Recognition And Measurement Of Fayetteville Oil And Gas Acquisition By BHP Billiton

Overview of BHP Billiton

BHP Billiton is an Australian company incorporated in August 13, 1985. It is a global resource company. The company deals in iron ore, copper, petroleum, coal etc. The company is a multinational giant with operations in various country and generally sells its output via supply agreements with its customer and exchanges.(Reuters, 2018)

BHP has recently acquired US Fayetteville oil and gas from Chesapeake Energy Corporation on 31^st March, 2011 and has expanded its business under non-conventional mode.  By this acquisition, the company tried to expands its business operation in USA. The proposed acquisition amount to US $4,819 Mio and involved 100% stake in the acquired company. The payment outflow of resources in cash.

The resources acquired in the proposed acquisition involved4,87,000 Acres of land which was leasehold and properties producing natural gas including 3,000 wells of which majority are Group operated.(Anon., 2011)

The proposed acquisition was executed with much hope and future prospect but the same turned out to be a failure for the company and as an outcome company offloaded its investment in US Fayetteville oil and gas to Texas Energy firm. The later part of the report deals with the recognition, accounting treatment and measurement of the assets in terms of AASB.

Further

Recognising and measuring the acquisition of US Oil major as per Australian Accounting Standard Board, Evaluating the Measurement of the aforesaid acquisition by BHP Billiton, Determining the accounting for the aforesaid acquisitionBefore understanding the recognition of the acquisition of US Fayetteville oil and gas in the books of BHP Billiton, it shall be pertinent to understand the relevant Australian Accounting standards that are hit by such acquisition. The first and foremost AASB 3 Business combination which states what shall constitute a Business combination and the importance of fair value measurement under such acquisition which is covered under AASB 13 Fair Value Measurement. Further, AASB 116 shall provide the requirement of recognition of assets in the books of BHP Billiton post acquisition.(KPMG Audit Plc, 2011)

Further in terms of AASB 11 Joint arrangement deals with joint control in which the property is joint controlled by two or more entities.(Australian Accounting Standard Board, 2011)

In terms of AASB 3, the following are the criteria specified for acquisition method:

• Identifying who is the acquirer: BHP Billiton Limited;
• Determining the date of acquisition of the company: 31^st March, 2011;
• Identifying the asset acquired and liability assumed by the acquirer and measuring them: BHP Billiton has acquired assets and assumed liability under the same arrangement. Further, the acquisition involved outlay of resources of $ 4,819 Mio;
• The most important principle involved recognition of and measurement of goodwill or bargain purchase as a result of acquisition: In the present acquisition, initially the recognition involved a provisional basis but later goodwill was recognised in the books which were later impaired. Hence, the required condition for business combination was satisfied by BHP.[1]^{(Australian Accounting Standard Board, 2015)}

Further, as per Para 10 of AASB 3, the purchaser on the date of acquisition shall recognise in its books of accounts besides goodwill or bargain purchase the liabilities andassets acquired under the proposed acquisition along with minority interest. Further, the AASB also states that the above recognition shall be subject to framework of AASB and both asset and liability shall be required to meet the definition as defined under the relevant para of AASB 1048 “Framework for the preparation and presentation of Financial Statements”ontheacquisition date.  It has also been stated that the asset acquired and liabilities assumed under the acquisition shall form part of business combination and should not constitute a separate transaction.

Acquisition of Fayetteville Oil and Gas

Further in terms of AASB 116 Property Plant and Equipment a disclosure shall be required of the assets acquired under business combination. In addition the standard states that asset shall be recognised in the books only if it can be ascertained that economic benefits associated with the particular item shall flow to the entity and the cost of such can be measured fairly.(Australian Accounting Standard Board, n.d.)

In addition, in terms of AASB 13 Fair Value Measurement states that the cost of an asset shall be the fair value that would be received on disposing an asset in an orderly transaction between the market participants at the date of measurement.(Australian Accounting Standard Board, n.d.)

Further, under the present case, BHP Billiton has recognised the asset and liabilities at fair value on provisional basis. (The law relating to recognition of asset and liabilities on provisional basis is stated in below). Further, specific asset have been recognised in compliance with AASB 3, AASB 116 and AASB 13. In addition, since the acquisition involved 100% stake acquisition using internal funds of the company, question of non-controlling interest does not arise. The asset acquired and liabilities assumed under the proposed acquisition has been detailed here-in-below:

Analysis of Acquistion
Sl No	Particular	Provisional Amount (US$ M)
1	Property Plant and Equipment (PPE	4803
2	Inventory	3
3	Trade receivables and others	38
4	Account Payables	-21
5	Provision	-4
6	Net Asset that is acquired	4819
7	Payment made for  acquisition	4819
8	Goodwill/Bargain Purchase	0

Note: The above figures were provisional estimates reported in Annual report of BHP in terms of relevant para of AASB 

Further, as per Para 45 of AASB 3 Business Combination Measurement period, BHP Billiton shall be entitled to report provisional figures in the financial statement for the year ended 31^st June, 2011 if the initial accounting of the proposed acquisition has not been complete by the end of the reporting period i.e 31^st June, 2011. Accordingly, BHP Billiton has reported asset acquired and liabilities assumed under provisional basis as described above in terms of para stated above.

