Financial Reporting
The primary purpose of this kind of reporting is to provide financial statements which reflects the overall performances and changes in the financial dynamics of the individual or enterprise concerned.
The primary users of financial reports are mainly the investors (both existing and potential), the creditors and the lenders whose economic decision making depends significantly on the analysis of these reports. The fundamental features of these kind of reports are mainly trustworthy representation of data and the relevance. Timeliness, ease to understand, compare and verify are the added qualitative features of a good financial report. It is needed to see whether these requirements are satisfied in the latest financial report of BHP Billiton.
As discussed above the investors, the creditors and also the lenders are the ones whose decisions regarding investments an d borrowing, investing n equities and other risky assets depend on the effective information that they receive and analyze from the financial reports. The reports, not only reflects the financial prospects of the concerned enterprises or individuals but also indirectly shows the condition and efficiency in how the same manages its financial operations and how accountable these enterprises are. The reports are also sources of vital information for the managing bodies of firms, the shareholders and the public in general though they are not considered primary users as such.
The primary features of a robust financial report are as follows:
- a) Relevance:
Relevance of the financial information provided in these types of reports are of utmost importance as much of the decisions of the primary as well as non-primary users and the outcomes of such financial decisions depend on the viability of such information. This information are often used to forecast the future financial conditions due to the presence of their predictive and confirmatory values. Therefore, the information needs to be relevant in order to predict the future outcomes correctly and take appropriate decisions.
- b) Robust faithful representation:
The reports should be represented in such a manner that it provides a complete and unbiased view of the entire financial condition prevailing and the error is minimized.
- The completeness of the report helps the users to get a clear and wholesome picture of the current and future situations.
- Unbiased reporting indicates the absence of hidden and unequally weighted information, which if present may distort the result.
- An error if present in the reporting can have serious adverse implications for the primary users and therefore, a good report works towards zero error.
Adding qualitative features:
- a) Comparability- this helps the users in comparing the performances of different units in the same aspects or for reviewing the performances of same unit in different time spans.
- b) Verifiability- this indicates that even if one information is viewed from different perspective, the resulting statement will be the same that is the statement should hold the same meaning.
- c) Timely- in this type of reporting punctuality is an important factor as a lot of decisions and their success depends on how timely they had been taken.
- d) Easy to understand- the report, if not easily comprehendible by the users, may lead to confusions and faulty assumptions and thereby may lose its reputation as a good report.
The concerned enterprise is an Anglo-Australian based dual-listed enterprise (public), which ventures into the arena of mining, petroleum and also metals, having the headquarter located in Melbourne.
Why this organization:
According to the balance sheet of the company, 68.8% of the total amount of asset of the same comprises of the machineries, the plant and the tangible properties. Large PPE comprising of constructions, plants, land resources, machineries and other assets is an arena, which is suitable for exploring and for evaluating the performance of the enterprise
Disclosure requirements (AASB116) met by the enterprise:
- Usage of method of depreciation
- The rates of depreciations are given
- Usage of the gross amount of carrying
- The depreciation accumulated and the gross amount (carrying) are shown at the beginning and at the end of the period
- The reconciliation of the latter are incorporated to show the acquisitions, the profits and also the losses and the reserved profit (AASB 116).
As can be seen from the annual reports of the enterprise, majority of the requirements as per AASB 116 (p. 178), are met by the concerned organization:
- Provision of carrying amount
- Annual depreciation calculation
- Charging of depreciation to profits and to loss situations
As per the calculations of depreciation on June 30, 2017, by the method of straight line or the method of production units, the total of the same is 7736. Apart from that, the report also provides the lives for the buildings, which is between 25 and 50 years and the same for the machineries and plants which is ranged from three to thirty years. The disposals, acquisitions and information about impairments can also be seen from the report.
Project Structure
PPE title Disclosure and construction:
- The plants, the machineries and the assets are regarded as liabilities’ securities and on title the current restriction amount is mentioned
- The construction expenses are considered as carrying amount within the domain of property, machineries and units
However, it can be seen from the annual report of the enterprise, the restrictions in that of PPE are mentioned but the report does not reveal the amount of the PPE:
The construction amount, can be seen from above, to be supplied on the PPE:
The above figures show that the information regarding the commitments done for lease of the assets, machineries and the plants are shown.
Though almost all the requirements are met by the reports of the concerned enterprise, it however fails to explain the reason behind using the method of straight line to estimate the expenditures with respect to impairments and depreciations. However, the report provides information about the residual value and the useful life of the same.
As per the guidelines of requirements of AASB 116, the enterprise is required to reveal the impacts of changes in the accounting dynamics and it also needs to take into account the impact of the same in the existing as well as the near future periods. However, this information are strikingly missing from the financial report published by the concerned enterprise.
- a) Relevance:
As has been discussed above, relevance is specifically important in case of financial reporting as it helps in making correct and predictive financial decisions by the users.
Prediction- the concerned enterprise, in their report has provisions of the depreciation, the useful asset life and also the effects that are expected to be on the future periods.
Confirmation- the report has confirmed depreciation (current year), change in depreciation and impairments. It also has information of expenditures in depreciation to the profit in the current times and PPE to the assets in the current period.
Materiality- the PPE estimates in the report are materially accountable for the purpose of decision making of the users.
- b) Faithful Representation:
Unbiased- though there is no such abject presence of biasness in the financial report as such, however, there are several descriptive information and there are several evidenced of information hiding on part of the company with regards to the way of determining the useful asset life, the residual and the depreciation.
Complete- the report of the enterprise takes into account the numerical representations of different cost and other statistics and also considers the detailed description of the asset nature, thereby indicating that it is more or less complete.
Error- the report, mostly satisfying the major requirements of the AASB 116, does not show the presence of any major error in representation. However, the level of accuracy of the financial report has not been clarified till now.
- a) Comparability- the report of the organization is comparable as same format is maintained for the two successive years, 2016 and 2017:
- b) Timeliness:
The enterprise is reputed to provide their users with timely financial information, unlike many other companies:
Reports of the BHP Billiton
Reports of Rio Tinto
The report published by the concerned enterprise is expected to be beneficial for the users with respect to the decision-making aspect as:
- Information provided are trustworthy and viable
- The information are comparable with respect to time as well as with respect to other companies
- It is complete and unbiased on a general framework
- The way of representation is easily comprehendible
- Verifications are done by an auditor
- The information are provided to the user on a timely basis
The information provided to the users help them to have a view about the efficiency of the management of assets by the concerned enterprise and this in its turn help them in taking future decisions.
Conclusion:
The requirements, as discussed above, are majorly satisfied by the concerned enterprise, the BHP Billiton and the qualitative features are also complied with, with respect to its financial report. The report is of use to the users as it helps them in taking mostly robust financial decisions and in assessing the efficiency of the management of the enterprise with regards to its financial dynamics.
It will be even more beneficial for the users as well as for the company itself if it reveals the method of estimating the values of impairment and the model of depreciation it takes into account, as that will contribute to its transparency and relevance.
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