BAO2202: FINANCIAL ACOUNTING

VICTORIA UNIVERSITY

COLLEGE OF BUSINESS

BAO2202: FINANCIAL ACCOUNTING

GROUP ASSIGNMENT (20%)

Submitted by:

DISCLOSURE OF LEASING

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The public listed corporations are abided by numerous legal obligations listed and set out in

Corporations Act 2001. Additionally, these companies are also obligated to adapt to reporting

obligations which include preparations of the annual financial reports which must be

prepared in accordance with Australian Standards. The body called AASB; Australian

Accounting Standards Board has set out the rules and regulations that must be abided by the

corporations operating in Australia. These regulations are established to make the companies

provide comprehensible and transparent information in the general purpose financial reports

in order to provide the potential information users with accurate information. This in turn will

help the potential users in decision making process.

In the report, the financial reports of Qantas and BHP Billiton are examined and analysed in

accordance with the Australian Financial Reporting Standards. This report focuses on four

key sections of the annual financial reports of the two companies including disclosure of the

lease, liabilities, intangible assets and revenue. The report highlights the extent of the

compliance of these sections with the Reporting Standards, as well as, provides necessary

suggestions for improving the reports in future.

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AASB 117 and AASB 16

To comply with the recently issued IFRS 16, Australian Accounting Standard Board has

issued AASB 16, which has an effective date as January 2019. This will replace the current

lease accounting practices of AASB 117- leases. As airline industry and mining companies,

Qantas and BHP, it is expecting a bigger change over the lease accounting treatments

(Sinclair and Ridley, 2016). It can be identified in Qantas’s 2016 annual report, a note on the

standard changes and minor description of the impact on it. But there is no any inclusion

about the AASB 16 in BHP’s latest available annual report, 2015. Therefore, both these

companies are still using the accounting practices of AASB 117 for their leasing treatment.

Analysis compares and discusses BHP and Qantas leases disclosures

Both companies’ financial statements are indicating highly proportionate use of lease assets

in their operations. As per the AASB provisions for operating and finance leases, there

should have different accounting treatments.

Under the accounts of Qantas, there is a lease rental of $461million. This has shown under

the face income statement indicates Qantas has $461million of operating assets. AASB 117

requires operating lease rental to straightway recognize under the income statement, which

has correctly done by Qantas. Also, there are notes in Qantas about the future minimum

lease payment, sublease payments, arrangement or special terms of lease agreements. They

have categorized those as aircraft/ engine and non-aircraft/ engine. In BHP, they haven’t

shown the operating lease expenses in the face of income statement instead they have

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detailed under the notes to the operating expenses in their note 3. In 2015 y/e, they have $636

million worth of operating leases. In BHP, there is a breakdown for future lease commitments

as required by the standard but despite to Qantas, BHP has not shown the product categorizes

where they have obtained the operating leases or sublease payments, arrangement or special

terms either not shown completely or disclose at a very minimum level. Operating leases

accounting treatments are very much important to business since it directly and indirectly

affecting for the business profits after the taxes. Here, it indicates as a result of operating

leases rentals cut-off through the income statements, its impact on the business (Ross et al.

2004). Due to the same reason, most of the stakeholders are asking proper disclosure over the

operating leases (Gibson, 2013).

In finance, lease accounting treatments are different to operating leases under the AASB 117.

As the lessee BHP and Qantas need to identify assets and liabilities based on the fair value

based (Sinclair and Ridley, 2016). In BHP, there is a $436 million finance leases identified

and most of the leases are here mineral lands they have acquired. They have divided the

leases assets as current and noncurrent assets based on the duration they should could have

acquired. The finance lease’s interest portion has rightly taken in to the finance expenses in

BHP’s 2015 income statement. Also carrying amounts of each finance leases recognized

under the notes of a balance sheet. In BHP’s financial statements, there is

no mention about the calculation of fair value of assets/ liabilities. It is required under the

AASB 117, to mention the rate used to calculate the fair/ present values to recognize as the

balance sheet items. On the other hand, Qantas’s financial statement there is a $1,469 million

worth of finance leases. Same to BHP, Qantas too identified the finance lease assets/

liabilities by dividing rightly as current and noncurrent assets/liabilities. There is a

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breakdown under the balance sheet note to show net carrying values of the finance leases in

Qantas. Despite to operating leases categorization of aircraft/ engine and non-aircraft/ engine,

in finance leases Qantas has recognized in a one heading (there is no classification). Also to

depreciate the finance lease assets, common depreciation methods have used by Qantas as

provision of AASB 138, it has disclosed in their depreciation note. Same to BHP, there is no

disclosure about the fair value measurement for Qantas. Either present value rate used or

borrowing rates used to calculate the finance leases.

