The report intends to analyse the financial statements of three ASX listed organisations functioning in the same industrial sector. The organisations chosen include BHP Billiton, Rio Tinto and Ausdrill Limited, as they operate in the Australian mining sector. The report takes into account the evaluation of the latest annual reports of the three organisations including the assessment of segments such as equity and liability, other comprehensive income statement and corporate income tax.
BHP Billiton is one of the leading mining companies in Australia, which is involved in inventing, acquiring, developing and marketing natural resources globally. The main products of the organisation include copper, petroleum, coal and iron ore. It has been founded in 1851 with an employee base of 27,161 staffs (BHP 2018).
Rio Tinto is engaged in mining, finding along with processing mineral resources globally. The organisation provides copper, aluminium, molybdenum, silver, industrial minerals, gold, titanium dioxide, borates, iron ore, salt, uranium, metallurgical coal and iron ore. It is an Anglo-Australian organisation established in 1973 with workforce of around 46,807 staffs (Riotinto.com 2018).
Ausdrill Limited functions as a global mining services organisation. The main operations include Drilling Services Australia, Contract Mining Services Africa, Equipment Services and Supplies and other segments. The organisation is engaged in reverse circulation, rotary air blast, diamond drilling, bores production and monitoring, surface hole drilling, rotary air blast and others. The organisation is founded in 1987 having employee base of around 5,278 (Ausdrill.com.au 2018).
From the annual reports of the three chosen organisations, it is apparent that all of them have certain equity items in their balance sheet statement.
As per the annual reports of Rio Tinto, there are three main equity items, which include share capital, reserves and retained earnings. The share capital of the organisation has increased from $4,174 million in 2015 to $4,360 million in 2017 owing to the rise in number of equity shares. Increase in reserves could be observed from $9,139 million in 2015 to $12,284 million in 2017 owing to the increase in foreign currency translation reserve, hedge reserve and others (Brigham et al. 2016). Finally, increase in retained earnings could be observed from $19,736 million in 2015 to $23,761 million in 2017, as it has managed to increase its profit over margin over the years (Riotinto.com 2018).
For BHP Billiton, the main equity items include share capital, treasury shares, reserved and retained earnings. No change could be observed in share capital from 2015 to 2017, as the organisation has not issued additional equity shares in the market (Miller-Nobles, Mattison and Matsumura 2016). Treasury shares are observed to decline significantly from $76 million in 2015 to $3 million in 2017, as it has minimised its share buyback strategy. Reserves are observed to decline from $2,557 million in 2015 to $2,400 million in 2017 due to the fall in hedge reserve and foreign currency translation reserve (Marshall 2016). Finally, retained earnings have fallen from $60,044 million in 2015 to $52,618 million in 2017 due to decline in overall profit level of the organisation (BHP 2018).
In case of Ausdrill Limited, the three equity items include contributed equity, reserves and retained earnings. Like BHP Billiton, no change could be observed in contributed equity of the organisation due to no additional shares issued in the meantime. However, there are significant fall in reserves over the three-year period. Finally, significant rise in retained earnings could be witnessed from 2015 to 2017 due to considerable increase in profitability (Ausdrill.com.au 2018).
From the annual report of Rio Tinto in 2017, there is presence of both current and non-current liabilities. The current liabilities include borrowings and other financial liabilities, trade payables, tax payable and provisions comprising of post-retirement benefits. The total current liabilities have increased mainly due to rise in trade payables. Non-current liabilities comprise of borrowings and other financial liabilities, trade payables, deferred tax liabilities, tax payables and provisions comprising of post-retirement benefits. However, non-current liabilities have decreased owing to considerable decline in long-term borrowings and other financial liabilities (Riotinto.com 2018). As a result, the total liabilities have decreased from 2015 to 2017 for Rio Tinto.
