Critical Analysis of Financial Annual report presented by the company BHP
Executive Summary
The report presents a brief overview of the company BHP and the financial statements it has prepared for the year ended June 30, 2019. The report also discusses the major standards applicable on the company and the principles of Conceptual Framework of AASB, and int eh later part of the report presents a critical analysis of the various sections of the financial statements in terms of the fundamental principles described in the Conceptual Framework. It has come to light that improvements can be made int eh fixed assets and intangible assets disclosures, whereas the company has accurately shown the information pertaining to its operating segments.
1. Introduction
BHP is a diversified global resources Australian company that engages in extraction and processing of mineral resources, oil and natural gases in Australia and Americas. Iron ore, base metals, metallurgical coal, copper, aluminum, stainless steel metals, uranium, petroleum and gas are some of the major product divisions of the company (BHP, 2020). Majority income is earned from the production of metal ore mining. The company operates as a trading entity of the BHP Group PLC and its corporate vision is to bring together people and resources through enabling acquisition, availability and delivery of best resources and commodities in the most efficient manner (Bell. T, 2020). With total revenue of $44.288 billion in 2019 financial year BHPBL continues to be one of the world’s top producers of iron ore, copper and coal and it continues to play a major role in Australian market (BHP, 2020).
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2. General Purpose Financial Statements (GPFS)
According to the International Standard on Auditing ISA 200 issued by International Auditing and Assurance Standards Board (IAASB), a GPFS is a set of statement showing financial information that caters to the common financial information and reporting needs of a wide range of users / readers (IAASB, 2016). These users may include the collective stakeholders who are interested in the company and have their stake in one form or another in the company. These may include, for example, shareholders, suppliers and customers, government agencies and regulators, reviewers and auditors and the overall community in which the operations are undertaken.
The set of financial statement currently being reviewed in accordance with the conceptual framework of the Australian Accounting Standards Board (AASB), is GPFS as stated in the Basis of Preparation note in 2019 financial report of BHP. A GPFS can further be classified in a Fair Presentation Framework and a Compliance Framework. The 2019 BHP report is prepared in accordance with the following standards:
- (i) International Financial Reporting Standards (IFRS) issued by IASB;
- (ii) Australian Accounting Standards issued by AASB; and
- Other standards adopted by European Union (EU)
This makes the report being prepared suing Fair Presentation Framework which required management to go beyond what is required by these standards to ensure the true and fair presentation of information included in this report.
The set of financial statements considered include the following.
3. Critical analysis of the report with respect to Conceptual Framework
3.1 Property Plant and Equipment (PPE)
Following are the excerpts from Note 11 of the report:
Two measurement models are allowed for the measurement of fixed assets or PPE under the International Accounting Standard (IAS) 16 or the Australian variant AASB 16: Cost Model and the Revaluation Model. Under the cost model assets are valued at historical cost less any accumulated depreciation and impairment losses at the date of report. Whereas under Revaluation model assets are more accurately reflected at their fair market value (i.e. the amount that an asset would fetch in an open market) at each reporting date in terms of IFRS 13 Fair Value Measurements.
Both of the above models of fixed assets are acceptable. However, the model which more accurately reflects the current value of the assets is Revaluation model which is a better indicative of their current market prices. If so valued, the difference between the Book Value of shares and their market value in ASX could be reduced.
Under the conceptual framework and concept of Materiality is defined as under (AASB, 2019):
Since market value of most of the highly valued items like buildings, plant and machinery could be material to the report, ignoring it could impair this principle. It is also important to note that BHP revealed a $US835 million hit during the December half, that is mainly related to unplanned production outages (Khadem. N & Lannin. S, 2019).
3.2 Intangible Assets
Following figures are disclosed in Note 12 to the report (BHP, 2019):
The broad classification of intangibles other than goodwill into mere “Others” category does not appear to serve any useful purpose for the users as the understandability criteria of the Conceptual Framework appears to be missing which is as follows:
In addition to above, the recognition and measurement requirements of intangible assets are defined under IAS 38 or AASB 138 Intangible Assets. Under this standard an internally generated is specifically prohibited to be recognized as it fails to fulfil the requirements of the definition of an asset. These assets include resources like customer loyalty and databases of information which otherwise could contribute to the success of the company, but are not recognized in the financial statement. Refer to the below explanatory note on Intangibles which fails to make any reference to these assets and how its requirements are met.
In the absence of any information, the user may consider that the “Others” category may have these assets.
3.3 Goodwill and Impairment of Assets
Note 12 also makes reference to Goodwill as follows:
It seems that the goodwill is correctly measured at acquisition at difference between the fair value of assets acquired and the consideration paid, and subsequently at cost less any impairment losses. However, it misses any references to the impairment, which according to IAS 36 is required annually compulsorily at each reporting date for the goodwill. Whether such tests were undertaken? We don’t know. Consequently, the Faithful Representation principle of the Conceptual Framework seems to be somewhat missing, which is defined as follows (AASB, 2019):
3.4 Segment Reporting
Listed companies are required by IFRS 8 – Operating Segments to compulsorily disclose some information relating to their various segment sin which they operate. These segments could be either in terms of the nature of products, geographical segments of the market, or the demographic segments to which company caters etc. The purpose is to enhance the usefulness / relevance and comparability of financial statements to users who will have similar information like the management of the company when taking their decisions. These principles are discussed in the Conceptual Framework as follows:
The company has done a good job in identifying the segments as per the requirements of the relevant accounting standard and present it to the users (BHP, 2019).
In addition to above, the company has also presented financial information of great value in terms of the above identified segments, as follows (BHP, 2019):
4. Conclusion
To sum up above discussion, we may say that BHP is closely following the requirements of the accounting standards, however some additional information may be added or presented in the desired format for the users to add to their knowledge and enable them to have a deeper understanding of the report. This is specially the case in case of PPE and intangibles and the note relating to Goodwill. It is also understood that some information may not be presented for the commercial or confidential reasons and these are the exceptions.
5. References
Australian Accounting Standards Board (2015). AASB 116 – Property, Plant and Equipment.
Australian Accounting Standards Board (2016). AASB 136 – Impairment of Assets.
Australian Accounting Standards Board (2015). AASB 138 – Intangible Assets.
Australian Accounting Standards Board (AASB). (2019). Conceptual Framework. Available at: https://www.aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-19.pdf
Bell. T, 2020, ‘Company Profile: BHP Billiton’, viewed on 9th May 2020 < https://www.thebalance.com/company-profile-bhp-billiton-2340279>
BHP. (2020). About us. Retrieved 6 May 2020, from https://www.bhp.com/our-approach/our-company/about-us/.
BHP 2019. Annual Report (2020). Retrieved 6 May 2020, from https://www.bhp.com/investor-centre/annual-report-2019/.
International Auditing and Assurance Standards Board (IAASB). (2016). ISA Standard 200 – Overall responsibilities of the auditor in planning and performing the audit.
Khadem. N & Lannin. S, 2019, ‘BHP’s half-year profit drops 8 per cent to $5.66b’, viewed on 9th May 2020 < https://www.abc.net.au/news/2019-02-19/bhp-financial-results-profits-drop/10821926>
