Accounting Theory

Executive Summary

This report summarizes the accounting practices of the selected organization, i.e., BHB Billiton limited. Under this, BHB Billiton Limited annual report will be analyzed in order to assess the accounting policies and practices which company is following for maintaining its accounting records. This study report also explained the importance of disclosing the financial information in an adequate manner in order to attract a large number of investors for doing investment. It is very necessary to evaluate the accounting strategy which is framed according to the norms of accounting policies and also need to check the quality of disclosure. Moreover, this report also discussed the complaints regarding the conceptual framework which is followed by BHB Billiton in maintain and developing their financial information. Thus, this overall report helped in understanding and identifying the key accounting policies and strategies which are to be considered for identifying the potential red flags which are faced by the company in the competitive market.


This report outlines the accounting theories and issues which are involved or faced with the company, i.e., BHB Billiton Limited Company. In this, accounting quality of the company will be evaluated by assessing the accounting policies and theories which are adopted by the company. Further, this study will also highlight different areas of a section which will help in understanding and evaluate the accounting quality and strategy and flexibility (Kanodia & Sapra, 2016). In context to it, BHB Billiton Limited Company annual report of last two years will be undertaken in order to assess and evaluate the accounting policies ad theories. However, this report will assess the accounting flexibility and evaluate the accounting strategy and disclosure quality as well as also identify the potential red flags (Daniel & Sojamo, 2012). At last, this report will discuss the complaints which are identified by analyzing the accounting policies and practices of the company in terms of the conceptual framework.


Section 1: Identify key accounting policies

In this, key policies and estimates are used for measuring the risk, and critical success factors should be identified in order to understand & determine the importance of using accounting policies. There are some approaches which help in identifying the key policies are:

  • Critical success factors and risk
  • Size of the financial statement

While studying, it is also identified that there are some significant accounting policies which are used by the company consistently in order to manage and develop an effective consolidated financial statements. The significant accounting policies include comparative accounting policy, a principle of consolidation policy, sales revenue accounting policies, exploration and evaluation of expenditure and so on (Ding, et al., 2007). In concern to this, stated accounting policies helped the company in maintaining all financial records in an efficient manner.

The use of comparative accounting policies helps in measuring the risk which is involved in the company at the time of developing financial statements. In this, a comparative study is done in the financial performance of the company of last two years through which it becomes easy to analysis the actual business performance of the company (Romney & Steinbart, 2012). In addition to this, the use of sales revenue accounting policy is a key policy which is necessary to be considered by all the companies efficiently in order to determine the sales of the goods and services of the companies which are sold in a year. In other words, generating revenue from the sales is a major task for the organization as for increasing the revenue of the company, it is required that there are more sales of the goods and services in the market.

In like manner, exploration and evaluation expenditure policy is a policy which helps the company BHB Billiton to evaluate and analyze the historical data in a more efficient manner in order to explore more information and data which is useful for future perspective. This policy is recorded or charged in the income statement which is incurred in different circumstances (Xi, et al., 2011). For an organization, this policy is very significant as this helps the organization in recording the expenditures which are generated while evaluation or exploration of any capital expenditure. Moreover, when policy related to exploration areas includes the reserves of the company which is determined or monitored from the revenue generated.

The financial statement of BHB Billiton Limited Group is using the principle of consolidation as an accounting policy which helps in measuring the financial information of all BHB Billiton PLC and its subsidiaries (BHB Billiton Limited, 2015). While studying, it is also identified that there is various key accounting policy which is developed according to the company’s asset and liabilities (Kanodia, 2007). The accounting policy of the BHB Billiton also helps in managing and recording the expenditure and revenues in the right financial statements in order to avoid or eliminate the mistake or manipulation of the financial data for targeting the company’s stakeholders. However, the above-stated accounting policies are playing a key essential role in recording all financial transactions in the financial books efficiently and correctly.

Section 2: Assess Accounting Flexibility

To assess the accounting flexibility in the organization, it is necessary to analysis the accounting data or information in order to avoid the distortion. The accounting flexibility may result in two different ways, i.e., it may be good or worse for maintaining the accounting information. If a manager uses the accounting flexibility in the organization, then there are chances with the manager to select any accounting policies and estimates the financial data according to the present requirement rather than future (Kanellou & Spathis, 2013). While analyzing the accounting flexibility in the BHB Billiton Limited, it is found that it arises the flexibility in estimating and measuring the risk on the basis of Australian Accounting Standards Board (AASB).  There are some AASB standards like AASB 118 related to revenue, AASB 138 related to intangible assets.

