Accounting Assignment: PPE in BHP Billiton and Rio Tinto
You are required to obtain the annual reports of two ASX Top 200 companies in the same
industry and write a business research report to address the following questions related to the
items included in property, plant and equipment.
1. Review and evaluate the PPE disclosure of your selected companies which may include:
• What range of measures is used to determine amounts for these items in the reports of the individual companies?
• Do you think it is valid to add the items, given the measures used?
• How would you interpret the total amount for property, plant and equipment in the financial statements?
• Compare the measures used by the different companies for similar items. Are there any inconsistencies in how similar items are measured by the different companies?
2. Discuss the factors that accountants should consider when setting up company accounting policy relating to PPE.
3. Detail your view on the subsequent measurement of PPE and provide recommendations to accounting standard setters.
The report on accounting assignment distinguishes the PPE policy of two giant companies BHP Billiton and Rio Tinto. To conduct the study, the annual report of both companies has been discussed in an exhaustive manner. The study developed within this accounting assignment clearly establishes that both companies follow the same method for similar items in the classification and valuation of PPE. Further, with regular updates, most of the subsequent valuation method has been rationalized and more guidelines will attract prominence to the methods.
The aim of the report on accounting assignment is to conduct a detailed analysis of two ASX top 200 companies operating in the same industry. To prepare this report, BHP Billiton and Rio Tinto, mining giants are selected. BHP is engaged in production of different commodities that includes copper, iron ore and uranium while Rio Tinto is the world second largest metal corporation engaged in production of metals next to BHP. The accounting assignment ascertains the importance of PPE in both the organization and brings out a detailed comparison of the both as per some accounting parameters. The measurement of PPE of both companies is discussed followed by a recommendation.
1. PPE disclosures
Rio Tinto measures its assets as per IAS 16 at asset cost less accumulated depreciation and accumulated impairment loss. It also includes its leasehold assets under this heading as per the Right of Use assets as per leasing agreement. Both the owned and leasehold assets are shown separately. As the company is into the business of the mining industry the main expenditure and asset are related to mining sites and equipment. The valuations of the mining assets are done differently as per the stage of development of the mining project. The expenditure of the undeveloped project is not capitalized and only after the project becomes commercially viable and approval for mining has been received then only relevant expenditures are capitalized (Rio 2019). The intangible assets are also valued at cost if purchased and amortized over the asset’s life if the life of the intangible asset is finite and known or units produced. Generally, the life of the intangible asset is an infinite and straight-line method of amortization cannot be used so the company does not amortize such assets instead of on an annual basis test the impairment of the asset or in case if any such circumstances arise indicating signs of impairment than the test is done. The company outlined in the present context of accounting assignment also measures its investment in EAU, including goodwill as a single asset when any such indication of the impairment is seen (Rio 2019).
BHP is also having its major investment in noncurrent assets in the form of PPE. The other assets are measured at cost less depreciation and amortization. The cost involves the assets fair value to bring it in the manner vital for operation as well as the estimated future cost of the closure and facility of rehabilitation (BHP 2019). The management judgments are required in case of the exploration and evaluation process. According to the investigation on accounting assignment, the main area of estimation is to determine when the project has reached its developing stage and finally when it is finally developed. This estimation helps in determining the cost of capitalization to be done. If the management is of the opinion that future economic benefit will arise and there is the economic viability of the project than the amounts incurred are capitalized, till then all the expenses are directly charged to the income statement. Thus this estimation of future economic viability is most essential for a project extraction to come under property, plant, and equipment. After the estimation, the expenditure is classified under assets under construction. If due to change in circumstances the estimation chances the amount is transferred to the income statement. After the development process again the management has to determine through estimates that the value of assets under construction is transferred to other mineral assets or others as the case may be. Thus the major part of the asset is based and classified as per the management estimates. For depreciation, the management uses the straight-line method or the method of unit of production. The general trend of the management is to use the units of production method unless the other form for depreciation is a better estimate of the useful life of the asset (BHP 2019). The assets which are not depreciated include land, assets under construction and capitalized exploration. The company examined herein accounting assignment also has intangible assets in the form of goodwill and other intangibles. The intangible assets are amortized and tested for impairment annually as per the asset classification.
The addition of the items in the PPE of both the companies almost similar to both the company is related to the mining industry. The main challenge discussed in this accounting assignment is to determine when the cost of exploration and evaluation should be capitalized. As it is not possible to determine any technical method to come at the accuracy that future economic benefits will be obtained from the project. This is a very risky area and large amounts are invested. Thus such a large or major part is based on management estimates. This gives management an opportunity to be bias and window dress the assets with increasing the value of PPE. This will also lead to a reduction of expenses being charged to income statement which will increase the earning for the period. Thus this will not give the true and fair picture of the functioning of the company. The losses if any can carry forward by the company in the forms of assets, which if accumulated over a period of time will hamper the going concern of the company. Thus proper measures should be taken to determine what amount should be added to PPE and what amount should be capitalized. It will require the help of expert opinion as financial experts would not be able to determine future benefits from the mining projects.
