Essay: Analysis Of Cash Flow, Income, And Tax Of Rio Tinto.

1.From your firm’s financial statement, list each item of reported in the CASH FLOWS STATEMENT and write your understanding of each item. Discuss any changes in each item of CASH FLOWS STATEMENT for your firm over the past year articulating the reasons for the change.

2.Provide a comparative analysis of your company’s three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years.

3.What items have been reported in the other comprehensive income statement

4.Explain your understanding of each item reported in the other comprehensive income

statement

5.Why these items have not been reported in Income Statement/Profit and Loss Statement

6.What is your firm’s tax expense in its latest financial statements?

7.Is this figure the same as the company tax rate times your firm’s accounting income? Explain why this is, or is not, the case for your firm.

8.Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.

9.Is there any current tax assets or income tax payable recorded by your company? Why is the income tax payable not the same as income tax expense?

10.Is the income tax expense shown in the income statement same as the income tax paid shown in the cash flow statement? If not why is the difference?

11.What do you find interesting, confusing, surprising or difficult to understand about the treatment of tax in your firm’s financial statements? What new insights, if any, have you gained about how companies account for income tax as a result of examining your firm’s tax expense in its accounts?

1.

On analysis of the cash flow statement of Rio Tinto, the third largest mining company in the world, some important constituents of the cash flow statements were brought into the lime light. The company’s cash operations, like any other company is broadly classified into three categories, operating, financing and investing. Operating activities included payment of interest and taxes. Investing activities included purchase and sale of financial assets, plants, building and equipment’s Call, Chen and Tong., 2013). While financing activity include payment of dividends, borrowings, loans and other financial cash flows.

Some changes were seen in all the three activities. Payment of interest and taxes had increased from $1137 to $1297 million in 2017. Disposal of subsidiaries had also increased from $761 million in 2016 to $2675 in 2017. Sale of plant and other equipment’s had not been pretty much in the year 2017. In the financial front, payments of equity dividends to the equity shareholders of Rio Tinto had increased from $ 2725 million in 2016 to $ 425 in 2017. Repayment of borrowings had also decreased from $9361 in 2016 to $2795 in 2017.

2.

A comparative analysis of the performance of the company in all the three cash related areas has been provided below:

(Source: Rio Tinto, 2017)

On close analysis of the different activities of the company, it could see, that for the past three years, the performances have been fluctuating. In 2015 and in 2017, the financing activity cash flow had been dismal and in 2016 it was quiet high, crossing the $9000 mark. The company had a dismal performance in the 2017 period, which needs to be looked after. In case of the operating activities, the performance of Rio Tinto had been normal and in the year 2017, it had increased to the $13,000 mark, which is a positive sign for the overall operations of Rio. For the financing part, the performance had been abysmal and in 2017 itself the company had performed miserably, which needs to be looked after by the senior management of the company (Floris, Grant and Cutcher, L., 2013).

3.

Actuarial gains on post retirement plans, adjustments regarding the deferred tax on the post-retirement benefits. Cash flow hedge and currency translation adjustments are some of the items which have been included in the other comprehensive portion of the annual report of the company.

4.

The currency translation reserve’s main purpose is the conversion of the profits and the losses of the foreign subsidiaries of the parent company. The operations of the foreign companies are converted into the reporting currency of the parent company’s country of operation. Whereas the cash hedging reserve’s main purpose remains the protection of the cash operations of the parent company against any fluctuation in the cash flow of the company (Taylor and Richardson., 2013). It is done in order to provide protection to the company from the various kinds of financial ill-effects of the financial mishaps of the global economy.

5.

These items have not been reported in the income statement of the company because of the following two reasons:

• These items are treated to be an external part of the company and are viewed a separate from the central or the main operations of the company.
• The income statement of any company is primarily utilized for the purpose posting important data and financial information which form the main crux of any company’s operations, example gross profit, net profit, expenses, incomes, and gains, of various kinds (Pavlovi? and Bogdanovi?, 2013).

Other Comprehensive Income Statement

6.

The current income tax charge for Rio Tinto has been $3270 million for the year 2017, which was $2115 million in the year 2016. The deferred income tax for the company was $695 million in 2017, which was ($ 548) million in 2016. The income tax charge for Rio is 30% for the year 2017.

7.

