Table of contents
BHP Group Ltd
Impact of COVID -19 on overall mining business
Impact of COVID -19 on BHP Group LTD
OFR requirements based on AASB 101 Source of estimation uncertainty (para 125-133)
The object of the report is to examine the impact of COVID 19 on the reporting requirements of OFR and provide a clear picture to the investors for BHP Group Ltd and its operations.
Key area covered in the report
To record the methodologies and estimates that the company presently uses, Audited Statement for FY 2019 is considered as base. The ultimate object of the report is to have an idea about the areas that will require additional disclosure and change in estimation and judgements for COVID impact reporting.
Covid-19 has impacted majorly to the global economy as well as individual industries. It has also created many uncertainties and challenges in preparation and presentation of financial statements. To satisfy the main purpose of OFR which is to help ensure that the directors’ report
and financial reports presented in a way that maximizes their usefulness, focusing on the needs of people who are unaccustomed to reading financial reports, ASIC has recently introduced focus area in FR. This are includes following,
(i) Solvency and going concern,
(ii) Subsequent events
(iii) COVID-19 disclosures in the financial report and OFR
(iv)Lease accounting and rent waved
(v) Assessment of investments, assets and investment in unlisted entities on fair value
(vi) Non-financial assets measuring
(vii) Non IFRS disclosure
Australian listed companies are allowed to go for public investment without issue of prospectus. against this exception s299A(1) of the Corporations Act 2001 (Corporations Act), has mandated listed companies to have Operation and Financial Review (OFR) within directors report. This disclosure includes,
(a) Major operations of the company,
(b) Latest financial updates and
(c) strategies that company has adopted
This disclosure will enable investors to have complete information about the organization at one place rather than fetching the result from the detailed annual report. OFR will guide the investors whether to invest in the company is beneficial or not.
2.1 Objective -
Key objectives of the reporting will be
(i) Provide all the necessary financial information to inventors
(ii) Measure the impact OF COVID 19 and report the same as per the requirement OF OFR
(iii)Comply ASIC guidelines and requirements of s299A
BHP Group Ltd. is a listed company on Australian Stock Exchange. it is engaged in the business of extracting and processing minerals oil and gas. the company BHP group Limited and BHP group PLC are Parent companies and have many II listed subsidiaries as well.
The company has around 80000 employees and contracts mainly within Australia and Americas. The company has major export business with Singapore, Houston and the United States. (Source - BHP -About Us)
The FS of the company for the year 30th June, 2019, reports a profit of US$8.3 billion in FY2019, compared with FY 2018, a profit of US$3.7 billion. It indicates the company is growing rapidly and earning more than 50% than last year.
3.1 Impact of COVID -19 on overall mining business -
As lockdown within the countries and curtailing movement of workers, goods and services and consumers, production operations are highly affected. Companies engaged in exports of commodities have experienced huge loss. The output drop was recorded around 17%. The price of Brent Crude has reported 53% down which is the highest in the last 17 years and was being traded at US$23/bbl by March ending. Further the overall metal market has reported price reduction of around 20% (Source - The impacts of COVID-19 on the Mining Sector by David Rumbens and James Campbell-Sloan)
3.2 Impact of COVID -19 on BHP Group LTD -
As per one of the reports of DH deccanhearld, BHP Ltd has reported a 4% decrease in annual profit. The profit recorded for 20th June, 2020 was US$9.06 billion than the expected US $9.46billion. Further the company has recorded major expenditure towards donation and contribution for safety and wellbeing of workers.
3.3 OFR requirements based on AASB 101 Source of estimation uncertainty (para 125-133)
AASB 101 requires the company to disclose the assumptions and source used for estimating future value of its assets and liabilities which has significant risk of change in material amount within the next financial year.
Based on the report for the year 2019, company has made made necessary judgements and estimates in recording them.
The company is recording estimated provision of US$ 263millionwhich is 50% share of the decomposition cost of BHP Billiton Brasil due to dam failure 2016 in the FY2019.
