Select three 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 companies’ annual reports and save to your computer your firms’ latest annual reports consecutively for last three years. Do not use your companies’ 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 companies’ financial statements carefully and include information from these footnotes in your answer.
You need to do the following tasks:
EQUITY & LIABILITY
- From your companies’ financial statements, list each item of equity reported and write your understanding of each item. Discuss any changes in each item of equity for your firms over last three years articulating the reasons for the change.
- From your companies’ financial statements, list each item of liability reported and write your understanding of each item. Discuss any changes in each item of liability for your firms over last three years articulating the reasons for the change.
- Provide a comparative analysis of the debt and equity position of the three firms that you have selected.
CASH FLOWS STATEMENT
- From the financial statement of your chosen companies, list each item 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 companies over last three years articulating the reasons for the change.
- Provide a comparative analysis of your companies’ three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years.
- Also provide a comparative analysis of the three companies that you have selected explaining the insights that you can get from the comparative analysis.
OTHER COMPREHENSIVE INCOME STATEMENT
What items have been reported in the other comprehensive income statement for each company?
- Why have these items not been reported in Income Statement/Profit and Loss Statements?
- Provide a comparative analysis of the items shown in the other comprehensive income statement section for the three companies. If these items were included in the income statement / profit and loss statements of each company, how would the profit attributable to shareholders of the company be affected?
- Should other comprehensive income be included in evaluating the performance of managers of the company?
ACCOUNTING FOR CORPORATE INCOME TAX (15 Marks)
- What are the tax expenses shown in the latest financial statements of the three companies that you have selected?
- Calculate the effective tax rate for all three companies that you have selected. Effective tax rate is calculated as (income tax expense / earnings before tax). Which one of the companies has the higher effective tax rate?
- Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.
- Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies?
- Please calculate the cash tax amount for all three companies using the book tax amount, changes in the deferred tax assets and deferred tax liability (please do your own research for your better understanding of these concepts and the method of calculating the cash tax amount the book tax amount.)
- Calculate the cash tax rate for all three companies. Which company has higher cash tax rate? (Please do your own research to familiarise yourself with how to calculate cash tax rate).
- Why is the cash tax rate different from the book tax rate?
Please remember some aspects of your companies’ treatment of tax can be a very complicated area, particularly for some companies. For a better understanding of the concepts included in the assignment that has not been introduced in the class, please do your own research.
|Accounting For Business||May 30 2019|
PART A Financial Ratios and Financial Statement analysis
- Ratios Calculation: The given information and calculations can be presented as follows:
|30 June Year 2019||Year 2018||Year 2017|
|Net credit sales||$ 6,30,000||$ 4,90,000|
|Cost of goods sold||$ 2,90,000||$ 2,50,000|
|Cash||$ 18,000||$ 12,000|
|Accounts receivable||$ 70,000||$ 60,000||$ 78,000|
|Inventory||$ 1,30,000||$ 1,50,000||$ 1,30,000|
|Current liabilities||$ 1,05,000||$ 81,000|
|Period to Pay||30 days|
|Industry Average Inventory Turnover||101 days|
The calculation of ratios and formulae are:
|Ratio||30 June Year 2019||Year 2018||Formula|
|Quick Ratio||0.17||0.15||Quick Assets/CL|
|Accounts Receivable Turnover (times)||9.69||7.10||Net Credit Sales/Average Receivables|
|Accounts Receivable Turnover (days)||37.7||51.4||365/Accounts Receivables Turnover|
|Inventory Turnover (times)||2.07||1.79||COGS/Average Inventory|
|Inventory Turnover (days)||176.2||204.4||365/Inventory Turnover|
- Ratio Analysis:
- Regarding short term solvency, the focus should be on current ratio and quick ratio. The company’s current ratio reduced from 2.74 to 2.08 in year 2019. A current ratio of 2.0 indicates ideal level where the current assets provide 200% buffer for the current liabilities. The company has a level above 2.0 which indicates sufficient coverage.
- However, quick ratio, also known as acid test ratio further reduces current assets by excluding non-liquid current assets such as, inventory and accounts receivable. This is because in a situation where company needs to discharge its current liabilities immediately, these types of non-liquid current assets may not be useful as they may not be convertible to cash immediately. The company’s level of quick ratio is quite low at 0.15 in 2018 and 0.17 in 2019, indicating that it may be unable to discharge its current liabilities immediately, if the need arises. However, the slowly rising level of quick ratio y-o-y basis indicates that company may be making an effort to improve the level.
