Recognition And Measurement Of Acquisition Of U.S. Fayetteville Oil And Gas Shale

Accounting Standards for Acquisition of Fayetteville Oil and Gas Shale

The recognition and measurement for the acquisition of the US Fayetteville Oil and Gas shale according to the AASB. The relevant AASB for the acquisition of the company is the AASB 3 that states that the company can undergo. The BHP Billiton Company had acquired the U S Fayetteville Oil and Gas Shale on March 11 classifying the same investment as a business combination. The recognition principle for such kind of principle should be based on the date of acquisition the BHP Billiton Company should recognize the assets of the target company separately from the goodwill of the company (Russell 2017). The identifiable assets acquired during the acquisition process should qualify to become a part of the assets and liabilities of the companies must meet certain terms and conditions as presented by the Framework for Preparation and Presentation of Financial Data and Reports. To qualify as per the standard guideless and conditions the assets and liabilities of the target companies must be in possession with the acquiring or the target company and should not generate with results of any other transactions. The BHP Billiton Company or the acquiring company should account for the target company’s assets by the standard rules and guidelines. There should be no double counting of recognizing assets of the company, which the acquire has already taken into account. For example, Goodwill and other Intangible assets of the company should not be considered by the BHP Billiton Company if the same is not recognized by the acquire company in there balance sheet (Tran and Zhu 2017). The transaction could result in the creation of goodwill between the two companies but the same should be acquired and recorded as per the Australian Accounting Standard Boards. The Accounting standard boards also gives the guidelines of recognizing operating assets and liabilities of the companies.

The measurement principle according to the AASB 3 states that the BHP Company can measure the net identifiable assets and liabilities of the companies as the fair value of the assets and liabilities of the company at the acquisition date of the assets. It is suggested by the accounting standards that the BHP Company should measure the assets of the acquiring company at either fair value or at the liquidated value of the assets. The company uses the measurement basis done by the BHP Company for the Business combination the purchase method earlier until the year 2009. The purchase method involves identifying the net assets of the target company. The business combination for the fiscal year was accounted by application of the acquisition method of accounting, the net identifiable assets and liabilities of the companies are recorded at the fair value at the acquisition date (Jin, Shan and Taylor 2015).

Evaluation of the measurement of Fayetteville Oil and Gas Corporations was done by the acquisition method by the BHP Company. The net assets of the target company will be valued at their current market price and then there will be a reassessment of the balance sheet of the target company. The fair value determined of the target company will then serve as the base for the acquiring company current market along with the target price (Carey, Potter and Tanewski 2014). The BHP Company showed the transaction under the business combination method or the acquisition method under which the assets and liabilities of the target companies are merged with the acquiring company by the amount of percentage stake the acquiring company applies and the rest of the portion is determined as minority interest in the target company’s balance sheet. The balance sheet of the BHP company suggests that the company had reported an approximately USD $552 Million amount of goodwill that was as part of the goodwill in the acquisition of the US Fayetteville Gas Company (Dickinson, Wangerin and Wild 2016). The amount extra paid is due to the goodwill recognized in the balance sheet of the acquiring company (Wangerin 2017). Generally, the amount is calculated as the extra potential, which the target company can pay off in the due course of the business. The accounting assumptions and determining the fair value assets of the company are some of the key concerns the company might want to analyze. The accounting assumption and determining the true potential of the company of the US Fayetteville company was too aggressive. The company had spent around US $30 Billion in the acquisition deal. The company had to charge the impairment on the extra amount of assets it had paid after the decrease in the oil prices the impairment amount was around 105 of the total deal value around 2.8 billion dollars (Su and Wells, 2018).

Measurement Principle for Acquisition of Fayetteville Oil and Gas Shale

The accounting treatment and the recording of the acquisition of the Fayetteville oil and gas was done by using the acquisition method. Under the acquisition method, the target company net identifiable assets and liabilities are recognized at the balance sheet of the company, which are at the book value of the company at the historical prices for the company. The reassessment of the balance sheet assets and liabilities is done after determining the fair value of the assets and liabilities of the company (Paugam, Astolfi and Ramond 2015). The BHP Company determines the acquisition cost for the US Fayetteville company after the initial reassessment of the balance sheet of the company. The BHP company had then reassess as 30 billion dollars as the considerable value for the company’s assets. The things which was taken into assumption by the company was the cash flow generation by the target company. The company determined the cash flow generation at the asset peak cycle, which had overvalued the targets company assets and shown an increased potential of the company assets in the generation of the cash flows. The significant assumptions had led to overvaluation of the company assets and valuation for which the goodwill component had a considerable weightage. The BHP Company did the impairment in the year 2015 when the oil price started falling and the reassessment for the company assets was done in the case. The true value of the assets and the potential pf the assets had significantly fallen which had lead the company to write an impairment in the goodwill or the extra amount, which had paid. The impairment charges for the company was around 2.8 billion dollars, which was noted in the financials of the company (Kimbro and Xu 2016).