Since the present acquisition involved the net asset acquisition amounting to 4819 US Mio which is equivalent to consideration paid no goodwill or bargain were recognised in the books of BHP for the year ended 30^th June, 2011. Further, disclosures were made in the books and financial statement for acquisition and assets were added at fair value and disclosed accordingly in terms of AASB 116 PPE.

The company further complied with requirement of AASB 3 Business combination by expending the amount incurred in executing the proposed acquisition. Further, the incurred for acquisition was treated as operating expense under cash flow statement a part of financial statement.Further, no discounting of payment made for acquisition was made as the said payment for settlement was not deferred by BHP and paid from internal accruals of the company.

Recognition and Measurement of Acquisition

The company post lapse of 1 year recognised the asset at fair value and made adjustment to the provisional amount made earlier in the books of accounts in terms of Para 45 of AASB 3. The said amount is disclosed and the final value arrived has been disclosed in the books of accounts and the financial statements prepared accordingly. The details are here-in-below:

Analysis of Acquisition (30Th June,2012)
Sl. No	Particular	Provisional Amount (US$ M)	Adjustment made	Final Fair Value (US $M)
1	Property Plant and Equipment (PPE	4803	-523	4280
2	Inventory	3		3
3	Trade receivables and others	38		38
4	Account Payables	-21		-21
5	Provision	-4	-24	-28
6	Net Asset that is acquired	4819		4272
7	Payment made for  acquisition	4819	5	4824
8	Goodwill/Bargain Purchase	0		552

On perusal of the above, one can understand that the adjustments have been made in the books of accounts of company by reducing the value of PPE in terms of AASB 116 and disclosing the same in notes to accounts of the Annual report for June ended, 2012. The goodwill created in the books of the company shall be tested for impairment in terms of AASB 136 Impairment of Asset and AASB 116 Property Plant and Equipment and AASB 13 Fair Value. The amount of goodwill recognised under AASB 3 Business Combination stands at US $ 552 Mio which is tax deductible[2]. Further, the same has been disclosed as recognised on the basis of synergies.(KPMG Audit Plc, 2011)

The goodwill recognised was later on impaired in terms of AASB 136 in the financial statement and appropriate disclosure stating carrying value and recoverable value.

The asset was also subject to depreciation in terms of AASB 136 Property Plant and Equipment.

Further, the journal entries made at the time of acquisition of US Fayetteville Oil and Gas has been detailed here-in-below;

Date	Particulars	LF	Amount	Amount
	Property Plant and Equipment A/c…Dr		4803
	Inventory A/c….Dr		3
	Trades Receivables and Others A/c..Dr		38
	To Account Payables A/c			21
	To Provision A/c			4
	To Consideration for Purchase A/c			4819
	Consideration for Purchase A/c..Dr		4819
	Chespake Energy Corporation A/c			4819
	Bank A/c..Dr		4819
	To Chespake Energy Corporation A/c			4819
	Profit and Loss A/c..Dr		17
	To Business Combination expense			17

The amount charged to depreciation shall be written off in Profit and Loss account and correspondingly Accumulated depreciated account shall be increased.

In addition, in next year the value of Property Plant and Equipment was reduced by 523 US Mio and provisions were increased by 24 US Mio to result in creation of goodwill in the books of BHP amounting to US 552 Mio..(KPMG Audit Plc, 2012)

References:

Anon., 2011, bhpbilliton resourcing the future Annual Report 2011,

Anon., 2012, Impairment of Assets: a Study in Global Crude-Oil Companies,

Australian Accounting Standard Board, 2011, Joint Arrangements,

Australian Accounting Standard Board, 2015, Business Combinations,

Australian Accounting Standard Board, n.d, Impairment of Assets,

Australian Accounting Standard Board, n.d, Property, Plant and Equipment,

Australian Government, 2015, AASB 136 – Impairment of Assets,

KPMG Audit Plc, 2011, bhpbilliton resourcing the future Annual Report 2011,

KPMG Audit Plc, 2012, bhpbilliton resoucing the future Annal Report 2012,

KPMG LLP, 2016, bhp billiton Annual Report 2016,

Reuters, 2018, BHP Billiton Ltd (BHP).