Discussion
The purpose of this report is to highlight the asset and liability recognition policy of company based on the AASB 9 framework. The company that has been chosen to perform the analysis is BP plc, which is an oil and petrochemicals company involved in exploration and production of oil and natural gases and having operations all over the world. The report discusses the recognition policies of assets and liabilities of BP Plc based on the framework of AASB 9. The report goes on to explain the framework of AASB 13 and how does it relate to the AASB 9. The importance of recognition of different financial assets and their relevance is discussed in a comprehensive manner. The report highlights the impact of the recognition policy on the profits and losses of the company. The recognition of financial assets may also have an impact on the revenues and the liabilities of a company which the report would be highlighting in detail. The compound instruments of the company that would be analyzed is the convertible bonds that the company has issued and the impact of issuing such security is also discussed in the report. The disclosures made by the company regarding the financial instruments are also discussed in the concluding sections of the report.
AASB 9 is an accounting framework and has come into existence since the beginning of January 1, 2018 and has replaced another AASB 139 which deals with the recognition and management of financial instruments. The use of this standard ensures that the companies provide all the necessary and crucial information regarding the assets and liabilities while preparing and reporting the financial performance of the company. The framework of the standard lays down the guidelines which would help companies to classify its financial assets and liabilities according to the cash flow generating characteristics and the model of the business in which assets are held.
The following section explains the asset and liability recognition policy of the BP Plc:
The financial assets of the company are recognized at fair value initially which generally is considered as the transaction price. Financial assets which are not measured at fair value or by means of profit and loss can be measured on the basis of the costs attributable to the instruments. The firm follows a policy of derecognizing an asset when the contracts term of the instrument expires or the right to receive the cash flow from the instrument expires. The group has a policy of identifying the financial asset debt instruments as amortized cost, fair value through OCI and it can also measure the asset at fair value by means of profit and loss statement of the company. The decision mainly depends upon the business model of asset management and the characteristics exhibited by the cash flows associated with the asset.
- Financial assets measured at amortized cost – When the business model of an asset has the objective to collect the contractual cash flow and the cash flows are majorly represented by interest and principal payments, the asset would be measured at amortized cost. Depending upon the significance of the time value of money, the amortized cost are expected to use the interest rate method which are effective, to determine the value. Trade and other receivables are examples of assets falling under this category.
- Assets measured at fair value through OCI – When an asset’s business strategy has the goal of acquiring of cash which are fixed through contracts and selling the assets. The assets’ cash flows should mostly consist of interest and principal payments, with the asset’s fair value determined by other comprehensive income.
- Assets measured at fair value through profit and loss statements – The types of assets which do not have the qualities to be classified as asses that can be valued at fair value, OCI or amortized cost techniques are passed through the profit and loss statement and are valued at fair value.
- Equity investments – These are measured at fair value through profit and loss.
- Derivatives in effective hedge – The derivatives which are hedging instruments and are employed in hedging an active position is to be taken into the balance sheet at the fair value of the instruments.
- Cash and cash equivalent – The cash and cash equivalents are extremely liquid security which can be converted into cash very swiftly having a less than three-month maturity can be treated as financial assets and it can be measured at amortized cost.
- Financial liabilities – Liabilities which are classified as held for trading can be treated as financial assets which are passed through the profit and loss statements and which are valued at a fair value. The liabilities which are discussed above is taken to the balance sheet to be recorded and the gains and losses which are experienced are recorded into the income statement. The liabilities which are classified as discussed above are carried on the balance sheet at the fair value and any gains or losses arising due to the liabilities are booked in the income statement. This category includes the derivatives which are not employed in any active hedging position within the organization. Derivatives identified as hedging instruments, on the other hand, are carried to the balance sheet and valued at fair value. For the first several quarters, such liabilities are recorded at fair value. The fair value of the projected proceeds is equal to the fair value of the interest-bearing loans and borrowings.
The three-primary objective of the AASB 13 can be explained as that it provides the proper definition of a fair value. The second definition of the standard is that it lays out rules to set a single standard which covers the framework of fair value measurements. The standard also provides details on the required disclosures for firms measuring assets and liabilities under fair value needs to provide. The AASB 13 is not focused towards changing the basic recognition policy of assets and fair value or when the fair value accounting can be used, instead it brings together fair value measurement from all other standards under a single standard for the ease of use. The fair value definition under the AASB 13 framework is the price that would be exchanged between two market participants for buying or selling an asset marked at a specific measurement date. The primary principle under this standard is that the market price of the asset is the exit price for participants who holds the asset or owes a liability.
