International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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controls and tax increases;
• actual production levels from the cost centre or cost pool are below forecast and/or
there is a downward revision in production forecasts;
• serious operational problems and accidents;
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• capitalisation of large amounts of unsuccessful pre-production costs in the cost centre;
• decreases in reserve estimates;
• increases in the anticipated period over which reserves will be produced;
• substantial cost overruns during the development and construction phases of a
field or mine; and
• adverse drilling results.
The extract below shows BHP’s accounting policy for impairment testing.
Extract 39.18: BHP Billiton plc (2017)
Notes to the Financial Statements
12 Impairment of non-current assets [extract]
Recognition and measurement
Impairment tests are carried out annually for goodwill. In addition, impairment tests for all assets are performed when
there is an indication of impairment. If the carrying amount of the asset exceeds its recoverable amount, the asset is
impaired and an impairment loss is charged to the income statement so as to reduce the carrying amount in the balance
sheet to its recoverable amount.
Previously impaired assets (excluding goodwill) are reviewed for possible reversal of previous impairment at each
reporting date. Impairment reversal cannot exceed the carrying amount that would have been determined (net of
depreciation) had no impairment loss been recognised for the asset or cash generating units (CGUs). There were no
reversals of impairment in the current or prior year.
How recoverable amount is calculated
The recoverable amount is the higher of an asset’s fair value less cost of disposal (FVLCD) and its value in use (VIU).
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows.
Valuation methods
Fair value less cost of disposal
FVLCD is an estimate of the amount that a market participant would pay for an asset or CGU, less the cost of disposal.
Fair value for mineral and petroleum assets is generally determined using independent market assumptions to
calculate the present value of the estimated future post-tax cash flows expected to arise from the continued use of the
asset, including the anticipated cash flow effects of any capital expenditure to enhance production or reduce cost, and
its eventual disposal where a market participant may take a consistent view. Cash flows are discounted using an
appropriate post-tax market discount rate to arrive at a net present value of the asset, which is compared against the
asset’s carrying value.
Value in use [extract]
VIU is determined as the present value of the estimated future cash flows expected to arise from the continued use of
the asset in its present form and its eventual disposal. VIU is determined by applying assumptions specific to the
Group’s continued use and cannot take into account future development. These assumptions are different to those
used in calculating fair value and consequently the VIU calculation is likely to give a different result (usually lower)
to a fair value calculation.
[...]
Impairment test for goodwill [extract]
For the purpose of impairment testing, goodwill has been allocated to CGUs or groups of CGUs, that are expected to
benefit from the synergies of previous business combinations, which represent the level at which management will
monitor and manage goodwill. Onshore US goodwill is the most significant goodwill balance and has been tested for
impairment after an assessment of the individual CGUs that it comprises.
[...]
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Key judgements and estimates [extract]
Recoverable amount testing
In determining the recoverable amount of assets, in the absence of quoted market prices, estimates are made
regarding the present value of future post-tax cash flows. These estimates require significant management
judgement and are subject to risk and uncertainty that may be beyond the control of the Group; hence, there
is a possibility that changes in circumstances will materially alter projections, which may impact the
recoverable amount of assets at each reporting date. The estimates are made from the perspective of a market
participant and include prices, future production volumes, operating costs, tax attributes and discount rates.
The most significant estimates impacting asset recoverable amount valuations for Onshore US assets, including goodwill are: Crude oil and natural gas prices
Crude oil and natural gas prices used in valuations were consistent with the following range of prices published by
market commentators:
2017
2016
West Texas Intermediate crude oil price
(US$/bbl)
51.48 – 89.31
49.00 – 81.00
Henry Hub natural gas price
(US$/MMBtu)
2.68 – 4.44
2.74 – 5.55
Oil and gas prices were derived from consensus and long-term views of global supply and demand, built upon past experience of the industry and consistent with external sources. Prices are adjusted based upon premiums or discounts applied to global price markers based on the location, nature and quality produced at a field, or to take into account contracted oil and gas prices.
