Business combination analysis Essay


The UK is peculiarly of import for planetary fiscal coverage because it has been a major power in the universe economic system since the mid nineteenth century ( Flower and Ebbers, 2002 ) . Since so, environmental and cultural influences such as planetary heating, economic downswings and corporate meltdowns overseas ( Enron ) have meant an increased involvement in societal coverage every bit good as transparence which have fomented the development of regulative fiscal coverage patterns, methods and processs ( Elliott and Elliott, 2006 ) . Since companies ‘ activities extend beyond national frontiers, it is necessary to bring forth a flow of dependable homogenous fiscal information about them and hence utilise national every bit good as international accounting criterions ( Alexander et al. , 2003 ) .

The development and harmonisation of the UK ‘s accounting criterion have been greatly influenced by the International Accounting Standards Committee ( IASC ) . Based on the IASC, International Accounting Standards ( IAS ) have been developed through an international procedure, affecting global accounting professionals, preparers and users of fiscal statements and every bit good as national criterion puting organic structures ( Alexander et al. , 2003 ; Harisson et al. , 2004 ) . Many UK companies, particularly big transnational companies and international fiscal establishments, prepare their fiscal studies in conformity with International Accounting Standards ( Nobes and Parker, 2000 ) . Recently, the European Union ( EU ) adopted a ordinance necessitating listed companies governed by the jurisprudence of a member province to fix their amalgamate histories in conformity with international accounting criterions after 1st January 2005 ( Harisson et al. , 2004 ) . Following alterations in EU ordinances, UK companies listed on a stock exchange in the UK will be required to follow International Financial Reporting Standards ( IFRS ) ( Nobes and Parker, 2000 ) . The development of IFRS takes topographic point during International Accounting Standards Board ( IASB ) meetings and such criterions are progressively adopted by UK companies in topographic point of fiscal coverage criterions issued by the Accounting Standards Board ( ASB ) ( Flower and Ebbers, 2002 ) ; Elliott and Elliott, 2006 ) . The Institute of Chartered Accountants in England and Wales ( ICAEW ) adds that, “ Other United kingdom companies within the UK have a pick of describing under UK GAAP or IFRS ” ( ICAEW website ) .

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We have chosen to analyze the one-year studies ( henceforth ARs ) of BP PLC & A ; Royal Dutch Shell PLC. Both are major participants in planetary energy production and are recognized as being two sixths of the group normally known as ‘super big leagues ‘ , depicting the six largest energy companies within the private sector. Both are genuinely planetary companies with operations in over 100 states, using over 90,000 staff.

The intent of comparing similar companies is to let a more in-depth analysis of fiscal coverage patterns and analyze whether companies with such similar operations implemented diverging accounting fiscal describing policies or revelation patterns and the deductions of these.

Both BP and Shell ‘s amalgamate fiscal statements “ have been prepared in conformity with the commissariats of the Companies Act 1985, Article 4 of the International Accounting Standards ( IAS ) Regulation and with International Financial Reporting Standards ( IFRS ) as adopted by the European Union… [ and ] in conformity with IFRS as issued by the IASB ” ( SAR, 2009: 118 ; for BP see BPAR, 2009: 108 ) . Although, while Shell ‘s parent company fiscal statements have been prepared in conformity with the same IFRS ( SAR, 2009: 177 ) , BP ‘s have been prepared “ in conformity with… United Kingdom by and large accepted accounting pattern [ UK GAAP ] ” ( BPAR, 2009: 191 ) . However, this has no material impact on our analyses as we merely cover with amalgamate fiscal statements and their “ related notes ” ( BPAR, 2009: 103 ; SAR, 2009: 111 ) .

Before looking in deepness at BP and Shell ‘s ARs, it is of import to recognize that BP and Shell ‘s registered hearers ( Ernst & A ; Young LLP and PriceWaterhouseCooper LLP severally ) province that their “ consolidated fiscal statements give a true and just position, in conformity with IFRS as adopted by the European Union ” ( BPAR, 2009: 103 ; SAR, 2009: 111 ) .