In case of BHP Billiton, the current liabilities constitute of trade payables, interest bearing liabilities, other financial liabilities, current tax payable, provisions and deferred income. The current liabilities have declined from $12,853 million in 2015 to $11,366 million in 2017 due to fall in trade payables. On the other hand, the non-current liabilities include trade payables, interest bearing liabilities, other financial liabilities, deferred tax liabilities, provisions and deferred income. There has been significant decline in non-current liabilities from $54,035 million in 2015 to $42,914 million in 2017, as interest bearing liabilities have declined considerably. This has resulted in decline in total liabilities of the organisation in 2017 (BHP 2018).
According to the annual reports of Ausdrill Limited, current liabilities include trade payables, borrowings; current tax liabilities and employee benefit obligations, which have increased owing to increase in employee benefit obligations. The non-current liabilities include borrowings, deferred tax liabilities and employee benefit obligations. The amount has declined from $433,300,000 in 2015 to $408,852 million in 2017 due to fall in long-term borrowings (Ausdrill.com.au 2018).
In order to contrast the debt and equity position of the three organisations, debt-to-equity ratio is deemed to be the most suitable measure.
From the above table and figure, it could be observed that all three organisations utilise more debt capital rather than equity financing for meeting their capital needs. Out of these organisations, the maximum amount of debt capital is used by Rio Tinto and Ausdrill Limited. However, in terms of liabilities, Ausdrill Limited has the lowest liability amount compared to the other two organisations. Thus, in terms of financial leverage, BHP Billiton has the lowest amount of risk followed by Ausdrill Limited and Rio Tinto.
Cash flow statement:
From the cash flow statements of BHP Billiton, the main items under operating cash flows include dividends received, interest paid and interest received, income tax refund and payment and changes in assets and liabilities. These cash flows have fallen considerably from 2015 to 2016; however, improvements could be observed in 2017. The investing cash flows of the organisation mainly include purchase of property, plant and equipment, exploration expense, proceeds from asset sale and proceeds from divestment of operations, subsidiaries and joint operations.
The investing cash flows have fallen over the year mainly due to decline in purchase of property, plant and equipment implying less investment on fixed assets (Gordon et al. 2017). In case of financing cash flows, the significant items include proceeds from interest bearing liabilities, settlements or proceeds from instruments associated with debt, repayment of interest bearing liabilities, ordinary share proceeds, share purchase for staffs and others. These cash flows have increased significantly in 2017 owing to lower proceeds generated from interest bearing liabilities. However, the significant rise in operating cash flows have offset such increase due to which increase in closing cash balance could be observed in 2017 (BHP 2018).
In case of Rio Tinto, the major items falling under operating cash flows include dividend from equity-accounted units, consolidated operational cash flows, payment of net interest and dividend and tax payment. These cash flows have increased considerably from 2015 to 2017 owing to increase in consolidated operational cash flows. The investing cash flows of the organisation constitute of purchase and sale of fixed and intangible assets, disposals of subsidiaries, joint ventures and subsidiaries, purchase and sale of financial assets acquisitions of subsidiaries, joint ventures and subsidiaries.
These cash flows have fallen from 2015 to 2017 due to increased earnings from disposals made. The financing cash flows include payment of equity dividends, proceeds from and repayment of borrowings, share repurchase and others. The main reason that these cash flows have increased in 2017 is due to share repurchase and payment of equity dividend. As a result, positive increase in cash balance could be observed in 2017 (Riotinto.com 2018).
For Ausdrill Limited, the main items falling under operating cash flows include customer receipts, supplier payments, interest receipt and payment, income tax refund and payment along with receipt of management fee. These cash flows have decreased from 2015 to 2017 due to fall in receipts from customers.
The investing cash flow items primarily include payments for fixed assets and investments, proceeds from fixed assets and business sale and others. The reason that these cash flows have increased from 2015 to 2017 is due to considerable payment for fixed assets, particularly, property, plant and equipment. The financing cash flow items include repayment of hire purchase, secured borrowings and lease liabilities, dividend payment to shareholders and proceeds from and repayment of unsecured borrowings. These cash flows have decreased considerably due to repayment of secured borrowings. Due to this, increase in cash balance could be observed in 2017 compared to 2016 (Ausdrill.com.au 2018).