- The turnover ratios are also known as efficiency ratios as they indicate how efficiently a company is utilizing its assets. The accounts receivable turnover ratio has improved considerably y-o-y basis from 51.4 days in 2018 (7.10 times) to 37.7 days in 2019 (9.69 times). This indicates that on an average, payment from debtors is received within 37.7 days. However, the average period to pay in the industry is 30 days and company still has scope to reduce this ratio to match the industry average period. The company’s inventory turnover ratio has also improved considerably y-o-y basis from 204.4 days in 2018 (1.79 times) to 176.2 days in 2019 (2.07 times). This indicates that on an average, the inventory is turned around in 176.2 days. However, this is very high as compared to industry average of 101 days. This is a big risk as the inventory entails a huge cost of maintenance, warehousing etc. Further, high period of inventory may also cause obsolescence risk. It may be prudent to review inventory levels and reduce the production of items that are not selling or put up a clearance sale to get rid of inventory at hand currently.
PART B Income & Revenue
The required can be presented as follows:
|Software Sales||$ 25,00,000||Revenue|
|Updates Download||$ 30,00,000||Revenue|
|Interest on short-term investment||$ 50,000||Income|
|Discount on early liab settlement||$ 2,000||Cash Discount or Income|
|Share Issue||$ 5,00,000||Income|
The last column indicates classification for each line item. For any company, revenue refers to the amount received from customers for the company products and services.
Whereas, income is a much larger term that indicates net profit of the company after including all items. In other words, the revenue and total income from various sources is included and then all expenses are deducted to arrive at income.
In above case, company is a software company selling anti-virus software. Hence, revenue will be the line items that show software sales and software updates download as these are related to product of the company.
All the other line items, such as interest earned on short-term marketing securities (investment income), cash discount (operating income) and share issues (financing income) can be classified as income.
PART C Balance Sheet Comparison
The required can be presented as follows:
|ABC Company||XYZ Company|
|Balance sheet||Balance sheet|
|As at 30 June 2020||As at 30 June 2020|
|Cash at bank||2,400||2,000|
|Total current assets||7,200||26,000|
|Total non-current assets||54,000||20,200|
|Loan payable due 30 September 2020||31,200||7,200|
|Total current liabilities||52,800||12,000|
|P. Cable Capital||8,400||34,200|
|Total owners’ equity||8,400||34,200|
|Short term Loan to Equity||3.71||0.21|
From above, the three key ratios can be seen. XYZ has a much higher current ratio of 2.17 indicating higher level of liquidity as compared to ABC. Further, XYZ has a much higher quick ratio of 0.17 indicating higher level of immediately available liquidity as compared to ABC. If the debt to equity ratio is seen, XYZ scores better with a lower ratio of 0.21.
- Hence, a bank should definitely select XYZ as compared to ABC for approving a short term loan seeing the liquidity and debt levels.
- Even an investor should go for XYZ as level of liabilities is lower and liquidity is much better. Additionally, net assets level is much higher.
- The impact will be negligible seeing the difference between ABC and XYZ. Hence, decision will remain the same.
The assignment intends to cover the selected and chosen firms equity, cash flows and tax liability etc for the last 2 fiscal years. The assignment research would also aim at finding the movement in equity shareholders fund for the last few years and also the profitability associated with its operations. Further the analysis of the capital structure of the company would be undertaken to see if the company’s capital structure is risky and more debts are utilised in the same. The analysis would also strive to find if the company’s management is striving to reduce the debts present in the capital structure or not. In the last section the analysis would involve the assessment of the company’s tax liability, provisions for taxes, deferred taxes and liabilities and the cash rate of tax in the last two fiscal periods.
Companies chosen for the assignment are Rio Tinto, BHP Billiton and Adelaide Brighton Limited.
1 Rio Tinto
2. BHP Billiton
3. Adelaide Brighton Limited
BHP Billiton Limited as in the last two three decades emerged as one of the largest mining and metals company in Australia. The BHP limited has spread its operations in 4 continents and has large mining operations involving Aluminium, copper and steel etc. it also happens to be one of the biggest employers in the country with over 65,000 employees and makes significant amount of EBIT per annum. However, the growth rates of the company and its profitability has suffered in the last few years because of competition in recent times and because of the worldwide slowdown in construction and building industry. Since the FY 2013 the BHP Limited has been headed by Andrew McKenzie. In 2016-2017 however the company has returned to remarkable growth territory.