Consolidation and Business Combination Reporting

Before looking into the accounting policies related to concern combination and consolidation, the footings ‘group ‘ and ‘control ‘ must be defined.

IAS 27 Consolidated and Separate Financial Statement provinces that when one endeavor exercises control over another, straight or indirectly, a group is said to be ; the commanding endeavor is called the parent and the other, its subordinate. ( Elliot and Elliot,2006: 525 )

IAS 27 defines control “ as the power to regulate the fiscal and runing policies of an entity so as to obtain benefits from its activities ” ( Bonham et al. , 2009: 402 ) . Owning more than half of the vote rights in another entity, straight or through a subordinate, is considered the threshold for control ( Elliot and Elliot,2006: 527 ) . Even if less than half of the vote rights are acquired, it is still possible to place the acquirer ( Elliot and Elliot,2006: 527-528 ) .

Accounting for a concern combination and consolidation is done by utilizing IAS27, IFRS3, IAS 3 ( Joint Ventures ( JVs ) ) and IAS 28 ( Associates ) .

Harmonizing to IAS 27, the parent has to fix amalgamate fiscal statements for all subordinates. This avoids the creative activity of misdirecting histories by the parent. It besides determines the full net incomes of the parent ‘s investing and measures the public presentation of the company ‘s managers ( Elliot and Elliot, 2006: 525-526 ) . The freedoms are when the parent company is itself a entirely owned or partly owned subordinate of another endeavor and its proprietors do n’t hold an expostulation with the parent non showing amalgamate histories ( Elliot and Elliot,2006: 525-526 )

Under UK GAAP there are a few differences. FRS 2 governs the Consolidation of Subsidiaries. Under IAS 27 a subordinate should be excluded from consolidation when the control is intended to be impermanent ( Elliot and Elliot, 2006: 527 ) . However, FRS 2 topographic points a bound of “ about one twelvemonth from day of the month of acquisition ” ( Wilson et al.,2001: 314 ) . IAS ‘ longer term retentions could therefore falsify the amalgamate studies of IFRS describing for a longer period than UK GAAP. Contrary to UK GAAP, IAS 27 does non allow the exclusion from consolidation of an entity it continues to command merely because that entity is runing under terrible long-run limitations ( Elliot and Elliot, 2006:527 ) . Under IAS 27 exclusion “ on the evidences that a subordinate ‘s activities are dissimilar from those of the others within a group can non be justified ” ( Elliot and Elliot, 2006: 527 ) However, FRS 2 “ requires non-consolidation where the subordinate ‘s activities are so different from those of the remainder of the group that its inclusion would be incompatible with the duty to give a true just position ” ; although this is merely in exceeding fortunes ( Wilson et al.,2001:315 ) .

The method used for accounting a concern combination is called acquisition method ( Purchase method, IFRS 2004 ) . The stairss involved are:

There are 3 sorts of concern combination: entirely owned subordinates, associates and JVs.

Subordinates are owned and controlled by parent company from the acquisition day of the month ( Alfredson, et Al, 2005: 668. ) . BP states that in note 1, page108.

An associate, harmonizing to IAS 28, “ is an entity, including an unincorporated entity such as a partnership, over which the investor has important influence and that is neither a subordinate nor an involvement in a joint venture. ” ( Alfredson, et Al, 2005: 937 ) Accounting for associates is done by utilizing the equity method. ( Appendix A )

JV, as defined by IAS31, “ is a contractual agreement whereby two or more parties undertake an economic activity that is capable to joint control ” ( Alfredson, et Al, 2005: 986 ) . As shown below, JV is widely used by both BP and Shell.

What is apparent in the amalgamate fiscal statement are ( I ) grosss from associates and JVs, ( II ) investings in associates, ( III ) JV and ( IV ) the value of minority involvements ( MIs ) .

The difference in UK GAAP here is that the proportionate consolidation method is recommended for jointly-controlled entities, while the equity method is permitted. The proportionate consolidation method leads to a different revelation sums in fiscal statement, such as the venture has to set portion of assets, liabilities, income and disbursals line- by-line with similar points in the fiscal statement ( Gee, 2007: 450 ) . The equity method, nevertheless, merely shows the net income and loss from the investing, which is more important for investors.