It could be observed from the above figure that the operating cash flows of the organisation have declined from 2015 to 2017 and this denotes falling business income from operational business functions (Khansalar and Namazi 2017). After this, the organisation has decreased its investment over the years by minimising the payment of fixed assets. However, it has incurred huge expenses for repaying interest bearing liabilities (BHP 2018).
Froom the above figure, it is apparent that there is huge increase in operating cash flows due to increased earnings from consolidated operational cash flows. However, there is fall in investing cash flows due to earnings from disposals (Reid and Myddelton 2017). Finally, there has been rise in financing cash flows due to share buyback by the owners of the organisation (Riotinto.com 2018).
The above figure clearly indicates that the operating cash flows have fallen from 2015 to 2017 due to decline in customer receipts. However, huge expenses incurred for property, plant and equipment have increased the investing cash flows for Ausdrill Limited. On the other hand, financing cash flows have fallen in 2017 from 2015 due to no expenses incurred in repaying secured borrowings (Ausdrill.com.au 2018).
Based on the above analysis, it could be stated that BHP Billiton has earned maximum amount from operating cash flows followed by Rio Tinto and Ausdrill Limited, even though the trend is declining over the years. It could be witnessed that all organisations are involved in investment of buying property, plant and equipment, intangibles and other business acquisitions. When all the aspects are combined together, it could be observed that they have made huge investments. Finally, the three organisations have incurred huge expenses for interest, finance costs and dividends, which have resulted in increased cash flows.
Other comprehensive income statement:
From the annual reports of BHP Billiton, the main items reported in other comprehensive income statement include available for sale investment, cash flow hedge and the items that could not be reclassified to the income statement (BHP 2018).
For Rio Tinto, the main items included in its other comprehensive income statement are cash flow hedges, foreign currency translation reserves, profit or loss on foreign operation transactions and others (Riotinto.com 2018).
Ausdrill Limited has reported certain items in its other comprehensive income statement that include foreign currency translation, net exchange differences, non-controlling interests and others (Ausdrill.com.au 2018).
The three organisations have not recorded the above-mentioned items in other comprehensive income statement, as their nature is extraordinary and they are not used for carrying out their daily business operations. The organisations use them for disclosing their business activities during the year (Black 2016). Therefore, these reasons prevent the organisations to report the items in their income statement for which comprehensive income statement is used to report them.
From the annual reports of the three organisations, cash flow hedges are common in other comprehensive income statement. Rio Tinto has registered the highest other comprehensive income followed by Rio Tinto and Ausdrill Limited, as identified from their annual reports. Moreover, it could be seen that these organisations have taken into consideration foreign currency translation transactions in their other comprehensive income statement. These have resulted in attributing income to non-controlling interests as well as shareholders of the organisation (Bratten, Causholli and Khan 2016).
Therefore, if these items are recorded in the income statements of the three chosen organisations, the impact would be on net profit directly with increase or decline in extraordinary items. This clearly implies that the profitability aspects of the organisation would be affected by inclusion of these items in other comprehensive income statement (Graham and Lin 2018).
The performance of entities need not depend on comprehensive business items, as they are depicted characteristically in their annual reports. Moreover, it is evident that these items are extraordinary and periodic in nature. Furthermore, the items incorporated in other comprehensive income statement are mainly extraordinary in nature. Hence, when all these aspects are present, the management of the business organisations need not use other comprehensive income for analysing the performance of the managers (Khan, Bradbury and Courtenay 2018).
Accounting for corporate income tax:
The annual reports of the organisation have disclosed the tax expenses incurred for both the existing year and the previous year. Based on the annual report of BHP Billiton in 2017, the organisation has incurred income tax expense of $3,933 million in 2017, while it has received income tax benefit of $1,297 million in 2016. Thus, it has experienced increase in tax expense in 2017 (BHP 2018).