Both BHP’s and Qantas’s financial statements can’t identify any leases they have provided as

lessors. In AASB 117, there should have different accounting treatments and disclosure need

to be provided for lessors.

Improvement to consider for BHP and Qantas

Since BHP and Qantas from different industries, there are general differences in disclosures

for operating and finance leases in their financial statements (Gibson, 2013). BHP should

have not disclosed sub leases and leases expenses for the periods as required by the standard.

The arrangements for different lease agreements weren’t described by both the

companies. Those disclosures are required in AASB 16 as well. Therefore, once they

reported operating leases in future financial statements, need to provide such disclosures for

required stakeholders.

Finance leases, which is expecting to deeper disclosures under the AASB 16 than AASB 117,

especially the fair value calculations (King, 2016). Here, both the companies have not

disclosed about the rate and criteria used to take the fair value are questionable. This is an
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area where companies can manipulate the figures with different estimates as AASB 117

seems not consistent enough over the companies (Sinclair and Ridley, 2016). But under the

AASB 16, has bridged this gap with compulsory disclosures as now all leases now should be

shown as balance sheet item (King, 2016). Therefore, it is required both the companies to

improve their disclosures for fair value calculations in their future leases disclosures. Also in

future annul reports before 2019, of both these companies; it is recommended to show the

possible impact as a note with the changes of leases standard since it has predicted that both

airline and mining companies will affect largely with this change.

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DISCLOSURE OF LIABILITIES

A liability can be measured

With the overall sum of the entity in which it can be realistically repay at the final stage of

the reporting period to be reassured of the present obligation.

Whereas measuring Provision, the overall should be acknowledgment as the best estimation

of thought which need it to set the current requirement at the end of the reporting phase.

(AASB 137/ IAS 37 paragraph 3).

Measuring Contingent Liability clarify that the total of the requirement cannot be measured

with enough dependability.

Recognition of liability establish that it's expected to have a loss of preserve

Recognition of liability show that it is possible that running out of resource will result in the

settlement of modern compulsion. It show the total of settlement will take place, which be

able to be measured regularly. Liability illustrate suitable materiality level that supposed to

set below so

That the accrual does not get recognized.

According to AASB112 initial recognition of a liabilities is a follows. A temporary

dissimilarity might take place on the initial of a liability, but it's not likely for a firm to

subtract tax at some cost of an asset in the firm. This accounting method is for provisional

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difference based on the transaction that will finally initial recognize a liability. If the

organization agreement, recognized several accounting lose or gain the corporation identify a

few delayed tax liability which occur as of the deferring tax expense or income in the profit

or loss summary.

if the agreement is not a business understanding than it will not have an effect on neither

accounting income nor taxable profits and entity would be not present to exception which

offer a deferred the tax liability to be familiar with the tax that would be acknowledged for

the taxable rage along with differences that is predictable to the point that the deferred tax

liability approach to pass from the first acknowledgement of liability in transaction which

isn't a industry understanding and a point where the time of transaction result in neither the

accounting profit or the tax profit, this adjustment would compose the financial statement less

obvious. therefore the standard doesn't approve a exacting entity to distinguish succeeding

changes in the unrecognized deferred tax liability.

Provision that is contain an entity which have a present obligation that could result in a past

event. it's to be expected that provision has a loss of resource on behalf of the economic

reimbursement which is required to settle with the obligation. it have a reliable estimate

which can be illustrate as the sum of obligation.

Contingent Liabilities are not acknowledged in the financial statements since it must be initial

expose in term of the note to the financial statements. it's not predictable that contingent

liability contain a loss of capital representing the economic benefit that will be necessary to

determine the obligation.

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The economic principles of assets and liabilities representation all organization of the

potential currency flow. The majority are undecided but a few of these subject of contractual

guarantee at the same time as other aren't.