Future production volumes
Estimated production volumes were based on detailed data for the fields and took into account development plans for
the fields established by management as part of the long-term planning process. Production volumes are dependent
on variables, such as the recoverable quantities of hydrocarbons, the production profile of the hydrocarbons, the cost
of the development of the infrastructure necessary to recover the hydrocarbons, the production costs and the
contractual duration of the production leases. As each producing field has specific reservoir characteristics and
economic circumstances, the cash flows of the fields were computed using appropriate individual economic models
and key assumptions established by management. When estimating FVLCD, assumptions reflect all reserves and
resources that a market participant would consider when valuing the Onshore US business, which in some cases are
broader in scope than the reserves that would be used in a VIU test. In determining FVLCD, risk factors may be
applied to reserves and resources which do not meet the criteria to be treated as proved.
Impact of oil and gas reserves and future anticipated production levels on testing for impairment
Production volumes and prices used in estimating FVLCD valuations may not be consistent with those disclosed as
proved reserves under SEC Rule 4-10(a) of Regulation S-X in section 6.3.1 ‘Petroleum reserves’. Section 6.3.1
‘Petroleum reserves’ is unaudited and does not form part of these Financial Statements. FVLCD requires the use of
assumptions and estimates that a typical market participant would assume, which include having regard to future
forecast oil and gas prices and anticipated field production estimates. This contrasts with SEC requirements to use
unweighted 12-month average historical prices for reserve definitions.
Under SEC requirements, certain previously reported proved reserves may temporarily not meet the definition of
proved
reserves due to decreases in price in the previous 12 months. This does not preclude these reserves from being
reinstated as proved reserves in future periods when prices recover.
Short-term changes in SEC reported oil and gas reserves do not affect the Group’s perspective on underlying project
valuations due to the long lives of the assets and future forecast prices.
Discount rates
A real post-tax discount rate of 7.0 per cent (2016: 6.5 per cent) was applied to post-tax cash flows. The discount rate
is derived using the weighted average cost of capital methodology and has increased from the prior year due to
volatility in oil and gas markets.
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11.2 Identifying cash-generating units (CGUs)
An entity is required under IAS 36 to test individual assets for impairment. However, if
it is not possible to estimate the recoverable amount of an individual asset then an entity
should determine the recoverable amount of the CGU to which the asset belongs.
[IAS 36.66]. A CGU is defined by the standard as the smallest identifiable group of assets
that generates cash inflows that are largely independent of the cash inflows from other
assets or groups of assets. [IAS 36.6]. See Chapter 20 at 3 for further discussion about how
an entity should determine its CGUs.
In determining appropriate CGUs, mining companies and oil and gas companies may
need to consider some of the following issues:
(a) active markets for intermediate products (see 11.2.1 below);
(b) external users of the processing assets (see 11.2.2 below);
(c) fields or mines that are operated as one ‘complex’ through the use of shared
infrastructure (see 11.2.3 below); and
(d) stand-alone fields or mines that operate on a portfolio basis (see 11.2.4 below).
These issues are discussed further below.
11.2.1
Markets for intermediate products
In vertically integrated operations, the successive stages of the extraction and
production process are often considered to be one CGU as it is not possible to allocate
net cash inflows to individual stages of the process. This is common in some mining
operations. However, if there is an active market for intermediate commodities (e.g.
bauxite, alumina and aluminium) then a vertically integrated mining company needs to
consider whether its smelting and refining operations are part of the same CGU as its
mining operations. If there is an active market for the output produced by an asset or
group of assets, the assets concerned are identified as a separate CGU, even if some or
all of the output is used internally. If extraction and smelting or refining are separate
CGUs and the cash inflows generated by the asset or each CGU are based on internal
transfer pricing, the best estimate of an external arm’s length transaction price should
be used in estimating the future cash flows to determine the asset’s or CGU’s VIU.
[IAS 36.70]. See Chapter 20 at 3.
11.2.2
External users of processing assets
When an entity is able to derive cash inflows from its processing assets (e.g. smelting or
refining facilities) under tolling arrangements (see 18 below), the question arises as to
whether or not those processing assets are a separate CGU. If an entity’s processing
assets generate significant cash inflows from arrangements with third parties then those
assets are likely to be a separate CGU.
11.2.3 Shared
infrastructure
When several fields or mines share infrastructure (e.g. pipelines to transport gas or oil
onshore, railways, ports or refining and smelting and other processing facilities) the
question arises as to whether the fields or mines and the shared infrastructure should
be treated as a single CGU. Treating the fields or mines and the shared infrastructure as
part of the same CGU is not appropriate under the following circumstances:
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(a) if the shared infrastructure is relatively insignificant;
(b) if the fields or mines are capable of selling their product without making use of the
shared infrastructure;
(c) if the shared infrastructure generates substantial cash inflows from third parties as
well as the entity’s own fields or mines; or
(d) if the shared infrastructure is classified as a corporate asset, which is defined under
IAS 36 as ‘assets other than goodwill that contribute to the future cash flows of
both the cash-generating unit under review and other cash-generating units’.