As observed from the 2017 annual report of Rio Tinto, the income tax expense of the organisation has been $3,965 million in 2017 compared to $1,567 million in 2016, which signifies that the tax amount has increased considerably over the year (Riotinto.com 2018).
The 2017 annual report of Ausdrill Limited discloses income tax expense of $13,885,000 in 2017 in contrast to $4,581,000 in 2016. This denotes that the organisation has experienced significant increase in tax expense in 2017 like the other two organisations (Ausdrill.com.au 2018).
In order to compute the effective tax rate of BHP Billiton, Rio Tinto and Ausdrill Limited, the following calculation is performed, which is shown in the form of a table as follows The effective tax rate of the organisations implies the average tax rate, which they use for computing the taxable amount on business profit (Richardson, Taylor and Lanis 2015). By dividing the earnings before tax by income tax expense, effective tax rate is considered. The above table clearly shows that BHP Billiton has incurred the highest effective tax rate followed by Rio Tinto and Ausdrill Limited.
One of the most vital aspects for financial reporting of business organisations is deferred tax assets and liabilities and the organisations are liable to disclose the amounts in their financial statements at the end of an accounting period (Dyreng, Hoopes and Wilde 2016). From the annual reports of BHP Billiton, Rio Tinto and Ausdrill Limited, it could be seen that they have disclosed the amounts of deferred tax assets and deferred tax liabilities supported by financial footnotes. The main reason that these items are recorded is that provisional variation exists between tax profit and accounting profit. Another reason that supports their inclusion in the financial reports includes carry forward of tax assets and tax liabilities in the existing year from the previous period (Anesa et al. 2018).
From the annual report of BHP Billiton in 2017, it is found that deferred tax assets amount to $5,788 million in 2017, which have been $6,147 million in 2016. Hence, there is downfall in the amount of deferred tax assets. On the other hand, the organisation has deferred tax liabilities of $3,765 million in 2017 compared to $4,324 million in 2016 implying decline in the same (BHP 2018).
From the annual report of Rio Tinto in 2017, the amount of deferred tax assets has been $3,395 million in 2017 compared to $3,728 million in 2016. On the other hand, deferred tax liabilities have increased from $3,121 million in 2016 to $3,628 million in 2017 (Riotinto.com 2018).
As per the 2017 annual report of Ausdrill Limited, deferred tax assets have been $36,372,000 in 2017 in contrast to $37,300,000 million. On the contrary, deferred tax liabilities are observed to fall from $23,584,000 in 2016 to $22,077,000 in 2017 (Ausdrill.com.au 2018).
From the above table, it could be seen that Rio Tinto has the highest cash tax rate of 31.08% followed by BHP Billiton and Ausdrill Limited having cash tax rates of 30.73% and 29.21% respectively.
The main reason that the cash tax rate and the book tax rate do not resemble each other is that the organisations project the cash tax rate depending on the existing year. However, the estimation of book tax rate is conducted depending on the existing and the upcoming year (Taylor and Richardson 2014). When cash tax rate is computed, the deferred tax assets, deferred tax liabilities and weight of interest are taken into consideration, which could result in tax savings. However, in order to compute the book tax rate, the above items are not taken into consideration (Kawano and Slemrod 2016).
From the above discussion, it is clear that all the three organisations comprising of BHP Billiton, Rio Tinto and Ausdrill Limited are dependent primarily on debt financing so that adequate amount is obtained for financing the business operations. Moreover, it could be witnessed that these organisations collect considerable cash amounts from the customers and they invest heavily for the purchase and repayment of fixed assets, intangible assets and others.
Along with this, it has been analysed that all the three organisations do not consider extraordinary items in other comprehensive income statement, since they do not have direct associations with the day-to-day business activities of the organisations. From the taxation section, it is evident that all the three organisations have to take into account finance costs, deferred tax assets as well as deferred tax liabilities so that the cash tax rate could be calculated effectively.
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