In differentiate of entry value viewpoint it's establish that on a sure examination of the

arrangement that exist in the balance sheet date.

this clarify that it's not an economic examination, except it present a position where its

realistic intended for those who desire to place financial price on the firm.

These firms observe that since contingent liability cannot be recognized in the financial

statement. It’s not identifiable as it must initial assemble the release in the notes of the

financial statement. Contingent Liabilities in obtain in industry agreement state Qantas and

BHP are facing an unexpected liabilities occur from the expectations gaining and disposals of

a businesses. (Qantas 2015, BHP 2015).

The protected entity recommend self-insured liabilities connecting it to workers repayment

and community liability maintain. The provision such as liabilities are based on self-

regulating actuarial measurement, which show the statistics, sum and stage of assert. its

allows future value increase and asset to returns.

Imbursement include injury which happen before the balance sheet date, other than anywhere

the maintain be to inform following the reporting date. Provision reduction employ the

administration bond rate with a maturity date.

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The disclosure of provision:

Each of the provision shall disclose these entity

A. The carry forward The carrying quantity from the beginning and end of the given period

B. Supplementary provision have in any given period, with adding to obtain provision

C. The cost incurred during the period

D. The amount left uninsured during the period

all through at the final phase of the economic period, the organization have best salaried best.

in high observation of a settlement of cover assuring that Officers beside a encouraging

liabilities increase in that capability.

Qantas and BHP have the same standard as the AASB

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DISCLOSURE OF INTANGIBLE ASSETS

Disclosure of intangible assets is an essential requirement for the profit making entities in

accordance with Australian Accounting Standards Board. The section 138 of AASB sets out

the objective, definition and requirements in a comprehended manner. This section of the

report illustrates the compliance of Qantas and BHP Billiton with the AASB.

AASB 138

For profit making entities, the accounting standard 138 is applicable to all the annual

reporting periods commencing on or after 1 July 2013. The purpose of this standard to

“prescribe the accounting treatment for intangible assets that are not dealt with specifically in

another standard” (AASB 138).

Analysis compares and discusses BHP and Qantas intangible asset disclosures
Annual report for the year 2016 of both the companies illustrate that the two companies

present the intangible assets in a comprehended manner in the financial reports (BHP Billiton

2016), (Qantas 2016). The two companies meet the objective of the standard and provide

different accounting treatment for their intangible assets.

The AASB 138 provides a series of disclosure requirements for the companies. One of them

was disclosure of useful lives as finite or infinite, and if it is finite, then utilisation of

amortisation rates. Qantas and BHP Billiton both comply with this rule as the two companies

have provided the amortisation rates in the intangible asset. Additionally, the accumulated

amortisation is carried at the beginning and end of the period (BHP Billiton 2016), (Qantas

2016).

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In addition, if the asset has infinite useful life, then the entities must provide the depiction of

the asset accompanied by the factors that determined the asset has infinite useful life in their

financial report (AASB 2016). It is crucial for them to present the carrying amount and

residual amortization period in their financial reports. When examined the annual report of

BHP Billiton, it is inferred that the company has provided all the necessary components

mentioned above in a clear and transparent manner, thus it complies with this provision. In

the financial report, the company explains the Goodwill as an intangible asset with infinite

useful life and provides information regarding the same (BHP Billiton 2016). However, the

financial report of Qantas presents the mere figures for the Goodwill without presenting any

explanations about the factors associated and its fair value which is questionable. Thus, this

component can be improved for Qantas (Qantas 2016).

Furthermore, according to AASB 136, it is essential for the entities to disclose statistics

regarding impaired intangible assets. BHP Billiton’s annual report for the year 2016 identifies

the impaired intangible assets for the year and discloses it in the financial report separately.

This provides the potential users with transparent statistics relating to impaired assets (BHP

Billiton 2016). On the other hand, impaired intangible assets are classified in “others” in the

financial report of Qantas which includes foreign exchange movements, non-cash additions

and impairments of intangible assets as described in the notes under the intangible assets

column. Despite the disclosure, the statistics and information is not transparent in this case as

it is unknown about the exact amount of intangible assets being impaired (Qantas 2016).

