Comparative Analysis Of Debt And Equity Position Of Four Public Limited Companies Listed On ASX - Essay.

(i) Do your own research and critically discuss whether the financial accounting and reporting should be regulated or manager should be allowed to disclose financial accounting information voluntarily.

(ii) Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB? 

 Select 4 public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name.

In this section, go to your firms’ annual reports and save to your computer your firms’ latest annual reports consecutively for last four years. Do not use your firms’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firms’ financial statements carefully and include information from these footnotes in your answer. You need to do the following tasks:

(iii) From your firms’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past four years articulating the reasons for the change.

(iv)  Provide a comparative analysis of the debt and equity position of the four firms that you have selected. Please prepare the above answers in your own words.

Importance of Corporate Disclosures and Adoption of IFRS

An organization's financial statements are analyzed in different ways by different users because the requirement of information varies from user to user. On the other hand, organizations carry an objective of keeping their users satisfied with their reporting styles. Therefore, they try to disclose every possible information including terms and conditions so that users can extract their required information and use it for making best decisions.

The today's observations show us that the disclosures requirement isn’t sufficient enough to satisfy the needs of the intended users. The corporate environment is separated into two groups of users where one set of users are satisfied with the sufficiency of information provided while the other set of users aren't satisfied and are looking for more information to analyze the reports in a better way. Hence, it has become important to carry out a regulation of such financial reports so that whether the entity has made sufficient corporate disclosures or not can be regulated. The preparation and presentation of such reports along with corporate disclosures are important as it reflects an organization's image in terms of its financial performance and position (Alvarez, 2013).

All the companies working within the same industry should adopt similar practices and policies to represent corporate disclosures so as to maintain a consistency among them and have a common approach towards the reporting requirements (Easton, 2010). However, it is important for the management to judge the materiality of an information because immaterial information, if disclosed, can cause damage to the organization as a user may not have the same perception as the company might be having towards it. An auditor's duty also plays an important role as they can advice the management regarding disclosures that should be made and disclosures that are irrelevant. For such requirements, the standard board defines an accounting framework within which an organization should work as the framework guides the managers regarding corporate disclosures requirements. Such use of financial regulation helps the intended users to have a comparative analysis of different companies, whether in the same industry or different industries.

The another important thing an organization should consider is its 'control' and it should keep on regulating that because stronger the control is, the more reliable the internal sources are and the better is the quality of the disclosures. The manager should understand that the disclosures of information shouldn't be made voluntarily but as per the required requirements. The main objective behind such detailed disclosures is delivering the best possible transparency of such reports. Hence, we can conclude that the reporting of financial information is idealistic in nature and the organizations should maintain a control on the disclosures of information. Transparency doesn't mean disclosing every information and making the reports voluminous in nature. It means disclosing all the relevant and significant information that discloses the true and fair view of an entity. Where the management provides information that make their reports look voluminous, they somewhere divert from their main objective of delivering qualitative reports an in that case, the organization is suppose to carry out an insensible act.

Components that Together Form Equity

IFRS is a defined framework for preparation and presentation of financial statements having relevance globally and guides an organization for the collection and presentation of data as per the regulations prescribed by International Accounting Standards Board (IASB). It is a broader concept, as observed by AASB and FRC, which is based on strategic implementation, helps entities to report as per Corporations Act, 2001 and other relevant acts. The adoption of such reporting methods helps entities to ensure that they are working within the guidelines set by the AASB framework. The AASB is said to follow a policy of neutrality because what's important is recording and reporting of every event or transaction, irrespective the entity is a profit making entity or not for profit making entity.

The AASB is said to have adopted various standards, which are classified as Australian Accounting Standards now, in order to align with the guidelines and policies set up by the Financial Reporting Council (FRC). It is important tod discover whether all the organizations within an industry in Australia are aligning with IFRS system as issued by IASB so as to maintain a consistency among various financial reports and also, with consistency, the financial results can be measured & compared reliably. IFRS system is a strong global movement and the accounting & auditing industry will totally depend on such system having an impact on the international market.

However, adoption or implementation of IFRS norms haven't been made compulsory yet for all the entities because IFRS recommends huge changes and for an entity, it is not possible to totally change its reporting style in one go. Having changes incorporated in the financial sector of the market is not an easy task because incorporation doesn't need only making changes but also includes hiring of experts, installation of better IT systems and most importantly, time. Considering such relevant reasons, the board hasn't make IFRS norms compulsory for all countries in one go. However, earlier or later, the board has an aim of bringing IFRS standards into effect globally so as to have a global consistency all over the world. However, we should consider that pros of such a system when adopted by the accounting sector, that is, it will boost the economic environment of a country and will provide useful benefits to an organization such as transparency, better compliances, a good reputation in terms of both national and international status, etc. The countries currently working with the framework defined by General Accepted Accounting Principles (GAAP) should try getting into the IFRS framework so that the aim of having uniform principles globally can be achieved and problems regarding convergence cannot be a problem in the future (Elaine, 2015).