Beside the income straight generated from the combination, MI is another gross beginning. In a combination, stockholders other than the parent company are jointly referred as MI ( Elliot and Elliot, 2006: 530 ) . Harmonizing to IAS 27, “ Minority involvements… shall be presented in the amalgamate balance sheet within equity, individually from the parent stockholders ‘ equity. Minority involvements in the net income or loss of the group shall be individually presented ” . ( Alfredson et al, 2005: 775 ) . IASB states that MI should be calculated by the entity construct ( Appendix A ) , in which MI is counted as the equity holder of the group ( Alfredson et al, 2005: 655 ) .

Intangible assets are besides influenced by concern combination, particularly good will, which is of import to MNCs. During concern combination, the assets acquired and liabilities assumed are recognized at their just value at the day of the month of acquisition, but the cost of the purchase is non ever equal with the just value, so the difference between cost of purchase and just value is counted as good will ( Appendix A ) ( Alfredson, et Al, 2005: 396 ) .

For case, Shell ‘s acquisition of Duvernay Oil Corp. , where good will was valued at $ 330m, about 1/15th of the entire consideration of their equity ( $ 5,013m ) ( SAR 2008, NOTE 11 ) .

Shell and BP present their good will in different ways. Shell opts to group all intangible assets into one tabular array, whereas BP chooses to handle good will individually. Possibly this is to soften the blow from both their losingss in good will. BP ‘s note 25 ( intangible assets ) is spared the $ 1,128m autumn in good will ( since 2007 ) and Shell can chunk its good will loss together ( $ 181m ) along with its ‘other ‘ intangible assets. However, this should non be hard for spoting investors to place:

Interestingly, BP uses note 12 to divide the damage of good will from its good will and intangible plus tabular arraies. Shell, nevertheless, compounds goodwill impairment into its intangible plus tabular array ( see note 10 above ) under ‘Charges for the twelvemonth ‘ ( $ 311m in 2008 ) . They both use the discounted hard currency flow theoretical account ( Appendix A ) for damage of good will. However, BP used a price reduction rate ( Appendix A ) of 11 % and Shell a rate of 6 % . Because of the differences in informational revelation, BP appears to hold greater transparence than Shell, a really of import construct for possible investors.

Both BP and Shell experienced a aureate three old ages, get downing in 2006 due to increasing oil monetary values ( see Figure 1. ) . BP and Shell increased the investings in Business Combination. BP, nevertheless, experienced a diminution in disposal during 2006-2008. Shell lost $ 1.1 billion on proviso for decommissioning and Restoration on disposal in UK and USA, ( SAR, 2009: 142 ) but this did n’t hold a strong influence on the hard currency flow of the group ( SAR, 2009: 154 ) Besides, Shell had gained $ 1,395 million from the disposal of certain operations in Germany ( SAR, 2009: 132 ) . Strong hard currency influxs and fewer losingss on disposals are ever promoting for investors.

Environmental and Social Reporting

Social and environmental coverage exists because “ there is a philosophical position that holds that a company possess a function in society ” and can non move “ without respect for the scope of effects for its actions ” ( Elliot and Elliot, 2007:796 ) . However, there appears to be no consolidative paradigm or model for equal revelation ( Z & A ; eacute ; ghal and Ahmed, 1990: 1 ) and this is apparent in Shell and BP ‘s ARs. Firstly we will analyze the external environmental criterions both companies adhere to comparing them to UK GAAP. Then we consider the involuntary and voluntary information disclosed.

