide to take back a property that the company had bought. This means that the changes interrupt the company’s operations and cannot be controlled when it comes to that, e.g. the New South Wales government buying back BHP Billiton’s Caroona coal mine. Additionally there are frequent and drastic price changes for the company’s products which affects the revenues and profits value for the company in the end of the business year.
Just as mentioned earlier, BHP Billiton Company uses the GAAP standards and principles; which are closely related to those of IFRS (Georgiou, 2010). However, there are few challenges and complaints that accompany the use of IFRS standards or the GAAP accounting principles (Harris and Arnold, 2012).
Generally, for an asset to be recognized in the statement of financial position, it must have an economic value to the business and the economic value must be measurable. However, according to IFRS, every asset should be classified as either tangible or intangible which causes confusion in some businesses whereby some take the exploration and evaluation assets to be part of the property, plant and equipment assets (Bebbington et al, 2014).
Usually, a business’s assets value measurement can be done after asset recognition which cause challenges for the organization to recognize even the unrecognizable asset. On the other hand, the IFRS principles and policies have always focused on recognizing the business arrears that can bring revenues to the business (Beuren et al, 2008).
Conclusion
From the research, it is clear that every business must have effective and efficient accounting and reporting principles and standards. However, making the choice for the suitable standards may be difficult but should be done. Apart from helping in the documentation and maintenance, these standards are meant to guide and govern a business’s financial statement preparation and reporting. They are used to deal with complex accounting and financing business operations like depreciation, goodwill recognition and financial statements consolidation among other things. Being a successful business organization, BHP Billiton has been using very effective and efficient accounting and reporting standards to control and manage its financial statements. The company has also been involved in initiating and implementing effective strategic decisions that have contributed to its growth and development within a short time span. Therefore, the company should certainly continue to use these standards or even create others that can be more beneficial in future.
References
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