The accounting standards which are followed or selected have high influence over the accounting flexibility because the policies are chosen according to the company’s benefit for a long term. In simple words, the accounting information of the company is less likely to yield a firm’s economics insights if a manager of BHB Billiton uses a high degree of flexibility in selecting estimates or accounting policies. The relevancy of accounting information is analyzed on the basis of accounting policies which are implemented for developing a financial statement (Romney & Steinbart, 2012). On the other hand, it is also found that managers are required to use those accounting policies in the financial reporting which display the actual picture and financial performance of the company efficiently and effectively. The selected accounting policies somewhere creates an impact on the company’s performance adversely as this will increase the changes of manipulation of data and increase in errors in the financial data. While assessing the accounting flexibility, it is found that BHB Billiton uses a different accounting standard which eliminates the unsatisfactory reporting practices by promoting the accounting standards to increase consistency and comparability (BHB Billiton Limited, 2016).

In respect to this, accrual accounting concept is also used by the financial manager of the company in order to rely on some assumptions. According to Dechow, et al., (2011), accrual accounting concept is subjective in nature, and also it helps in improving and developing the quality of the financial reporting (Fowzia, 2011). During the assess of accounting flexibility, it is also determined that high degree of flexibility in the accounting will create influence over the financial reporting of the company as accounting flexibility will allow the managers to select the accounting standards in which managers tries to follow the positive theory of accounting which is related to the accounting phenomena.

The positive theory of accounting is the best way of doing a fundamental assumption in which individual action is predicted on the basis of action which is driven in order to maximize the wealth. On the other hand, Sinko, et al., (2013) stated that positive theory of accounting provides the insight about cash flow which is associated with the debt & management compensation in order to determine the impact. BHB Billiton Limited is using best accounting theories and policies which are helping the financial department to estimate and make financial decision efficiently (BHB Billiton Limited, 2016). Flexibility in accounting policy is creating less impact as a company knows which policy and theory will provide the benefit to the company.

Section 3: Evaluate Accounting Strategy

The choice to maintain the flexibility in accounting practices allows the managers to strategically communicate the information related to economic condition and distort performance. While evaluating the accounting strategy, it is identified that there are some issues which are to be considered by the organization includes norms related to accounting policies with industry peers, providing incentives to managers for managing the earnings of the organization and so on (BAKAR & Saleh, 2011). In addition, there are other issues such as a change in accounting policies and estimates may develop difficulties, estimating the accounting on the basis of unrealistic information, and achieving a certain accounting objectives, the accounting transactions are structured.

At the same time, these issues are creating huge influence over the financial decision making as a company is required to follow some norms which are related to accounting policies that are adopted for an achievement of organizations goals (Marquis, et al., 2016). While studying, it is determined that norms are made for industry peers in which firm’s competitive strategy is obtained on the basis of high quality and investment in considerable resources so that it can reduce the product failure rate in the market. At the same time, providing the incentive to the manager is encouraging him to work efficiently whereas a change in policies or estimates affects the justification.

The changes in policies are done in order to improve the quality and reduce the expenses which are incurred. On the other side, it is also identified that firm structure is related to the significant business transaction which helps in achieving an accounting objectives.  In this study, accounting strategy is evaluated in order to understand and identify the reasons or factors which are critically affecting the company performance and operational function to a large extent (Macve, 2015). Evaluating the accounting strategy is not easy as strategies which are used by BHB Billiton is framed or developed for operating the function of the organization in best efficient and smooth manner.

While analyzing the company’s strategy, it is identified that company has developed a strategy for meeting their organizational goals and objectives as well as for developing a consistency and sustainable growth in the organization. During the evaluation process, it is identified that there are some critical success factors which are to be considered by the company’s while developing any accounting strategy for estimating a financial budget or taking any financial decisions (Epstein, et al., 2014). However, it can be depicted from this study that following the proper accounting strategy helps the company to achieve a certain accounting objectives efficiently and effectively.

Section 4: Evaluate the quality of disclosure

While evaluating the accounting quality of disclosure, it is observed that accounting policies and theories play a significant role in managing and recording the financial data or information effectively. The disclosures made by BHB Billiton seem to be adequate as all the relevant financial information that is required for effective decision making are disclosed by the company (Steininger, et al., 2016). The disclosures help to give a clear description of BHB Billiton’s financial position to its stakeholders. The company is using different accounting theories and practices to manage the financial performance of the company.

