Recognition and Measurement of acquisition of US Fayetteville Oil and Gas in the books of BHP Billiton Limited

BHP Billiton Limited completed the acquisition of 100% stake of US Fayetteville oil and gas from Chesapeake Energy Corporation on 31^st March, 2011. The operation of the company is located in Arkansas, USA. The value of the proposed acquisition was estimated at US $4,819 Mio. The acquisition was funded from internal resources of the company. Since the said acquisition involved acquisition of asset and liabilities and the same constituted a business, it shall be defined as business combination in terms of AASB 3. The assets acquired by the company included 4,87,000 Acres of lease hold land and natural gas producing properties encompassing 3000 wells of which 800 are operated by Group.(KPMG Audit Plc, 2011) The mid stream asset acquired included gas gathering systems inclusive of extensive pipeline infrastructure and other associated compression station.

The acquisition method applied for accounting by the company as the following criteria in terms of AASB 3 has been satisfied:

• Identification of the acquirer: BHP Billiton Limited;
• Determination of date of acquisition: 31^stMarch, 2011;
• Identification of asset and liability and measuring them: The same has been carried out and company was purchased for US $4,819 Mio;
• Recognition and measurement of goodwill or bargain purchase: Since the fair value and purchase price matched approximately no recognition of goodwill or bargain purchase was done

In terms of Para 10 of AASB 3, on the acquisition date, the purchaser shall recognise in its books apart from the goodwill, the assets or liabilities of the company acquired along with non-controlling interest. The same shall be subject to conditions that both asset and liability shall meet the definition in terms of AASB 1048 “Framework for the preparation and presentation of Financial Statements” at the date of acquisition. Further, the asset acquired and liabilities assumed shall be part of business combination and shall not be a part of a separate transaction.

In the instant case, the asset acquired and liabilities assumed have been identified and recognised in the books of BHP Billiton Ltd. Further, since the stake has been acquired at 100%, no minority control exists. The detail of the value of acquisition has been provided here-in-below:

Note: The above figures are provisional estimates.

Further, all the assets acquired and liabilities assumed have been valued at fair value in terms of Measurement principle of Para 11 of AASB 3 and AASB 13. Further, since the purchase price paid and the fair value of the asset acquired are approximate, the provisions of para 32 to 36 relating to goodwill and bargain purchase are not considered.

In addition, the acquisition was paid in cash and the cost incurred relating to acquisition has been expensed in Profit and Loss Account for June ended 2011. Further, the same has been treated as operating expense under cash flow statement. It shall also be pertinent to note that since the settlement payment was not deferred the same has been recognised without discounting .

Acquisition Analysis

Further, in terms of Para 45 of AASB 3 Measurement period, the acquirer is entitled to report provisional figures in books for asset acquired and liabilities assumed at the end of the reporting period, if the initial account for such proposed acquisition is not complete at the end of the reporting period. BHP Billiton has reported asset and liabilities on provisional basis in terms of the stated para. Further, if any new assets or liabilities are identified the same shall be duly accounted.

Further, during the end of June 2012, the following adjustments were made in the books of accounts to arrive at the final fair value of the assets. The same has been detailed here-in-below:

On account of adjustment made in the books goodwill has recognised to the tune of US $ 552 Mio which is tax deductible. The goodwill has been recognised on the basis of synergies. In addition, AASB 136 requires annual testing of impairment of goodwill recognised.(KPMG Audit Plc, 2011)

 Further, the assets acquired were impaired in the books for year ended June 2012.

Further, the journal entries made at the time of acquisition of US Fayetteville Oil and Gas has been detailed here-in-below;

Further, during the next year property plant and equipment value was adjusted against goodwill through credit and debit transaction respectively.(KPMG Audit Plc, 2012)

The assets have been valued at cost as required under AASB 116 Property Plant and Equipment and the cost represents fair value as required under AASB 13 Fair Value Measurement.  

Factors that have affected the recognition and measurement of impairment loss of the acquired company& determine the relevant accounting treatment and recording for impairment loss ofFayetteville operation 

The factors that could have affected the recognition and measurement of impairment loss of the acquired company have been detailed here-in-below: 

• Decrease in price of oil and shale gas during the period leading to testing of impairment of acquired company: As the price of commodity plays a crucial role for testing of potential indicator for impairment.(Anon., 2012)The change in price impact the following factors which have a bearing on recoverable value of the asset:
• Forecasted growth rates;
• Budgeted Volume;
• Budgeted sales price;
• Cost structure;
• Timing of flow of cash;
• Future expenditure of capital nature and budgets for exploration;
• Activities of operational nature.
• Estimation of reserves is not precise and are subject to judgement which can be revised in future. Thus, impairment occurs on decrease in estimation of volume of oil or gas. Reference may be had to Para 2.13.1 of Annual Report of BHP Billiton Limited, 2012 Page 57, wherein similar reason has been presented for the impairment of asset of US Fayetteville Oil and Gas.
• Delay in exploration Activity on account of legal sanctions, government approval, environment regulations leading to stalling of project and consequently testing for impairment;(KPMG Audit Plc, 2011)
• Redundancy, closure and cancellation of contract also affects the recognition of impairment for an oil or gas company;
• Future Production from the property purchased : Probable reserves and resources;
• Exchange Rates: Current Exchange rates prevailing in the market;
• Discount Rate: Cost of capital after adjusting risk which shall be appropriate to the resource.(KPMG Audit Plc, 2011)
• Sudden decline in the gas prices at domestic market of United states and the management has taken decision to arrange a plan for development,so in case of Fayetteville shale gas assets the company has done impairment of goodwill and other

