Discuss about the Corporate Reporting of BHP Billiton Company for Petroleum.
There has been an increasing need for companies to provide adequate, relevant and comparable financial statements in their annual reports in the recent years. This need has compelled many corporations to adopt a modern mode of reporting where both financial and non-financial information is required to be disclosed and included in the annual reports. BHP Billiton is not an exception to this. A number of both local and international accounting standards such as IFRS, IAS and AASB have been responding appropriately to a number of emerging issues concerning how financial and non-financial reports should be presented. AASB 10 prescribes the manner in which both financial and non-financial information that is required to be provided by corporations in Australia when it comes to the presentation of financial statements in the annual reports. A close look at the financial statements of BHP is taken to assess the reporting policy adopted by the company. This paper seeks to examine the qualitative characteristics of BHP Billiton annual reports including their relevance, comparability and completeness of the financial statements and sustainability reports.
The main aim of a company’s financial statements contained in the annual report is usually to provide information that is useful for making decisions. For the accounting information to be useful for decision making, it has to conform to certain qualities that are required by both local and international financial reporting standards. The international financial reporting standards (IFRS), International Accounting Standards Board (IASB) and the Australian Accounting Standards Board (AASB) provide the guidelines in which corporations should disclose and report its financial statements (iasplus.com. 2018; “IFRS Qualitative Characteristics Of Financial Reporting – CAKART”, 2018, np.). Most of the guidelines require that a company’s financial statements should adhere to the four main qualitative characteristics namely: Relevance, comparability, understandability and reliability.
Looking at the annual reports for BHP Billiton for the financial periods 2016 and 2017, it is evident that most of the qualitative requirements of financial statements presentation have been adhered to. For instance, both 2016 and 2017 financial statement sections of the annual report are comprised of the same items. This provides a room for comparability. The section provides a report on the consolidated financial Statements, the director’s declaration, the statement of Director’s responsibilities and information about BHP Billiton Plc 217 (BHP Billiton | 2016 Annual report, 2016, pp.156-225; BHP Billiton | 2016 Annual report, 2017, pp.155-229). With such uniformity in the manner of reporting that has been adopted by the company, any user can be able to clearly look for a comparison between the annual reports for the two periods. A lot of information contained in the annual reports for the two years is also easily understood. The understandability, in this case, is in terms of nature of the language that is being used to report the figures and statements made by the directors. Aspects of reliability and relevance can also be seen in the BHP’s annual reports because an independent auditor was involved in examining the financial records of the company to ascertain that they have been prepared according to accounting standards and that they represent a true and fair view of the company.
Since sustainability reporting in accounting is becoming a very important part of business reporting and financial reporting today, the practice has gained widespread acceptance (Globalreporting.org. 2018). BHP Billiton has not been left behind in this and it has considered disclosing a number of social, environmental and sustainability activities it undertakes in the course of the financial periods through the annual reports (BHP Sustainability Report, 2017, np.). AASB 101 provides the framework in which companies should prepare their financial statements for presentation at the end of the year through the annual reports. The standards, therefore, require Australian companies to include sustainability disclosure as a way of showing openness and transparency to all the stakeholders of the organization. The Global Reporting Initiative (GRI) provides guidelines on how sustainability disclosure should be done (Bhattacharyya,2015). BHP Billiton through its annual reports has been working to address all the GRI requirements including the ten principles provided by the International Council on Mining (and Metals (ICMM) and the United Nations Global Compact (UNGC).
Looking at the annual reports for BHP Billiton for the financial periods 2016 and 2017, it is evident that the company has valued the importance of disclosing non-financial information to its stakeholders, a situation which has seen it comes up with a number of corporate social responsibility and sustainability practices (BHP Billiton | 2017 Annual report, 2018, pp.47; (BHP Billiton | 2016 Annual report, 2016 pp.22-44). All these practices are captured in the annual sustainability reports. Because BHP Billiton acknowledges the fact that most of its operations have a big impact on the environment, most of the sustainability practices being undertaken by BHP Billiton are centred on protection of the natural environment. The company has therefore been in continuous support of the communities around where they operate by the provision of essential services such as clean water, food and clean air through reduction of carbon emissions. Both the annual reports for 2016 and 2017 shows how the company is committed to disclosing and reporting all the pertinent information regarding the social and environmental aspects of the company.