The disclosures are important to present as it helps the shareholders, investors, creditors, etc to view and asses the actual financial position of the company. While analyzing the BHB Billiton financial stamen, it is found that company had disclosed all relevant financial information in the financial reporting. BHB Billiton has prepared different consolidated financial statements which help in analyzing and identifying the actual financial situation and adequacy of the disclosure (BHB Billiton Limited, 2015). In addition, the adequacy of footnotes to financial statements is relevant enough as this indicates the contingency assets or liabilities.

According to the current financial performance of the company, it is determined that notes which are made available in the annual report of BHB Billiton are more sufficient as notes for financial statements are provided in a wide manner. The notes of financial statements covered all financial items in which all items are described in effective manner, i.e., all assets and liabilities items are explained separately (Bolderdijk, et al., 2013). The notes to the financial statements are prepared or disclosed as segment reporting, and this helps in evaluating the performance of the company in a better manner.

At the same time, GAAP defines the elements of financial statement in an efficient manner in order to measure the success. GAAP allows the company to have consistency in reporting among the firms and over various time periods (Ho, et al., 2015). GAAP helps to reduce the risk of fraud and misinterpretation of the financial information. It helps the company to measure its performance in terms of comparing the financial statement across various time periods. It further helps to draw the realistic conclusions about the company’s performance as it reflects the clear picture of the company by measuring the key success factor (Harris & Symons, 2013). On the other hand, it is also evaluated that segment reporting disclosure is also efficient for the company as it helps the stakeholders or shareholders to analyze in dept the company’s debt and equity, asset and liabilities.

Section 5: Identify potential red flags

In this section, red flags are discussed in depth in order to identify and determine which factors indicate the potential threat to the organization and its security. According to Barr-Pulliam, et al., (2017), a red flag is an indicator of potential problem or threat which defines the undesirable characteristics that stand out as an analyst in terms of the financial statement, company’s stock, negative news report. The potential red flags which are identified which analyzing the annual report of BHB Billiton is the decrease in the revenue from last two years, increase in account receivables or inventory in relation to sales. The trending decrease in the revenue indicates that company BHB Billiton is not able to generate high revenue in last two years (Arruñada, 2011). So, it is predicted that investment in the company is not good as the company is not able to generate more revenue from the sales.

While analyzing the annual report, it is also identified that company has more inventory in relation to the sales. In context to it, it is found that inventory of the company is increasing in the warehouses as the company is not able o target the large customer or satisfy them with the goods or services due to which sales are decreasing or trending down (Fowzia, 2011). In addition to this, there are some other issues which are also needed to be considered as a potential red flag such as issues related to increasing in the difference between the net income and cash flow, unexpected write off the assets and so on.

While analyzing and evaluating the balance sheet of the BHB Billiton Limited, it is observed that assets of the company are decreasing as a company has written off some of its assets in 2016 as compared to the years 2015 (BHB Billiton Limited, 2016). In addition to this, it is also determined that there are some changes which are found by the auditors who evaluate the financial performance of the company on the basis of financial data (Gordon & Fischer, 2011). The auditor’s changes are necessary changes which are to be done by BHB Billiton in their financial reporting. In an organization, there is a both internal and external auditor who provides the review to the competitive audit. Moreover, BHB Billiton also evaluates the external audit report in order to determine and evaluate the key potential red flags faced by the organization.

Section 6: Complaints with the conceptual framework

In this section, the conceptual framework is discussed in which it is identified that is there any conceptual framework regarding any complaints which is made for accounting policies and theories adopted. For achieving sustainable development, proper conceptual framework needs to be followed by the companies in order to avoid the mistake and financial misstatement. In the research study of Gordon & Fischer (2011), it has been clearly explained that long term policy framework helps the BHB Billiton in measuring the economy situation and competition level to some extent. The complaints related to a conceptual framework are under a complex regulatory framework where government officials and representatives take decisions or action against the issues. With the help of this, it becomes easy for the company to improve and develop their accounting framework in order to achieve an accounting objective.


The main purpose of this report is to analyze the disclosure quality of annual reports as well as accounting policies of the listed company, i.e., BHB Billiton Limited. The BHB Billiton Limited is using different significant accounting policies like consolidate principle; comparative statement policies, etc are used by the company for achieving a successful financial reporting. The accounting information disclosure quality of the company is sufficient and high when it measured with the accounting policies and strategies adopted. From this, study, it can also be interpreted easily that there are some potential red flags which are affecting the company in a negative manner like an increase in the inventory in relation to the sales; decrease in revenue from last two years affects the company’s performance to a large extent.

This report also explained different theories and policies which are influencing the accounting choices as well as a quality of disclosure to an extreme level. At last, it can be concluded that accounting policy and theories are included under the conceptual framework which helps in identifying the objective and general purpose as well as helps in providing the accounting guidance to the company in maintaining or developing a financial information in the best manner.