However due to COVID 19, the lockdown period had shut down major operations and has also increased the labour cost post lockdown. The decomposition had not incurred any cost during the lockdown period and it might also cost higher as per average estimated monthly cost once the operation might have started. Accordingly this figure will require major estimation changes for FY 2020.
The company operates in different countries and accordingly records deferred tax liabilities for different tax jurisdiction considering temporary difference of income and expenditure.
Lockdown has affected major business operations and accordingly revenue generation for government and company. Many countries have reduced their tax rates to help the company by reducing their liabilities. As there were huge profit reduction and government help in the form of tax reduction, deferred tax liabilities will be subject to necessary changes.
Company recognize trade receivables initially at fair value and afterwards at amortization cost following IFRS 9. Company allows a 30days credit period and also takes proper steps for collections.
However due to the pandemic many small businesses have been shut down. The cash flow was not getting generated and there are many businesses which have not rebound yet. Thus the company has to confirm the impact of COVID 19 on the debtors and accordingly revalue its trade receivables at fair market value. The company should also make proper provision for bad debts.
Company records its inventories at cost or net realizable value whichever is lower and for ascertaining cost company adopts average cost concept.
The global market for iron and minerals has recorded huge price reduction. Whereas the supply of material and labour has also been affected. Accordingly, companies may notice huge price differences between cost and market. However, companies should stick to the method and report accordingly.
The company records its fixed assets at cost reduced by accumulated depreciation and impairment charges. The cost of the assets is derived by purchase cost accumulated with any direct costs incurred for and estimated future costs of closure and rehabilitation of the facility.
Presently the property market of Australia and other countries is facing downfall and will take some time to recover the cost. Company should report fair value of the assets the company wants to sell in near future and record the loss.
Company records impairment of non-current assets when its recoverable amount is lesser than its carrying amount. This is as per the AASB 101.
Company may have a good impairment loss to be recorded in FY 2020. It should be properly disclosed along with its source of data.
Goodwill, investment in other companies are some of the examples that will have greater effect of COVID 19.
Looking at the overall analysis and considering AASB 101, the company may have a major impact on its operations which includes sales, purchases, productions, carrying amount of current and noncurrent assets, Cost of productions and other COVID related expenses. All these will impact majorly on the profitability of the company. The investors are concerned with the market price and dividend payout policy of the company. The company may report a reduced rate of dividend. However in spite of down market BHP shares reported lowest reduction in price which is a plus point for the company. To maintain investor’s faith and resume the market company should make necessary changes on their major estimates and report true and fair picture for June 2020.
The company is having diversified business operations within different countries. Apart from this company has recently reported estimates for year 2020 which gave following results,
This estimates shows reduction in profit and accordingly reduction in dividend. Thus the impact consideration can be confirmed here.
Audit Report 2019 (https://www.bhp.com/-/media/documents/investors/annual-reports/2019/bhpannualreport2019.pdf)
BHP - About us (https://www.bhp.com/our-approach/our-company/about-us/)
Clarity in financial reporting (https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-clarity-financial-reporting-asic-focus-areas-june-240720.pdf?nc=1)
The impacts of COVID-19 on the Mining Sector by David Rumbens and James Campbell-Sloan (https://www2.deloitte.com/au/en/blog/covid19-blog/2020/impacts-covid-19-mining.html)
Covid-19 impact: BHP Group's annual profit falls 4% (https://www.deccanherald.com/business/business-news/covid-19-impact-bhp-groups-annual-profit-falls-4-874601.htmlhttps://www.deccanherald.com/business/business-news/covid-19-impact-bhp-groups-annual-profit-falls-4-874601.html)
BHP RESULTS FOR THE YEAR ENDED 30 JUNE 2020 (https://www.bhp.com/-/media/documents/media/reports-and-presentations/2020/200818_bhpresultsfortheyearended30june2020.pdf?la=en)
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