According to my opinion, I believe that the information provided by BHP Billiton in its 2016 and 2017 annual general meetings is both adequate and sufficient because it involves the presentation of both non-financial and financial information about the entity.
Since BHP Billiton has done a lot when it comes to sustainability reporting, I think the only thing that the management needs to do, is improving on the issue of transparency and openness when it comes to environmental disclosure (Hummel, & Schlick, 2016). The management of BHP needs to be frank and open to both the members of the public and the regulators on issues touching the environmental effects caused by the operations of the company to the society. The Brazil Dam Disaster which occurred in 2015 was an incident that really discredited the reputation of the company (Szoke,2018 ;Burrit and Christ, 2018) If the company had taken appropriate risk mitigation and disclosure measures before starting up the Dam project, such an incident could not have occurred (Nakayachi, 2014). Above everything the management have to comply with all laws, adhere to the company’s policies, standards and guidelines, health, safety, environment and community and ensure equality in employment (Maniruzzaman, 2011).
The role of and importance of the pre-acquisition entries during the preparation of the consolidated financial statements cannot be underestimated (WALKER, 2011). Some of the main purposes of the pre-acquisition in the preparation of consolidated statements include.Pre-acquisition entries ensure that there is a continuous supply of relevant information to be used in the formation of the consolidated financial statements, the entries facilitate the supply of comparable information that can be used by users to compare the operational and financial performance of the different segments of an entity over time (WALKER, 2011).The preparation of the pre-acquisition entries is a way of showing accountability on the side of the management since all the relevant details of a transaction are disclosed. Pre-acquisition entries also prevent double counting of the assets with economic benefits to the entity. Pre-acquisition entries facilitate recognition of assets and liabilities that have been acquired in the process of combination which has not been recognized by any entity in the group. Provides the opportunity of recognizing any goodwill/gain on the purchase that could have been realized during the process of combination and assists in preventing double recognition of equity of an entity.
The existence of dividends payable for shares acquired from a subsidiary by the buying entity is referred to as cum-dividend. Shares acquired cum-dividend is used to mean that the acquiring entity has a right to dividends already declared (dividends payable). What this means to the acquiring company is that the company is purchasing shares which have earned dividends that have to be received by its previous holders in form of cash receipt (AASB 3- Business Combinations, 2018). For example, if a company say B acquires another company C at a value of $500 000 when as at the date of acquisition company C had a cash of $ 500 000, dividends payable of $10 000 and share capital of $490 000. In such a case, the pre-acquisition entries have to adjust in such a way that the dividends payable are recorded as dividends received of $10 000 and the consideration for the value of shares acquired as $ 490 000. Parent B will, therefore, record the $ 10 000 as its asset (dividends receivable) while company C which is the subsidiary will record the $ 10 000 as a liability (dividends payable).
It is important to distinguish between pre-acquisition and post-acquisition dividends because it would help the acquiring company to determine how to treat the entries. For instance, if the dividends are declared from the pre-acquisition profits, it would mean that they are being taken by the purchaser company but later the number of dividends attached to the profits acquired would be demanded by the previous owners (Arora, 2015, np). The accounting entry, in this case, would be to deduct the number of such dividends payable (pre-acquisition dividends) from the cost of the investment (acquisition value)
When it comes to post-acquisition dividends, the acquiring company would have to credit the dividends to the profit and loss account because they are paid out of the post-acquisition profits. Distinguishing pre-acquisition and post-acquisition dividends is, therefore, necessary because it would enable the company to recover the cost of purchase and treat the dividends as income respectively.
If as at the date of acquisition, the subsidiary company has goodwill in its account, the goodwill consideration would be transferred by the acquiring company after comparing it to the identifiable net assets of the subsidiary. This means that according to the acquiring company, the goodwill found in the books of the subsidiary company would not qualify as its identifiable assets and hence the need for adjustment for the unidentifiable asset (goodwill) to calculate a new portion of goodwill that is being acquired by the group. If the goodwill that has been acquired is not yet recorded after the acquisition, the same is going to be recognized in the business combination valuation entries. (IFRS 3 — Business Combinations, 2018. np) The pre-acquisition entries would, therefore, eliminate the business combination valuation entries as pre-acquisition equity.
