Impact of Australian Accounting Standards - Essay Example

? Finance accounting Table of Contents Executive Summary 3 Impact of Australian Accounting Standards 3 Reversal write-down 3 Current and non-current assets and methods of valuation 4 Current financial position of BHP Billiton 5 Importance of Reserves in BHP Billiton 6 Conclusion 7 Reference 8 Executive Summary The study shows the impact of the Australian Accounting Standard in BHP Billiton, through which the decision of write-down can be avoided as the decision of write down, is very harmful for any company as such. Thus the current and the non-current assets and liabilities of the company has been assessed so as to investigate on the valuation method thus adopted by the company. At time the valuation of the assets of the company gets inflated due to the method of valuation thus adopted by the company. Lastly, the reserves of the company is estimated and their modes of utilization so that the write-down of the company can be avoided. Impact of Australian Accounting Standards When the net realizable value for all of the subsequent period. Due to a certain circumstances the inventories of the company needs to be written down below the cost that no longer exists or with the evidence related to the net realizable value caused as a result of the changed economic circumstances (Walton & Aerts, 2006, p.120). This leads to the reversing of the write-down where the amount if restricted to original write-down, so much so, the new carrying amount of the company will be lower than the revised net realizable value along with its associated cost. With the selling of the inventories the carrying cost of the inventories is treated as the expense in the period in which the revenue is recognized. This result in the written down value of the inventory is considered as the cost or occurrence of losses. The concept of reversal write-down value generally occurs from the increase in the net realizable value of the concerned company; which is recognized as a fall in the amount of inventory as an expense in the period of reversal write-down occurrence (Johnston & Johnston, 2005, pp.62-63). Reversal write-down The concepts of the reversal write-down under the Australian Accounting Standards will have a great impact on the current situation of BHP Billiton’s US Shale Gas assets related to the financial statements of the company. The inventory cost of the company will reduce thus reducing the carrying cost of the Shale Gas assets to a remarkable extent. Thus the increase in the net realizable value of the company will be projected at a low rate than now. This in turn will lower the intrinsic value of the company resulting in the valuation of the company being similar to the market value of the company or lower than the market value. Hence the company will be in the condition to revive of the present condition to a certain extent (Australian Government, 2009, p.17). Current and non-current assets and methods of valuation Yes, the current and non-current assets of the company, BHP Billiton’s have been valued in the financial statements of the company. The income and the deferred tax of the company accounted under the head of other assets of the company has taken the deductible temporary differences resulting in the deferred tax of the company amounting to US$3119 million as against US$2195 million in 2010. These amounts have not been recognized due to the probable future taxable profits as the deductible temporary differences do not expire under the tax legislation. The trade receivable of the company is the considered as the impaired assets of the company. All the financial assets of the company are computed at the fair value price under the consideration of payment and receipt. The fair value method is the not a completely independent process. It is based on the results of weighted average value of the items of the company. In spite of providing a balanced figure of valuation yet its limitation the valuation of the business model still persists. However, the fair value accounting process conveys important information related to the financial assets as against relying completely on the historical costs of the company. Fair value system of accounting reflects a better projection of the current market condition; thus providing a comparable status of the company at different point of time to the investors of the company through the financial disclosures issued by the company (Mard, Hitchner & Hyden, 2007, p.3). Other advantages of using the fair valuation of company is that incentives related to the operation of the company can be readily eliminated if unrealized. This would result in the reduction of the malincentives affecting the quality of earnings as an estimate of the economic rent. Fair valuation of the company leads to a stronger cyclicality of the accounting variable. Under the unstable economic condition fair valuation of the assets of the company is the most beneficial as it allows for the revaluation of the assets. Moreover, under the situation of economic downturn fair value accounting has the capacity of recognizing the not so good news when the fair value of the assets of the company is above the cost of the assets. Contrarily, in the recent years the fair value accounting of the company has resulted in high rate of volatility increasing the procyclicality of the measures of accounting. Thus the adoption of the fair valuation of the current and the fixed assets of the company has been beneficial with respect to the conservatism method of accounting system