IAS 37 is applicable under IFRS and screens ordinances on ‘Provisions, Contingent Liabilities and Contingent Assets ‘ ( IASB, 2009:1877 ) every bit good as IAS 16 which screens ‘Property, Plant and Equipment ‘ “ acquired for safety or environmental grounds… [ and ] to follow with environmental demands ” ( Bonham et al. , 2009:1511 ; IASB, 2009:1150 ) . Harmonizing to IFRS commissariats are “ liabilities of unsure timing or sum ” ( IASB, 2009:1888 ) . For there to be a liability, there must be an duty at the balance sheet day of the month that is present or likely ( Nobes and Parker, 2008:141 ; IASB, 2009:1888-90 ) . As Bonham et Al. describe, “ [ tungsten ] hether an ‘obligating event ‘ or non there is a ‘constructive duty to clean up the land ‘ ” ( 2009:1504 ) . BP ‘s policy honours this: “ Liabilitiess for environmental costs are recognized when a clean-up is likely and the associated costs can be faithfully estimated ” ( BPAR, 2009:113 ) . This is in line with IAS 37 ‘s lineations of “ improper environmental harm ” ( IASB, 2009:1889 ) . Therefore Shell is obligated to unwrap its $ 1.0 billion “ environmental capital disbursement ” ( SAR, 2009:65 ) , its “ entire liabilities… carried for environmental clean-up ” of $ 1.2 billion ( SAR, 2009:65 ) and its “ duties being carried for disbursement on decommissioning and Restoration including oil and gas platforms ” of $ 10.5 billion ( SAR, 2009:65 ) . Though BP is non as forthcoming in their “ Environment ” subdivision, their note 37, ‘Provisions ‘ , provides their relevant figures: $ 9,501 million in decommissioning liabilities, $ 2,107 million in environmental 1s and $ 3,487 million in judicial proceeding and other costs ( BPAR, 2009:158 ) . The fact that IFRS merely require figures refering to liabilities, decommissioning, works, belongings and equipment, highlights the deficiency of environmental demands in one-year studies.

These accounting criterions were developed through coaction between the ASB and the IASC and use both internationally through IAS 37 and in the UK through UK GAAP ‘s FRS 12. As a consequence the diction and deductions of the criterions are virtually indistinguishable ( Wilson et al 2001: 1952 ) . Since so, the similarities have been furthered by Financial Reporting Exposure Draft 14 ‘s ( FRED 14 ) proposals on environmental commissariats which mirror those of IAS 37. This posses few jobs for comparative analysis ( Wilson et al 2001: 1987 ) .

Since 1997 and the remotion of the British Standard Institute ‘s BS7750 there are two staying environmental coverage criterions, “ the European Union ‘s Eco-Management and Audit Scheme ( EMAS ) and the International Organization for Standardization ‘s ISO 14000 series ” ( Gray and Bebbington, 2001:105 & A ; 106 ) . EMAS ‘ regulative stringency makes it a less attractive policy pick for companies ( Gray and Bebbington, 2001:107 ) . Gray and Bebbington suggest that “ ISO 14000 is now the criterion for environmental direction and audit ” ( 2001:108 ) . However, “ the ISO ‘s counsel on environmental direction and audit is explicitly voluntary… and… contains no demand for either revelation or vigorous confirmation ” ( 2001:108 ) . This may be a cardinal ground for ISO 14000 ‘s wide-scale acceptance.

Shell claims, in their “ Environment and Society ” , it is “ holding major installations certified to international environmental criterions, such as ISO 14001 ” ( SAR, 2009:64 ) . BP states: “ the operations at our major operating sites are covered by enfranchisement to the ISO 14001 ” ( BPAR, 2009:43-4 ) . This, nevertheless, ignores 39 % of BP ‘s fixed assets as their environmental and societal coverage covers merely their operations in the EU and the U.S ( BPAR, 2009:43 ) . Furthermore, they mention their ain, “ Operating Management System ( OMS ) , including ISO 14001 ” ( BPAR, 2009:44 ) . While BP has its system in topographic point which applies its “ Environmental Group Defined Practice ( GDP ) ” ( BPAR, 2009:44 ) , Shell claims that it behaves “ in line with the Shell General Business Principles… and Code of Conduct ” ( SAR, 2009:64 ) . ISO 14001 ‘s flexible and voluntary nature provides range for companies to follow internal criterions in their environmental coverage ( Gray et al. , 1995 ) .