assets and a total of US$2.8 billion(US$996 million tax benefit) impairment was shown in FY 2012   

In terms of AASB 136, the asset shall be impaired when the carrying value of the asset is higher than recoverable value of the asset. Further, recoverable value is defined as higher of value-in-use or fair value less cost of disposal. The fair value of the asset shall be determined in terms of AASB 13 Fair Value Measurement.(Australian Government, 2015) 

Before analysing the accounting for impairment, some few key terms need to be understood for better understanding of the accounting treatment:  

• Value-in-use: It is the present value of the cash flows which is expected to be earned from an asset or cash generating unit;
• Fair Value less cost of disposal: The fair value of the asset is the price that the asset would fetch in an orderly transaction between market participants at a measurement date;

Further, cost of disposal shall mean all those cost which are directly attributable to the sale of the asset and does not include finance cost and income tax expense;

• Carrying Amount: It is the value that is standing in the books of company w.r.t to a particular asset or a Cash generating unit post deduction of accumulated depreciation or amortisation if any;
• Recoverable value: It is higher of value-in-use or fair value of an asset or a cash generating unit.
• Discount rate: The discount rate shall be the rate that correctly reflects the time value of money or correctly estimates the specific risk allocable to that particular asset. 

Accounting for Impairment

Further for impairing an asset one need to identify at the end of each reporting period of indication existing for impairment. If the entity finds that any such condition exists, then the entity shall estimate the recoverable value of the asset. 

In terms of Para 59 of AASB 136, if  and only if the recoverable amount is below the carrying value of the asset, the asset shall be impaired and there shall be impairment loss. Further, in terms of Para 60 any impairment loss occurred during the year shall be recognised in Profit and Loss A/c as a debit transaction. Further, if the impairment loss exceeds the carrying value the value of asset shall be recognised at nil. Sudden decline in the gas prices at domestic market of United states and the management has taken decision to arrange a plan for development,so in case of Fayetteville shale gas assets the company has done impairment of goodwill and other assets and a total of US$2.8 billion(US$996 million tax benefit) impairment was shown in FY2012 

For US Fayetteville Oil and Gas the impairment amount stood at AUD 2835 Mio in the books of BHP Billiton Limited on account of reasons stated above. Further in terms of Para 104 of AASB 103, while allocating an impairment, firstly goodwill shall be reduces then the loss shall be allocable to other asset on proportionate basis. The same was immediately expensed in Profit and Loss of the company for the period ended June, 2012 and a tax credit provision of 996 US $ Mio was created.(KPMG LLP, 2016) 

Further, a second write down took place in June 2016 ended financial statement of US $ 7.2 Billion on its US Assets. The same also have been expensed in Profit and Loss Account in alignment with treatment defined under AASB 136 of Australia. 

Further, account of impairment  in case of Fayetteville shale gas assets obtained from Chesapeake Energy in the year 2011 ,March, both  Key Managerial personnel namely Marius Kloppers and Mike Yeager suggested the Committee that shall not be considered for a STI award for  the Financial Year 2012. The Committee and the Board respected and acceded to it. 

References:

Anon., 2012. Impairment of Assets: a Study in Global Crude-Oil Companies. [Online]
Available at: https://www.repec.org.br/index.php/repec/article/download/306/680
[Accessed 18 September 2018].

Australian Government, 2015. AASB 136 – Impairment of Assets. [Online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download
[Accessed 18 September 2018].

KPMG Audit Plc, 2011. bhpbilliton resourcing the future Annual Report 2011. [Online]
Available at: https://www.bhp.com/-/media/bhp/documents/investors/reports/2011/bhpbillitonannualreport2011.pdf?la=en
[Accessed 19 September 2018].

KPMG Audit Plc, 2012. bhpbilliton resoucing the future Annal Report 2012. [Online]
Available at: https://www.bhp.com/-/media/bhp/documents/investors/reports/2012/bhpbillitonannualreport2012.pdf?la=en
[Accessed 19 September 2018].

KPMG LLP, 2016. bhp billiton Annual Report 2016. [Online]
Available at: https://www.bhp.com/-/media/bhp/documents/investors/annual-reports/2016/bhpbillitonannualreport2016.pdf?la=en
[Accessed 19 September 2018].