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Improvement to consider for BHP and Qantas

Both the industries have provided the information relating to the intangible assets taking in

consideration the standard, however, they have not justified to the rules and regulations

mentioned in accordance with the AASB standard 138. The two companies have defined and

recognised the intangible assets according the standard, but they lacked the disclosure of the

same. Firstly, when evaluating and analysing the financial reports of BHP Billiton, it is

inferred that the company has presented its disclosure in an effective manner and in

compliance with the standard (BHP Billiton 2016). Though, it can present the fair value of

the intangible assets with infinite life in more descriptive style. Similarly, the financial report

of Qantas can be improved if they provide impaired intangible assets separately which will

provide a transparent statistic (Qantas 2016). Along with that, it can also provide explanation

about intangible assets with infinite life. These changes may help the user to understand the

report and the financial performance and position of the company in an improved way

(AASB 2016).

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DISCLOSURE OF REVENUE

Australian Accounting Standard Board has been in the process of issuing Accounting

standards for the professional Accountants and corporate so that they can be guided properly

how to deal with accounting treatments of accounting related matters. AASB has prescribed

the treatment also for the revenue issuing a full flash standard AASB 118 which covers Sale

of Good, Interest, Royalties and Dividends and also Rendering Services .We will here review

most recent financial reports of two Australian based firms (Qantas and BHP Billiton) from

different industries. Our main is to analyze, compare and discuss both firms’ disclosures of

revenue to explore both firms’ compliance with relevant Australian accounting standard.

While some recommendations will be made at the end of each section regarding the

improvement of accounting information being analyzed that can ultimately help in the

usefulness and transparency.

ANALYSIS
Qantas
Qantas has prepared all its financial statements according to the Australian accounting

standards and International financial reporting standards, its revenue has been recognized

under the criteria of revenue recognition being prescribed by Australian accounting standard

and IFRS. (Qantas, 2016)

The criterion of revenue recognition under the new Australian accounting standard 15 has

been fulfilled

Revenue arisen from providing services is one of the aspects of the Scope to which AAS is

applied. (AASB, 1998)

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BHP Billiton
BHP Billiton has complied with international financial reporting standards and Australian

accounting standards preparing its financial reports and UK companies Act 2006, Australian

Corporation Act 2001 as well. (BHP Billiton, 2016). In its revenue section it has disclose the

measurement prescription and revenue recognition criteria.

Somehow it is following and old Australian accounting standard related to revenue which

might be still in practice while its revenue recognition criteria is the part of newly issued

Accounting standard by AASB and IFRS.

Both firms Qantas and BHP Billiton have complied with the AASB, Qantas revenue

disclosures are not so explanatory so that it makes analysis slightly challengeable, therefore it

needs to improve its transparency disclosing every section of the revenue. BHP Billiton is

somehow doing good, disclosing some of the relevant information regarding revenue

recognition principles and measurement prescription, while it can improve its disclosures

related to revenue giving reference to each of the sub-section in Total revenue.

DISCUSSION

Qantas

Qantas’ revenue comes from net passenger and freight services and other income as well. Net

passengers and freight revenue comes from two main regions, 1) net passengers and freight

revenue from Australia 2) net passenger and freight revenue from overseas. Third part of the

revenue that is other income slightly seems debatable. Net passenger and freight revenue is

attributed to a geographic region based on the point of sale and where not directly available,

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on a pro-rata basis. Other revenue/income is not allocated to a geographic region as it is

impractical to do so (Qantas 2016).

Other income includes

1) Frequent Flyer marketing revenue, membership fees and other revenue
2) Frequent Flyer store and other redemption revenue
3) Retail, advertising and other property revenue
4) Contract work revenue
5) Other

BHP Billiton

BHP Billiton Revenue mainly comes from its sale of products, it is a mining company

involves in the mining of gold, petroleum, iron etc. the revenue has been recognized under

the criteria of AASB 118 as per the Compliance statement in the reports. Its revenue is

disclosed by the company on geographical basis, sale of good and rendering services.

Its customers are located across the globe and that is why it has classified and disclosed the

revenue from each geographical region. Its customers from china contribute the largest

proportion of its overall revenue. It has disclosed all its revenue from each region separately.