In the case of the BHP group major part of the PPE consist of plant and equipment and then land and building, other mineral assets and assets under construction are parallel to each other and the least amount consists of exploration and evaluation (BHP 2019). During the year from 2018 to 2019, the value under assets for construction has shown a major increase that is due to less transfer to an asset held for sale during the year.
In the case of Rio Tinto during the year 2018 to 2019 considered in the present context of accounting assignment, there has been no major change in the total value of PPE as compared to last year where the assets value declined (RIO 2019). The total additions during the year are set off through depreciation and impairment during the year.
On comparing the different measures used by both the company it is seen that they both follow the same method for similar items in the classification and valuation of property, plant, and equipment. An analysis into other companies such as Wesfarmers, AGL Energy, Bega Cheese, etc indicates that the measurement of PPE is done at cost less accumulated depreciation and impairment losses that are accumulated. The self-constructed cost comprises of materials cost, direct labor and overheads. Hence, the same method is prescribed by the accounting standard and is to be used by different companies in the same industry or different industry.
2. What are main the factors accountant need to consider in regards to the case scenario of accounting assignment?
The research on accounting assignment signifies that the accounting policy is the standards set by the company to determine how it will deal with its earnings. The policy should adhere to the generally accepted accounting policy and also with applicable accounting standards. The major accounting policies relating to property, plant, and equipment are the determination of the depreciation method and recognition and valuation of Goodwill (Matei, Tole and Stroe 2017). The depreciation is most common for every company and a major part of the financial statement. It is a noncash factor in the income statement. The main factor determining the depreciation of any asset should be such that it represents and reflect the most accurate useful life of the asset (Carlon 2019). The accountant should not blindly apply the straight-line method if it does not represent a useful life. For example, if an asset’s life is not dependent on the time period it is used but limited to a number of units it can produce than the accountant should use Units of Production methods for depreciating such assets. In the case of the straight-line method also determining the useful life depends upon the management estimate of the future economic benefits to be recovered from the asset. Thus the estimate should be properly analyzed and then approved for implementation. The annual review of the estimate should be done to check if any change in the estimate is required or not. The determination of depreciation also depends upon lease agreements in case of leasehold assets (Matei, Tole and Stroe 2017). Thus there are various factors as noted in the accounting assignment that should be kept in the mind while determining the value of the Property, Plant and equipment depending upon the nature of the industry in which the company belongs, the nature and size of asset and future economic developments regarding the usefulness of the asset.
3. Subsequent measurement and recommendation
The subsequent measurement of the property, plant, and equipment is dependent on the determination of the fair value or the test of impairment which is required to be done annually. This method stated in the accounting assignment is very time consuming and costly (IAS 17 2018). Practically determination of the fair value is difficult and the help of the expert is required. The valuation that is determined is not always accurate and subject to certain assumptions that may change in the course of time. Thus, the valuation of the PPE is vague and there is no standard method is prescribed. Thus a standard method should be determined for subsequent valuation of the assets. This forms a major part of the financial statement of the company. The responsibilities of the auditors are higher in determining the value of such assets. In the given case of the mining companies considered in the current scenario of accounting assignment, the financial experts are not competent to determine or find the economic benefits of the mining projects thus the report of the external expert in the given field is required. The guidelines for proper recognition of the exploration and evaluation of the mining asset should be provided and for transferring the amount from the asset under construction to miming assets and others.
From the overall discussion on accounting assignment, the property, plant, and equipment forms one of the major parts of the balance sheet of any Company especially any manufacturing or production company. Thus its valuation and measurement are considered by various stakeholders in their decision making. It includes both tangible and intangible assets and measurement of both the assets is different as per accounting standards. The method of depreciation and amortization are specified in the applicable standards followed by the company.
BHP 2019, BHP 2019 annual report & accounts. Available from: https://www.bhp.com/investor-centre/annual-report-2019/ [Accessed 7 April 2019]
Carlon, S 2019, Financial accounting: reporting, analysis and decision making. 6th ed, Milton, QLD John Wiley and Sons Australia, Ltd
IAS 17 2018, IAS 16 PPE, Available from : https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/professional-resources/ifrs-factsheets/factsheet-ias16-property-plant-and-equipment.pdf?la=en&rev=97b44c4ebfa4463f9244464d2452ee96 [Accessed 7 April 2019]
Matei, N.C, ?ole,M & Stroe, M.A 2017, The importance of tangible fixed-assets revaluation: a comparison between romanian accounting regulations and the ipsas 17 ‘property, plant and equipment. Accounting assignment Available from: https://www.semanticscholar.org/paper/THE-IMPORTANCE-OF-TANGIBLE-FIXED-ASSETS-A-BETWEEN-Matei-%C5%A2ole/53146416804c480083bb9a28c677079c736903fc [Accessed 7 April 2019]
Rio Tinto 2019, Rio Tinto 2019 annual report & accounts, Available from: http://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_RIOA_2018.pdf [Accessed 7 April 2019]