The process of acquiring some interests in a subsidiary company is a form of business combination. As per AASB 3, subsection 18, the same measurement of business combinations applies to the controlling entity. The standards require that the acquiring entity should have to measure the identifiable assets and liabilities as at acquisition date as fair values (Business Combinations aasb3, 2018, pp.10). Those who came up this standard assumption that the fair values of a company’s assets and liabilities as at the date of acquisition would provide the most relevant information that is required of the users. This means that the fair values would be equal to the cost that is taken by the acquiring entity.
Because the effective cost of the business combination is arrived at using the identifiable assets and liabilities figures, then fair values would be used in computing the actual values of items to be used in drafting the consolidated financial statements and any residual would be goodwill or bargain purchase. As per AASB, the only asset that cannot be measured using fair value of goodwill because already goodwill is a product of the fair values. In a case where the fair values of a subsidiary result to a gain on the purchase during combination, the entry would not be treated as a reduction in the fair values of the identifiable assets and liabilities but consistent with the cost (AASB 3-Business Combinations, 2015, np.). The fair values will, therefore, remain unchanged and the excess would be recognized as a gain.
References
Aasb.gov.au. (2018). Accounting standards. [online] Available at: https://www.aasb.gov.au/Pronouncements/Current-standards.aspx [Accessed 25 May 2018].
Arora, A., 2015. What Is The Treatment Of Dividend Received For The Pre-Acquisition Period On Investment?. [online] Bing.com. Available at: <https://www.bayt.com/en/specialties/q/197331/what-is-the-treatment-of-dividend-received-for-the-pre-acquisition-period-on-investment/> [Accessed 31 May 2018].
Bhattacharyya, A. (2015). Corporate Social and Environmental Responsibility in an Emerging Economy: Through the Lens of Legitimacy Theory. Australasian Accounting, Business And Finance Journal, 9(2), 79-92. https://dx.doi.org/10.14453/aabfj.v9i2.6
BHP Billiton. 2016. BHP Billiton | 2016 Annual Report. [online] Available at: <https://www.bhp.com/investor-centre/annual-reporting-2016> [Accessed 29 May 2018].
BHP Billiton. 2018. BHP Billiton | 2017 Annual Report. [online] Available at: <https://www.bhp.com/investor-centre/annual-reporting-2017> [Accessed 29 May 2018].
Burrit, R. and Christ, K., 2018. How BHP And Vale React Next To Brazilian Dam Failure Will Be Critical. [online] The Conversation. Available at: <https://theconversation.com/how-bhp-and-vale-react-next-to-brazilian-dam-failure-will-be-critical-50405> [Accessed 31 May 2018].
BHP Billiton Sustainability Report 2016. (2018). Globalreporting.org. Retrieved 25 May 2018, from https://www.globalreporting.org/Pages/FR-BHPBilliton-2016.aspx
BHP Sustainability Report 2017. (2018). Globalreporting.org. Retrieved 25 May 2018, from https://www.globalreporting.org/Pages/FR-BHPBilliton-2017.aspx
Globalreporting.org. (2018). BHP Sustainability Report 2017. [online] Available at: https://www.globalreporting.org/Pages/FR-BHPBilliton-2017.aspx [Accessed 25 May 2018].
Hummel, K., & Schlick, C. (2016). The relationship between sustainability performance and sustainability disclosure – Reconciling voluntary disclosure theory and legitimacy theory. Journal Of Accounting And Public Policy, 35(5), 455-476. https://dx.doi.org/10.1016/j.jaccpubpol.2016.06.001
iasplus.com. 2018. IFRS 3 — Business Combinations. [online] Available at: <https://www.iasplus.com/en/standards/ifrs/ifrs3> [Accessed 29 May 2018].
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Maniruzzaman, A. (2011). Creeping legitimacy of corporate social responsibility. Amicus Curiae, 2011(85). https://dx.doi.org/10.14296/ac.v2011i85.1236
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Szoke, H. (2018). Brazil mine disaster exposes BHP’s failures. The Sydney Morning Herald. Retrieved 30 April 2018, from https://www.smh.com.au/opinion/brazilian-dam-disaster-shows-bhp-falls-short-of-global-expectations-20151119-gl2i8c.html
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