The factors that affected the recognition and measurement of impairment loss of Fayetteville Oil and Gas Operation was the changing oil prices and the rapid fall in the oil prices in the year 2015. The oil prices have fallen from a peak of about 120$ per barrel to a low of about$45 per barrel. The significant amount of oil prices was not expected by the BHP Company, which had raised questions on the accounting assumptions and the valuation analysis done by the BHP Company. The company valuation and assumptions was affected taken down by the company did not expect the significant drop down in the oil price. The impairment loss treatment would be done under the Australian Accounting Standards under, which the company had underwent through. The target company can take the assumption of future cash flow as 10% volatility in the cash flow generation but the volatility which was actually seen was greater than 50%/. The impairment loss treatment will be done under the corridor approach of accounting where the loss will straight away not affect the income statement of the company (Duh, Lee and Lin 2009). The loss or the impairment charges arising out of the reassessment of assets will be restated in the other comprehensive income statement of the company and the same would be allowed to be capitalized if the loss arising from the same is reversible. The losses or the impairment noted on the revaluation date of assets and liabilities will be treated as an expenses and recognized in the income statement of the company if the same is not reversible in nature. The impairment charges noted down by the company was around 2.8 billion dollars the fall in the productive value of the assets. The stakeholders and the investors of the company for going for the acquisition with the company at times when the fair value of the assets was too high or at the boom period. The company should have performed many types of analysis before the valuation of the assets and liabilities. The trend analysis alone could not have given a significance amount of base for the evaluation and determine the price of the assets and liabilities. The BHP Company should have also gone for scenario analysis in determining the assets price of the company in the case where the volatility in the assets price are seen to be very high. The analysis would have given the company a chance to analyze and get the value of the assets in different scenario and different possible cash flow scenarios (McClean and Hölscher 2014).

Evaluation of Fayetteville Oil and Gas Operations After Acquisition

The treatment for the impairment losses or the charges, which the company had assessed on the revaluation date of assets and liabilities of the companies. The impairment charges is calculated after reassessing the fair and true value of the assets and liabilities of the company. The charges was calculated after there was revaluation of assets and liabilities of the BHP Company (Chen, Wang and Zhao 2009). The impairment charges is calculated on the intangible assets of the company after a production fall or when the generation of cash flow from the assets is not certain in that case, the assets are revalued. The asset value is created by the economic benefits it would provide to the company (Chang and Yen 2015).

The impairment charges calculated will be determined by the fall in the productive assets of the company. In the case of the BHP Company, the fall in the production value was around 2.8 billion dollars. The impairment under the current accounting standards says that the impairment charge is only reversible under the case when the evidence for the same is justifiable. The accounting for the same could be done under two ways the methods are as such that if the loss are expected to be reversed the same loss can be capitalized in the income statement of the company. If the impairment charges for the company are expected to be non- reversible than the expenses should be shown as an expense under the income statement for the following year. The classification of the impairment charges should be done after an careful analysis of the assets class and the future value, expected cash flow to be generated is ascertained by the company (Vogt et al. 2016).

Reference

BHP | 2011 Annual Report, Summary Review and Form 20-F. (2018). Retrieved from https://www.bhp.com/media-and-insights/reports-and-presentations/2011/09/2011-annual-report-summary-review-and-form-20-f

Brent Crude Oil Price | Historical Charts, Forecasts & News. (2018). Retrieved from https://www.focus-economics.com/commodities/energy/brent-crude-oil

Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.

Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter? Evidence from China. International Research Journal of Applied Finance, 6(4), pp.197-222.

Chen, S., Wang, Y. and Zhao, Z., 2009. Regulatory incentives for earnings management through asset impairment reversals in China. Journal of Accounting, Auditing & Finance, 24(4), pp.589-620.

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Duh, R.R., Lee, W.C. and Lin, C.C., 2009. Reversing an impairment loss and earnings management: The role of corporate governance. The International Journal of Accounting, 44(2), pp.113-137.

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Kimbro, M.B. and Xu, D., 2016. The accounting treatment of goodwill, idiosyncratic risk, and market pricing. Journal of Accounting, Auditing & Finance, 31(3), pp.365-387.

McClean, P.L. and Hölscher, C., 2014. Liraglutide can reverse memory impairment, synaptic loss and reduce plaque load in aged APP/PS1 mice, a model of Alzheimer’s disease. Neuropharmacology, 76, pp.57-67.

Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do purchase price allocations matter?. Journal of Accounting and Public Policy, 34(4), pp.362-391.

Russell, M., 2017. Management incentives to recognize intangible assets. Accounting & Finance, 57, pp.211-234.

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Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax income gap.

Vogt, M., Pletsch, C.S., Morás, V.R. and Klann, R.C., 2016. Determinants of goodwill impairment loss recognition. Revista Contabilidade & Finanças, 27(72), pp.349-362.

Wangerin, D., 2017. M&A Due Diligence, Post-Acquisition Performance, and Financial Reporting for Business Combinations.

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