Financial Reporting For Legislation And Corporate Patenting

Accounting Standards Relevant to BHP’s Acquisition

The following report deals with the company BHP and its acquisition of US Fayetteville oil and gas in 2011. BHP acquired shale assets in 2011 for around $ 4.75 billion in a  bid to boost their US operations. However it did not gone according to plan when gas prices collapsed in early 2016, forcing the company to book massive losses.  Those declining natural gas price led BHP to take a pre tax impairment charge of nearly $ 7.2 billion  against the carrying value of its assets and onshore gas interests.In the first  part,  the case  analyses case scenario of BHP with the linkage of various accounting standards ( AASB) to highlight some of the various concepts related to acquisition . The next section deals with the concept of impairment loss and its treatment in this case.  BHP acquired this deal to have a foothold in the hydraulics sector, which is a new source of unearthing oil and natural gas from those oilfields in Arkansas. They wanted to implement this technology, which could help the grow in this sector.

In the acquisition of Fayetteville oil and gas by BFH, the accounting standard that is relevant in this case is AASB 3. The piurpose of this standard is to improve the consistency and comparability of the data that is provided by an economic unit. This data relates to the business combination and its effects.  It identifies and measures the assets and liabilities. In addition it also measures the level of  non controlling interest in the acquiree. It also identifies and measures the goodwill  that results from a bargain purchase of a business combination. The business combinations that have been acquired using the acquisition method  should be accounted in the following ways:

• Identify the acquirer
• The acquisition date needs to be determined
• Recognising and measuring the  required assets that are identifiable. In addition it needs to measure  the liabilies that are due including any non controlling interest in the acquiree.

In the above case BFH is the acquirer while Fayetteville oil and gas is the acquire. The date of acquisition was in early 2011. It paid $4.75 billion  in cash basis to buy nearly 487000 net acres. These fields consisted of natural gas producing properties in the Fayetteville Shale. Goodwill arose on this acquisition and its attributable synergies and  was valued at $3,022 million, on the whole US onshore goodwill(Kabir and Rahman 2016.).

BHP was to acquire Chesapeake Energy’s Fayetteville shale assets. The company plannaed to buy all the Chesapeake Energy Corp’s interests in the Fayetteville Shale region.This also included the whole midstream pipeline stream.  The amount for valuation was estimated at $4.75 billion in American dollars.  This investment is consistent with the strategy of the company. The similarity in investment included investing in large, low cost and longer life assets. These assets is expected to provide  significant volume growth from future development. BHP would be the operator of Chesapeake’s operated interests in this field. The sale assets include about 487000 acres of leasehold assets and natural gas properties all over Arkansas.  This purchase will intensify  BHP’s reserves and base of resources  by forty five percent.  These interests currently produce over 400 joules of energy an include development options that substantially produces a more productive return over a 40 year operating life.  This transaction symbolises  the entry of the company into the Us shale business.  This will make BHP a major North American shell gas producer.  It delivers an accessible way  to  a long term and a competitive base of resources. This base of reserves and resources will benefit the company to invest through the various business cycles. On  a long term, this acquisition will be useful because the expertise that they will gin here will help them to grow their business into a more global scale. It acquired during the oil boom of 2011. Due to a fall in the value of natural gas it declined from a value of $ 4.5 at the time of the deal to a slow as $1.60 in 2017. The assets that have been acquired by BHP were expected to generate strong margins and returns on capitals at today’s prices. This acquisition  will involve extracting oil and gas  from sale through hydraulic fracturing.  It has potential environmental impacts in an adverse manner. It also involved a conversion of water injection programs in the Minerva gas field. It also involved a  fresh beginning of  producing oil in the north west shelf in which they have an interest. They further expanded their shale oil and gas operations during the financial year 2012 when they acquired Petrohawk.  The purchase price was US 12 billion dollars .Ths valuation did not include the assumption of net debt which included an amount of 3.8 billion.  This acquisition will benefit this company in terms of achieving a more high quality of investment and making a major mark in US oil and gas sector(Guthrie and Pang 2013).

Concept of Impairment Loss and Treatment in this Case

Since acquiring Fayetteville and extending till 30^th june, 2011 the total  contributed revenue of  that acquisition involved US$ 107 million . This also included a net profit of $ 26 million to the Group.  The company did not present this information in the financial statement s because this information was based on the results of the Fayetteville Shale gas business for nine months prior  to the date of acquisition.