but more advanced methodology should be adopted by the company to keep in pace with the changing economic condition (Barth, Biscarri & Espinosa, n.d., pp.1-3). Current financial position of BHP Billiton The items comprising of the current liabilities of BHP Billiton are trade and other payables, interest bearing liabilities, other financial liabilities, current tax payables, provisions and deferred income. The items of the current liabilities and the non-current liabilities of the company are similar; but the segregation has been done on the duration of their repayment. The liabilities that are payable within a span of a year are the current liabilities of the company; whereas the liabilities whose payment duration extends over five years are termed as the other liabilities of the company. As far as the liquidity of the company is concerned the current situation of the company is very impression. However, the sudden fall in the liquid assets of the company is due to the acquisition of the company in term of property plants and equipment. Thus the rationale behind the crises of BHP Billiton is because of the extended borrowings of the company. The company has already taken loan from the financial institutions, so much so, that interest bearing liabilities are growing by the day. So as to expand its business in other sectors the company had adopted the strategy of acquisition which resulted in a complete failure with Rio Tinto. Thus the increase in the borrowing of the company has lead to the interest amount rising at a galloping rate. With the poor financial condition the raised liabilities of the company contributed in projecting an over valuation of the company with respect to the market that it is operating in. This had the repercussion of the Shale Gas assets of the company being write-down. Further the effects of this had fallen on the remuneration incentives of the company and its officials. However with the new strategies being adopted by the company it can be expected to bank on the Shale Gas even after the effect of Shale Gas of the company (The Telegraph, 2012). Importance of Reserves in BHP Billiton Reserves are present in the balance sheet of the company. Increase in the reserves of the company has resulted in the decrease of the ordinary share fully paid. On the reserves of the company increasing resulting in the fall of the equity of the company may result in the capital of the company decreasing as the company will not be in a position to issue new shares due to at present the company is over-burdened with borrowings taken by the company (BHP Billiton Limited, 2011, pp.163-194). The reserves of the company can be put to a lot of uses of the company. The reserves of the company can be used for the purpose of expansion. The reserves can further be put to other operative activities of the company. To satisfy the existing shareholders of the company may distribute higher dividend to them (Dodge, 1997, p.241). However, if the reserves of the company are kept idle it may incur cost which is known as the cost of reserve. So as to avoid the cost the reserve of the company should be put to some productive uses so that it yields further income for the company (Nikolai, Bazley & Jones, 2009, p.493). Since the company is under the huge burden of debt hence a part of it can be utilized for clearing out the debt of the company. The company is also exposed to other financial risk which is a cause of hindrance for the company so it may investment in market where the volatility is comparatively less. The reserve can be utilized for the research and development of the products of the company, so that it can come up with a product of better quality at a minimized rate. The company can also implement strategy of overcoming the long-term targets of the company, in which the reserve of the company can be utilized to a certain extent. Further the reserves of the company are essential for building a strong base so as to ensure the long-term viability of the organization (Murray, Newell, Pizer, 2008, p.7). Conclusion On the basis of the analysis made on BHP Billiton limited it can be said that the company at the moment is in deep waters which can be avoided by the adoption of some other valuation method. If the company can project valuation of the company lower than the market then the write-down of the BHP Billiton Shale Gas affect can be diverted to a certain extent. Reference Australian Government, 2009. Inventories. [Pdf]. Available at: . [Accessed on: 5 Oct. 2012]. Barth M. E., Biscarri J. G. & Espinosa G. L., n.d. Fair Value Accounting and Firm Valuation. [Pdf]. Available at: . [Accessed on: 5 Oct. 2012]. BHP Billiton Limited, 2011. Annual Report. [Pdf]. Available at: . [Accessed on: 5 Oct. 2012]. Dodge R., 1997. Foundations of Business Accounting. United States: Cengage Learning. Johnston D. & Johnston D., 2005. Introduction to Oil Company Financial Analysis. United States: PennWell Books. Mard M. J., Hitchner J. R. & Hyden S. D., 2007. Valuation for Financial Reporting: Fair Value Measurements and Reporting, Intangible Assets, Goodwill and Impairment. United States: John Wiley & Sons. Murray B. C., Newell R. G. & Pizer W. A., 2008. Balancing Cost and Emissions Certainty. [Pdf]. Available at: . [Accessed on: 5 Oct. 2012]. Nikolai L. A., Bazley J. D. & Jones J. P., 2009. Intermediate Accounting. United States: Cengage Learning. The Telegraph, 2012. BHP Billiton writes down shale gas assets by $2.8bn, chief Marius Kloppers forgoes bonus. [Online]. 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