Both Shell and BP voluntarily supply information sing nursery gas emanations ( Fig. 1 Shell, Fig. 2 BP ) , hurts ( Fig. 3 Shell, Fig 4. BP ) and oil spills ( Fig. 5 Shell, Fig 6. BP ) in their Argon:

One illustration of fluctuation is how Shell and BP use the consulting house Solomon Associates ( SAR, 2009:67 ; BPAR, 2009:7 ) . Both employ Solomon Associates ‘ Energy Intensity Index ( EII & A ; Ocirc ; ; ) mensurating the efficiency of their refineries. However, interestingly, Shell uses it as an environmental coverage tool and BP as a productiveness and public presentation step, foregrounding the companies ‘ diverging focal point.

Despite the similarities shown above a figure of differences still exist. Shell, unlike BP, discloses the nature of its spills. This is possibly to warrant its entire 1.5 thousand ton rise in volume spilt since 2007, blamed on “ one sabotage incident in Nigeria ” ( SAR, 2009: 68 ) . Besides, Shell ‘s information goes back five old ages to 1999 and BP ‘s merely to 2006. One glowering societal duty disagreement is that merely BP studies on its employee ‘s satisfaction. This emphasises the arbitrary nature of societal coverage.


Having examined both consolidation and environmental and societal coverage in item, it appears that the differences between the two companies ‘ revelation in the ARs are minimum but non undetectable.

Shell and BP ‘s Consolidated Financial Statements unwrap information in assorted ways, distributing their figures among different notes or tabular arraies or by showing information otherwise, as we saw with ‘Goodwill ‘ . Even a superficial scrutiny of their Group ( BP ) and Consolidated ( Shell ) Balance Sheets clearly show that, although the same indispensable information is presented, they both go into different degrees of item ( apparent in their equity revelations ) . However, these differences are superficial and should non present a job for the trained eyes of an investor or analyst familiar with accounting patterns.

With respects to environmental and societal coverage, comparative analysis is debatable because the one-year studies periodically mix voluntary coverage with informations required by fiscal coverage criterions. Though the differences in describing under IFRS are negligible, those between voluntarily disclosed information are great and inconsistent. Despite this it is in their best involvements to describe every bit to the full as possible because, “ If non done voluntarily it will go compulsory ” ( Gray and Bebbington, 2001:242 ) .

Shell appears more extroverted in its environmental coverage than BP. Potential accounts for this could be due to Western stakeholder force per unit area as there will be an “ unwillingness to describe on ethical issues in lesser developed states until public force per unit area intensifie [ s ] ” ( Adams, 2002:235 ) . It is besides possible that BP is aiming their Western investors.

There are, nevertheless, jobs with doing premises ; companies go to great lengths to pass on their environmental activities through a scope of media, non entirely the AR ( Z & A ; eacute ; ghal and Sadrudin, 1990:38 ) . BP and Shell make usage of separate ‘Sustainability Reports ‘ to let go of relevant informations on their environmental and societal coverage and on other related external ordinances ( see Appendix B ) .

When comparing BP & A ; Shell ‘s IFRS to those of UK GAAP our analysis of Business Combination and Social coverage has revealed some cardinal countries of treatment. In Business Combination, investors will necessitate to be cognizant of the aforesaid differences between IFRS and UK GAAP, such as those refering to the net income and loss originating from concern combination. However, these differences appear to be extremely circumstantial and merely use under specific scenarios, the effects of which are hence improbable to impact an investing determination.

As for Environmental and Social coverage, investors and analysts should non confront many jobs when comparing the numerical revelation of the two companies although they are likely to when analyzing the disparate environmental elements contained herein. This is because while IFRS and UK GAAP barely differ, voluntary environmental coverage varies greatly. Ethically-inclined investors will therefore happen it hard to spot between the environmental policies of the two companies. Fiscal analysts will besides confront similar jobs when trying to measure the two companies ‘ environmental impact. However, people who take ethical and environmental issues into consideration when doing investings are improbable to see Shell and BP due to the nature of their concern ; other companies which operate in other industries will be more affected by this type of coverage.

There were ever traveling to be a big Numberss of similarities in the one-year studies of two of the major participants within the oil and gas industry. However, we have proved that, though elusive and sometimes voluntary, there are disclosure disagreements to take into history when pulling comparings that are worthy of farther probe.


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