The accounting treatment of a business combination requires that the  acquired assets and the liabilities absorbed together incorporates a business.  The accounting treatment includes an acquisition mmethod which involves

Identifying and measuring the identifiable assets attained and the liabilities assumed including any non controlling interest in the acquiree

The date of acquisition corresponds to the recognition of the assets, which are completely separated from goodwill. It also recognises  the liabilities and non controlling interest n the acquire. These assets and liabilities are measured at their  fair values on the acquisition date. The acquisition price was 4.8 billion US dollars(Laing  and Perrin 2014.).

This acquisition was backed from thecash reserves of the company . There were some considerable acquisition related costs. These costs amounted to US $17 million . These expenses were  included in the consolidated income statement and in operating  cash flows . The fair values of the acquired  assets and liabilities that were provisonally determined during the Fayetteville shale gas business on the date of acquisition as follows:

The fair value of the  assets and liabilities epresent the net  consideration that was paid to Chesapeake. This is the reason why there was no  recognition of goodwill or bargain purchase in relation to this acquisition.  The fair values are provisional due to the intricacy of the process of valuation.

As per AASB 136, its procedures are meant to state that an entity makes sure that its assets are carried at an amount that is not more than the recoverable amount. As per this standard, an asset is carried at  an greater than its recoverable amount if the carrying amoun of the asset

surpasses the sale vaue of that asset.  This case is referred to as an impairment of asset . This standard applies to financial assets of subsidiaries , associates and joint ventures as well.

As per this standard if the asset’s recoverable amount is less than the carrying amount of that asset , the latter amount  will be diminished and adjusted to the recoverable amount. This corresponding diminish in value is an impairment loss. This loss shall be recognised immediately in profit and loss statement. The only exception to this is the asset cannnot carried or revalued as per the requirements of another standard.

Benefits of the Acquisition

The factors that affect the recognition and measurement of impairment loss include the following:

Once the impairment loss is recognised, the depreciated amount  for that  asset will be adjusted. This adjustment will be allocated across  time periods to distribute the revised carrying amount  of the asset  minus its residual value . This allocation is done on a systematic basis over the useful life of the asset

 It is often not  practical enough to approximate the exact  recoverable amount of each individual’s asset of a cash generating unit. In this case the standard requires a random allocation of an impairment loss. This  impairment loss relates to the assets of that unit , other than goodwill(Enriques 2014).

Reversing an impairment loss- An entity shall measure  whether any impairment loss has been recognised in prior periods or not . If there is evidence of that the entity shall evaluate the recoverable amount of that asset. An impairment loss that is  recognised in prior periods for an asset other than goodwill shall be reversed under only one condition. This condition makes it mandatory for  entities to reverse this loss only if there is a change in accounting method of estimating the recoverable amount of that asset, since the last impairment loss was recognised.

As per the above case the following factors would have evaluated the above impairment loss of Fayetteville which included an amount of 1913 million US$.

Investments in subsidiaries are specified at cost minus the amounts that are set aside as  provisions  for impairments. Investments in subsidiaries  are revised for impairment when there is a change in an event or circumstance . These changes specify that the carrying amount of the investment might not be recoverable. If there is any such indicaton ,BHP  makes an informed valuation of the recoverable amount. If the asset is set to be impaired, the corresponding loss for impairment will be recorded.  Further the  asset is written down on te basis  by which the carrying amount exceeds the higher of fair value less costs of disposal. The loss for impairment is acknowledged instantly in the income statement. So as per the given statement, an impairment loss of 1913 million US dollar has been recognised I the income statement as a loss item(Atanassov 2013)

Conclusion

In this report, after analysing the case study of BHP and its acquisition of  Fayetteville oil and gas, it is clear that the mining company  could not  expect the impending loss that the acquisition would make, due to a fall in natural gas prices. It followed all the relevant standards of AASB in reference to impairment of losses and business combinations. The accounting treatment has been far and proper in keeping in mind the  accounting standards in Australia.  Although the main point of the acquisition was to maximise value and returns to shareholders in the long term, yet it did not fulfil its expectations.  The impairment and value of the acquisition was appropriately dealt with in the financial statements.

References:

Atanassov, J., 2013. Do hostile takeovers stifle innovation? Evidence from antitakeover legislation and corporate patenting. The Journal of Finance, 68(3), pp.1097-1131.

Enriques, L., 2014. A New EU Business Combination Form to Facilitate Cross-Border M&A: The Compulsory Share Exchange. European Company Law, 11(4), pp.214-220.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting & Economics, 12(3), pp.290-308.

Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.

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