BHP Billiton has recognized its revenue under the specific criteria given by IFRS and AASB

“Revenue is recognized when the risk and rewards of ownership of the goods have passed to

the buyer based on agreed delivery terms and it can be measured reliably. Depending on

customer terms this can be based on issuance of a bill of lading or when delivery is

completed as per the agreement with the Group’s customers” ( AASB 2010).

Both of the firms have given sufficient and adequate information about the revenue and its

recognition somehow, while Qantas has not disclosed revenue properly coming from each of

the sub-class of other income, the information about other income might not be sufficient to

use it in decision making by statement of financial users. It needs to consider every aspect of
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revenue, its recognition criteria (how it has recognized the revenue), measurement (how it has

measured the revenue according to the AASB guidance.

Same id for the BHP Billiton it has somehow disclosed the revenue related information

comparatively more than Qantas, however it can improve the transparency of information in

various ways such that the decision makers may be able to exercise their judgment about the

information available to them and then use it in a way they want.

COMPARISON
Qantas
 It uses AASB and A-IFRS for the
presentation and preparation of
financial statements and also for the
revenue disclosures.
 Its revenue measurement prescription
and recognition criteria has not
mentioned by the company itself in its
report.
 Qantas other income is also included as
part of revenue while revenue should
be only that comes from sale of goods,
rendering services.
BHP Billiton
 It uses AASB and IFRS for the
preparation and presentation of its
financial statements.
 Its revenue disclosures are made
comparatively more transparent than
that of Qantas.
 It uses the old AASB guidance
regarding the measurement of revenue
while it has adopted the IFRS as well,
recognizing its revenue on the basis of
new IFRS 15 and new AASB 15 as
well while AASB 118 is still active
until January 2018.

(AASB 2016)
Both firms need to improve its transparency in its financial reports in the form of

giving sufficient disclosure notes to each class of transactions that contribute to

overall revenue.

Both firms should state in their reports the specific accounting treatments and

measurement

It might be more better to state in the disclosure note “ revenue has been measured

and recognized according to the principles of AASB and IFRS, all the revenue is

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complied with the principles and treatments of AASB”. Explaining each section of

revenue in full detail will be more useful for the decision makers.

In concise, it is evident from the report that the rules and guidelines outlined by the AASB is

an indispensable requirement for the public corporations as this obligates the companies to

present the information in clear and transparent manner in their general purpose financial

report. When analysing the financial reports of BHP Billiton and Qantas, it is established that

the two companies have provided the necessary information that is outlined in AASB.

However, the information and statistics can be presented in superior manner and with more

explanation that can provide its potential users with a well detailed information, which in turn

can help them in decision making process.

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REFERENCES

Australian Government 2010, Accounting Standards, Australian Accounting Standards

Board, viewed September 15 2016

<http://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPoct10_01-

11.pdf>

Australian Government 2016, Accounting Standards, Australian Accounting Standards

Board, viewed 10 September 2016 <http://www.aasb.gov.au/Pronouncements/Current-

standards.aspx>

Australian Government 2016, Intangible assets, Australian Accounting Standards Board,

viewed 10 September 2016 <

http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-

18.pdf>

BHP Billiton 2016, BHP Billiton annual report for the year ended 30 June 2016, viewed 15

September 2016 < http://www.bhpbilliton.com/investors/reports/2016-annual-reporting-

suite>

King A 2016, Lease accounting standards will shift debt back to companies, Australian

Financial Review, viewed on 13 September 2016

<http://www.afr.com/business/accounting/new-accounting-standards-will-shift-debt-back-to-

companies-20160113-gm4xqm>

Qantas 2016, Qantas annual report for the year ended 30 June 2016, viewed 10 September

2016

<http://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf>

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Ross, S, Westerfield, R & Jaffe, J 2004, Corporate Finance, 7 th Edition, McGraw-Hill.

Sinclair S & Ridley C 2016, Special gaap report AASB 16, viewed 15 September, 2016

<http://gaap.com.au/wp-content/uploads/2016/03/GAAP-Consulting-Special-GAAP-Report-

AASB-16-Leases.pdf>

Lennard, A 2003,"Liabilities and how to account for them", Balance Sheet, Vol. 11 Iss 1 pp.

21 -26Financial Reporting Handbook

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