[IAS 36.6]. In that case, the entity should apply the requirements in IAS 36 regarding
corporate assets, which are discussed in Chapter 20 at 4.2.
However, if none of the conditions under (a) to (d) above apply then it may be
appropriate to treat the fields or mines and the shared infrastructure as one CGU.
Any shared infrastructure that does not belong to a single CGU but relates to more than
one CGU still need to be considered for impairment purposes. It is considered that there
are two ways to do this and an entity should use the method most appropriate. Shared
infrastructure can be allocated to individual CGUs or the CGUs can be grouped together
to test the shared assets (similar to the way corporate assets are tested – see
commentary above).
Under the first approach, the shared assets should be allocated to each individual CGU
or group of CGUs on a reasonable and consistent basis. The cash flows associated with
the shared assets, such as fees from other users and expenditure, should be allocated
similarly and should form part of the cash flows of the individual CGU. Under the second
approach, the group of CGUs that benefit from the shared assets are grouped together
with the shared assets to test the shared assets for impairment.
11.2.4
Fields or mines operated on a portfolio basis
Mining companies and oil and gas companies sometimes operate a ‘portfolio’ of similar
mines or fields, which are completely independent from an operational point of view.
However, IAS 36 includes the following illustrative example. [IAS 36 IE Example 1C].
Example 39.8: Single product entity
Entity M produces a single product and owns plants A, B and C. Each plant is located in a different continent.
A produces a component that is assembled in either B or C. The combined capacity of B and C is not fully
utilised. M’s products are sold worldwide from either B or C. For example, B’s production can be sold in C’s
continent if the products can be delivered faster from B than from C. Utilisation levels of B and C depend on
the allocation of sales between the two sites.
Although there is an active market for the products assembled by B and C, cash inflows for B and C depend
on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can
be determined individually. Therefore, it is likely that B and C together are the smallest identifiable group of
assets that generates cash inflows that are largely independent.
The same rationale could also be applied by a mining company that, for example,
operates two coal mines on a portfolio basis, or an oil and gas company that, for
example, operates two fields within the one PSC and the entitlement to revenue is
dependent on production of, the revenue earned and costs incurred across the PSC, not
on a field by field basis. However, judgement needs to be exercised before concluding
that it is appropriate to treat separate fields or mines as one CGU, particularly when the
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production costs of the output of fields or mines differ considerably. This is because
there may be a desire to combine them into one CGU, so that the higher cost fields or
mines are protected by the headroom of the lower cost fields or mine, thereby avoiding
a recognition of an impairment charge. Therefore, to be able to combine on a portfolio
basis, a mining company or oil and gas company would have to be able to demonstrate
that the future cash inflows for the individual mines or fields cannot be determined
individually and therefore, the combined group represents the smallest identifiable
group of assets that generates cash inflows that are largely independent.
11.3 Basis of recoverable amount – value-in-use or fair value less
costs of disposal
The standard requires the carrying amount of an asset or CGU to be compared with its
recoverable amount, which is the higher of fair value less costs of disposal (FVLCD) and
value-in-use (VIU). [IAS 36.18]. If either the FVLCD or the VIU is higher than the carrying
amount, no further action is necessary as the asset is not impaired. [IAS 36.19].
Recoverable amount is calculated for an individual asset, unless that asset does not
generate cash inflows that are largely independent of those from other assets or groups
of assets. [IAS 36.22].
At 11.4 and 11.5 below we further consider the practical and technical aspects associated
with the calculation of VIU and FVLCD respectively for mining companies and oil and
gas companies.
11.4 Calculation of VIU
IAS 36 defines VIU as the present value of the future cash flows expected to be derived
from an asset or CGU. [IAS 36.6]. Estimating the VIU of an asset/CGU involves estimating
the future cash inflows and outflows that will be derived from the use of the asset and
from its ultimate disposal in its current condition, and discounting them at an
appropriate rate. [IAS 36.31]. There are complex issues involved in determining the cash