Asset Recognition
AASB 9 is a framework which had focus over three major areas which includes classification and measurement of securities. The four types of classifications before the AASB 9 standard were securities which were held to maturity, receivables and other types of loans, AFS and fair value. The criteria have been reduced to amortized cost and fair value under the AASB 9 (Davidsons 2019). The primary feature under the characteristics of AASB 9 is related to the recognition criteria of the expected losses in credit. AASB 13 brings about all the rules and regulations defined under various standards under one umbrella for the ease of understanding and convenience (Aasb.gov.au 2022).
The company had booked impairment losses in the year 2021 to the extent of $1617 million arising on the back of changes in the portfolio of assets. The reversal in impairment in the year 2021 was majorly because of the change in oil and gas price assumptions that were made within the group. The biggest impairment that was recognized was for the Hawkville in BPX energy to the extent of $962 million. The total amount that could have been recovered from these impaired assets was equal to $6760 million. In the year 2020, the group booked impairment losses in the production and developing assets that the group owns in the UK. The impairment from other businesses that the company had were equal to $63 million, $12 million and $30 million which the company had recognized in the past three years starting from 2019 to 2021.
As the company is exposed to the global markets of oil and petrochemicals and is one of the major players in the segment, the company has to go through and manage multiple risks arising due to the operations of the company. Credit risk, liquidity risk, forex risk, market risk and several others. The company faces two types of market risk which are; risk of volatile price of commodities like oil and natural gas which the company operates into. To manage the risks faced by the company it actively uses derivative instruments to hedge its exposures to above mentioned risks. The group uses currency forwards to fix the rates of the foreign currency payables in terms of interest payments and other currency exposures. The group also uses the interest rate swaps to manage the interest rates risk that the company is exposed to. The floating rate debt are converted into debts which are denoted in fixed rate on the basis of the movement in the interest in the future.
A convertible bond is a debt product that may be converted into common stock at a certain price and date (or a set of dates) in the future. On the repayment date, debt instruments provide bondholders shares at a set conversion proportion and conversion price. The key benefit of a convertible bond is that it is a kind of equity financing that allows for a delay in common stock dilution and earnings per share. Another benefit is that, when compared to other debt securities, it allows a firm to finance at a reduced interest rate. Convertible bonds provides the return potential and qualities of a stocks whereas it also maintains the safety that are associated with a bank (Martynova and Perotti 2018). Convertible bonds also provide all of the usual benefits of traditional bonds for both the bondholder and the bond issuer. The the economic significance of issuing a convertible bond is similar to that of issuing a regular bond. If an issuer issues a convertible bond, the issuer’s obligations to meet the interest payments and the principal repayments of the bonds that are issued are limited to the time till the bonds are not converted. The fair value of the instrument is determined by discounting the cash flows of the company which are associated with the instrument with a rate which is applied to financial instruments of similar credit status and which provides the same cash flows as the instrument that is being valued.
The SEC in the United States sets disclosure standards. The regulations may, however, be constructed by the Internal Revenue Service in order to achieve their goal of taxing individuals and businesses. The Securities and Exchange Commission (SEC) is responsible for enforcing disclosure regulations for corporations listed on the New York Stock Exchange. The SEC must be followed by all significant businesses which are a constituent of the New York Stock Exchange, or they may face severe penalties. The disclosures of the company includes shareholder information, Non-GAAP measures reconciliations, signatures, cross-references to form 20-f and others.
Conclusion
The goal of this report is to illustrate the company’s asset and liability recognition policy using the AASB 9 framework. BP plc, an oil and petrochemicals firm active in the exploration and production of oil and natural gas with operations all over the world, has been chosen to conduct the analysis. The study addresses BP Plc’s asset and liability recognition policies using the AASB 9 framework. The study goes on to clarify AASB 13’s structure and how it relates to AASB 9. The significance of recognizing distinct financial assets and their usefulness is thoroughly examined. The influence of the company’s recognition strategy on earnings and losses is highlighted in the report. The recognition of financial assets may have an influence on a company’s revenues and liabilities, which the report will go through in depth. The convertible bonds that the firm has issued are the compound instruments that will be examined, and the impact of issuing such a security will also be considered in the report. In the report’s final parts, the company’s disclosures on financial instruments are also examined.
References
(2022) Aasb.gov.au. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-10.pdf (Accessed: 30 April 2022).
Accounting Standard Update – AASB 9 | Davidsons (2019). Available at: https://davidsons.com.au/accounting-standard-update-aasb-9/ (Accessed: 30 April 2022).
Martynova, N. and Perotti, E., 2018. Convertible bonds and bank risk-taking. Journal of Financial Intermediation, 35, pp.61-80.
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