Analysis of Four Public Companies

The baisc components that together forms equity are :

• Equity contributed
• Reserves
• Retained Earnings

Contributed Equity : As the name suggests, the equity comprises of funds contributed by the shareholders or investors also known as shareholder's funds. Such shareholders gets shares of the company in return. This equity also represents the capital of shares owned by the entity itself. Such equity contributors or shareholders are considered as the owner of the company as there is no policy of getting dividends or returns or in fact, getting back their money in case of liquidation (Fridson & Alvarez, 2012). That is why, where an investor is ready to bear so much of risk, that are given a status of company’s owner to the extent of investment made by them. The company may issue new shares in the market that increases its equity capital. It may also opt issuing bonus shares to the shareholders existing at the date of issue after fulfilling of various other conditions (Taillard, 2013).

Reserves : Various types of reserves are there created according to the needs of an organization such as hedging reserves, remuneration reserves, general reserves, debenture redemption reserves, statutory reserves, reserves created due to translation of foreign currencies, etc (Girard, 2014). Hedging reserve is a reserve for protection against the future losses that may be incurred on the derivative instruments. The remuneration reserve is made so set aside certain amount so as to make immediate payments of remuneration when calculated appropriately and accurately. The main reason of not having an accurate calculation of remuneration is the continuous increment or decrement in the remuneration that changes over the period of time (Skonieczny, 2012). Similarly, asset revaluation reserve is also prepared by some organizations in order to compensate for losses that might arise due to revaluations or depreciation or fluctuation in prices due to fair value measurement or losses due to adverse environmental conditions. General reserve isn't prepared for any particular reason but in general to save the organization from immediate adverse circumstances by providing funds so that the operations of the entity are carried out easily and the entity can enjoy flexibility (Ittelson, 2009).

Retained Earnings: Also known as plough back of profits, retained earnings are the earnings earned by an organization and reinvested into it. This is done to use such earnings in the enhancement of operations of the business and also, to meet up with adverse situations in the later future. This type of reserves is also called safety reserves or a safety reserve can be created out of such retained earnings (Lyon, 2010).

Let us now have an analysis of the four public companies that are well known in Australia through below stated charts:

The above chart makes us to conclude that the business of BHP Billiton on an overall basis has been declining since previous years and as a result, it might visualize a downfall in the market. The analysis says that the major reason behind this downfall can be due to employee share awards that are being entertained by an entity. Because of this, the company has huge deductions in the reserves of the company and transfers were made accordingly to the employee share awards (McLaney & Adril, 2016).

From the above analysis, we observe that the organization's equity is falling on a continuous basis and as a result, a fluctuation might be experienced (Simpson, 2012). This fall would be a result due to huge expenditure over materials which are happening due to contacts already existing. However, the best part observed is the sufficient amount of retained earnings the company is maintaining from its past profits.

RIO TINTO

The above table shows that the company is having sufficient amount of retained earnings and also, it is having a good financial statement in terms of accumulation and comprehensiveness. Such retained earnings are a result of huge profits earned by the entity during all the previous years. We notice a high amount of comprehensive and accumulated income in the company's financial reports which somewhere also reflects the strong control over the business environment by the management of the company (Parrino, 2013).

On analyzing a company belonging to fast moving consumer goods (FMCG) sector, we visualize that while the company is experiencing a decline in its equity, on the same hand, it is experiencing an increase in its common stock (Penman, 2012). We also observe that there is a deficiency in the accumulated comprehensive income which might be due to troubles faced by it in the fields of mining and other businesses.

With clearly analyzing the data provided in the above chart, we can conclude that fast moving consumer goods have quite high debt equity ratio which is a negative point in terms of burden the company might be facing such as obligations regarding interest payments and redemption payments which would be indirectly affecting the operations of the entity. Coming to BHP Billiton, we see that the company's debt equity ratio is at equilibrium which signifies an efficient and effective financial structure of the company (Ramírez, 2018).

Coming to Orica, our analysis indicates alot of problems that the company might be facing in the near future because of their practices of continuously expanding their debt equity ratio which also indicates the risks in their financial structure. In case of Rio Tonto, a balance is being observed between the heavy retained earnings and the high debt equity ratio which means that the company is having a strong liquidity position so as to meet up with their debt obligations. Also, Tree Company is expected to recover all its losses with the growth which can be clearly seen through the results of its previous years (Siciliano, 2015).

Conclusion

After having an analysis of both the equity and debt components of the four public companies, it is evident enough that all the information’s aren't required to be disclosed on a voluntarily basis. Also, the required disclosures that are made should be regulated. The analysis of the above four companies in the mining sector helped us in understanding the importance of having an equilibrium between the debt and equity components of an organization so that smooth functioning of the business operations can be achieved.

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