On careful analysis of the income of Rio for the year 2017, some discrepancy was found in the reporting of the income tax charged. The tax charged for the year 2017 was $ 3270 million and if the amount is calculated by multiplying the income for the year 2017 with the required percentage of 30%, (12, 816 *30%), then the amount comes to $3844, which is different from the taxed amount charged $ 3270. There are certain reasons for this gap in the two figures of financial statements regarding the income tax which is charged and the income tax which is paid. The adjustments of various items of appearing in the general profit and loss accounts are being done, which are not actually reflected in the income statement of the company (Chang al., 2013). This is creating a huge gap between the two figures.

8.

The deferred tax assets of the company for the year 2017, stood at $3395 million, which was $ 3728 in the year 2016. The deferred tax liability of the company for the year 2017 was $6440 million and for the year 2016 was $ 6340 million (Rio Tinto, 2018). The primary reason for the recognition of the deferred assets and liabilities of the company is to protect the company against any kind of future tax related issues or any kind of contingencies arising from changes in government policies, market condition, which might have a direct impact on the share prices and the overall profitability of the company.

9.

The amount of corporate income tax paid by Rio Tinto for the year 2017 is $2307 million and the income tax expense was $ 1521. The amount of income tax payable by the income as seen from the income reports of the company was around $ 3270 million, which presents a stark difference between the two, which is due to the presence of some adjustments which are necessary from the perspective of the preparation of the financial statements. These items are generally incurred in accordance with the actual tax situations of the daily operations; whereas, the taxes based on the income taxes are a result of the principles which have been laid down by the accounting standards of ASIC and IFRS.

10.

When the taxes which have been mentioned in the cash flow statement of the company, are presented, it stands at $ 2307 in 2017 and $1521 in 2016. Consequently, when the  operations of the company in the context of the income tax which has been mentioned in the income statement is seen, a big difference emerges as the figure stood at $3207 and $2115 in 2017 and 2016 , respectively. The main difference lies in the impact or the difference of the effects of income tax on certain figures of gains and losses of varying degrees which are related to the different parts of the financing and investing operations of the company. The varying degree of differences in the tax treatment, treatment of deferred assets and liabilities are some of the reasons which is causing this sought of differences.

11.

After careful scrutiny and analysis of the financial statements of the company, a series of information about the way of preparation of the cash flow statements, treatment of income tax and the relevance of the different parts of the other comprehensive income statement of the company is also used. No such surprises or strange events have been reported in the reporting of the financial statements of the company. It has been noticed and consequently observed that the company has strongly adhered to the various provisions of the Australian income tax body and the other provisions of the ASAB, ASIC and A+IFRS.

References

Call, A.C., Chen, S. and Tong, Y.H., 2013. Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?. Contemporary Accounting Research, 30(2), pp.438-465.

Castillo, S., Jesús, D., de la Campa, A.M.S., González-Castanedo, Y., Fernández-Caliani, J.C., Gonzalez, I. and Romero, A., 2013. Contribution of mine wastes to atmospheric metal deposition in the surrounding area of an abandoned heavily polluted mining district (Rio Tinto mines, Spain). Science of the Total Environment, 449, pp.363-372.

Chang, X., Dasgupta, S., Wong, G. and Yao, J., 2014. Cash-flow sensitivities and the allocation of internal cash flow. The Review of Financial Studies, 27(12), pp.3628-3657.

Farshadfar, S. and Monem, R., 2013. Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), pp.111-133.

Floris, M., Grant, D. and Cutcher, L., 2013. Mining the discourse: Strategizing during BHP Billiton's attempted acquisition of Rio Tinto. Journal of Management Studies, 50(7), pp.1185-1215.

Pavlovi?, M. and Bogdanovi?, J., 2013. Cash flow statement. Škola biznisa, (3-4), pp.129-147.

References:

Richardson, G., Taylor, G. and Lanis, R., 2013. Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms. Journal of Contemporary Accounting & Economics, 9(2), pp.136-150.

Riotinto.com. (2018). [online] Available at: https://www.riotinto.com/documents/RT_taxes_paid_2017.pdf [Accessed 18 May 2018].

Riotinto.com. (2018). Global home. [online] Available at: https://www.riotinto.com/default.aspx [Accessed 18 May 2018].

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.