Arruñada, B. (2011) Mandatory accounting disclosure by small private companies. European Journal of Law and Economics, 32(3), pp. 377-413.

BAKAR, N. B., & Saleh, Z. (2011) Incentives for disclosure of accounting information in public sector: a literature survey. International Research Journal of Finance and Economics, 75(1), pp. 24-38.

Barr-Pulliam, D., Nkansa, P., Walker, K., appreciate helpful comments from Helen, W., Brown-Liburd, A. G., & Stefaniak, C. (2017) From Compliance to Strategy: Using the Three Lines of Defense Model to Evaluate and Motivate Internal Audit Contributions to Accounting Research.

Bebbington, J., Unerman, J., & O’Dwyer, B. (2014) Sustainability accounting and accountability. UK: Routledge.

BHB Billiton Limited. (2015) Annual Report [Online] Available at: (Accesses: 9th September, 2017).

BHB Billiton Limited. (2016) Annual Report [Online] Available at: (Accesses: 9th September, 2017).

Bolderdijk, J. W., Steg, L., & Postmes, T. (2013) Fostering support for work floor energy conservation policies: Accounting for privacy concerns. Journal of Organizational Behavior, 34(2), pp. 195-210.

Daniel, M., & Sojamo, S. (2012) From risks to shared value? Corporate strategies in building a global water accounting and disclosure regime. Water Alternatives, 5(3), pp. 636.

Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011) Predicting material accounting misstatements. Contemporary accounting research, 28(1), pp. 17-82.

Ding, Y., Hope, O. K., Jeanjean, T., & Stolowy, H. (2007) Differences between domestic accounting standards and IAS: Measurement, determinants and implications. Journal of accounting and public policy, 26(1), pp. 1-38.

Epstein, C. F., Seron, C., Oglensky, B., & Saute, R. (2014) The part-time paradox: Time norms, professional life, family and gender. UK: Routledge.

Fowzia, R. (2011) Strategic management accounting techniques: Relationship with business strategy and strategic effectiveness of manufacturing organizations in Bangladesh. World Journal of Management, 3(2), pp. 54-69.

Gordon, G. A., & Fischer, M. (2011) Accounting strategy to improve public higher education management. Journal of Accounting and Finance, 11(3), pp. 11.

Harris, P. G., & Symons, J. (2013) Norm conflict in climate governance: greenhouse gas accounting and the problem of consumption. Global Environmental Politics, 13(1), pp. 9-29.

Ho, S. S., Li, A. Y., Tam, K., & Zhang, F. (2015) CEO gender, ethical leadership, and accounting conservatism. Journal of Business Ethics, 127(2), pp. 351-370.

Kanellou, A., & Spathis, C. (2013) Accounting benefits and satisfaction in an ERP environment. International Journal of Accounting Information Systems, 14(3), pp. 209-234.

Kanodia, C. (2007) Accounting disclosure and real effects. Foundations and Trends® in Accounting, 1(3), pp.167-258.

Kanodia, C., & Sapra, H. (2016) A real effects perspective to accounting measurement and disclosure: Implications and insights for future research. Journal of Accounting Research, 54(2), pp. 623-676.

Macve, R. H. (2015) Fair value vs conservatism? Aspects of the history of accounting, auditing, business and finance from ancient Mesopotamia to modern China. The British Accounting Review, 47(2), pp. 124-141.

Marquis, C., Toffel, M. W., & Zhou, Y. (2016) Scrutiny, norms, and selective disclosure: A global study of greenwashing. Organization Science, 27(2), pp. 483-504.

Romney, M. B., & Steinbart, P. J. (2012) Accounting information systems. Boston: USA: Pearson.

Sinko, W., Lindert, S., & McCammon, J. A. (2013) Accounting for Receptor Flexibility and Enhanced Sampling Methods in Computer‐Aided Drug Design. Chemical biology & drug design, 81(1), pp. 41-49.

Steininger, K. W., Lininger, C., Meyer, L. H., Muñoz, P., & Schinko, T. (2016) Multiple carbon accounting to support just and effective climate policies. Nature Climate Change, 6(1), pp. 35.

Xi, F., Geng, Y., Chen, X., Zhang, Y., Wang, X., Xue, B., & Zhu, Q. (2011) Contributing to local policy making on GHG emission reduction through inventorying and attribution: a case study of Shenyang, China. Energy Policy, 39(10), pp. 5999-6010.



Leave a Comment