RIO Tinto happens to be the biggest competition for the BHP Billiton. The RIO Tinto company was formed in the year 1873 and ever since has spread its wing worldwide. The BHP limited has spread its operations in 4 continents and has large mining operations involving Aluminium, copper and steel etc. it also happens to be one of the biggest employers in the country with over 52,000 employees and makes significant amount of EBIT per annum. In the last financial year Rio Tinto limited achieved a revenue of $4obn USD and achieved a remarkable EBIT of $14 billion. The Assets of the company was much in excess of $100bn as of 30th June 2018.
Adelaide Brighton is a company which deals with integrated construction materials including lime. The primary activities of the company involve infrastructure and construction and mineral processing etc. it also deals with clinker production and distribution, cements, industrial use lime and premixed concrete etc. the Adelaide Brighton is listed in the ASX and has currently one of the fastest growing companies with 1400 plus employees.
Analysis in this research-based topic would involve the discussions surrounding shareholders equity and changes in the same and various cash flows segments of the three companies and tax liabilities of the same.
The items which are listed by the three entities in their financial statements are shown as follows:
|BHP BILITON LIMITED|
|Share capital invested by BHP Billiton LTD||1,186||1,186|
|Share capital invested by BHP Billiton Plc||1,057||1,057|
|Various types of Reserves||2,400||2,538|
|RIO TINTO LIMITED|
|Share capital (Rio Tinto Limited)||4,140||3,915|
|Share capital (Rio Tinto Plc)||220||224|
|Share premium Account||4,306||4,304|
|Issued and paid up capital||733.1||731.4|
In 2016, overall reserves for the BHP Billiton company was higher at $2538 m but the same was lower in 2017 at $2400 million because of significant decline in the firms hedging reserves and also because of payouts owing under employee share award reserves in 2017.The BHP Billiton Limited Retained Earnings (RE) increased significantly in 2017 from $49,542 million to $52,618 million as a result of a good growth of profitability in 2017. In 2017 the BHP limited paid approx. 35% of the profits after tax as dividends to the shareholders (Belverd Needles; Susan Crosson;Matt Poers, 2011).
Rio Tinto Plc holds share worth $220 million whereas Rio Tinto Limited holds bulk of the original shares issued worth $4,140.00 million. Due to some 32,397 shares cancelled by the Rio Tinto Plc in 2017 the total amount of holding has declined from $22 million to $220 million.
The shareholders equity of the Rio Tinto limited has increased form a $45,730 million in 2016 to $51,117m in 2017. This is because of the significant increase in the firms reserves and retained earnings. As of 2017, the reserves of the Rio Tinto company included capital redemption reserves, hedging reserves, foreign currency translation reserves and revaluation reserves. However, the biggest reserves for the company is listed in the name of other reserves.
For Adelaide Brighton limited the company has 618,396 shares under the Executive Performance Share Plan in 2017 and the same for the company in 2016 amounted to 768,352 shares amounting to a total of $2.2million and $1.7 million respectively. Retained earnings of the company has increased from $483.3 to $510.6 million as a result of the addition to the RE in the form of current profits after dividend payments in 2017.
The items of liabilities which are listed by the three entities in their financial statements are shown as follows:
|BHP BILITON LIMITED|
|Interest bearing liabilities (short term)||1,241.00||4,653.00|
|Other financial liability||394.00||5.00|
|Current tax payables||119.00||451.00|
|Total current liability:||11,366.00||12,340.00|
|Trade payables (long term)||5.00||13.00|
|Interest bearing liabilities -non current||29,233.00||31,768.00|
|Other financial liabilities||1,106.00||1,778.00|
|Deferred tax liabilities||3,765.00||4,324.00|
|Current tax liabilities||9.80||15.40|
|Total current liabilities||204.80||168.00|
|Deferred tax liabilities||86.00||89.90|
|Other non-current liabilities||0.10||0.10|
|Total non-current liabilities||560.00||438.60|
|RIO TINTO LIMITED|
|Interest bearing liabilities (short term)|
|Provisions (including benefits of retirements)||1275.00||1315.00|
|Total current liability:||11225.00||9362.00|
|Trade payables (long term)||856.00||789.00|
|Provisions (including benefits of retirements)||13367.00||12479.00|
|Liabilities held for sale||124.00||38.00|
Total liabilities for the BHP Billiton company is found to be the highest. The same is lowest for Adelaide Brighton company. The Total liabilities has increased for all the three companies in between 2016 and2017.
The Debt -Equity of the three companies are presented as follows:
|RIO TINTO LIMITED||BHP||ADELAIDE BRIGHTON|
As can be seen from the above calculations the Debt to equity ratio for all he three firms are quite varied. The debt to equity is the lowest for the Adelaide Brighton limited and this means the company’s financial risk is lowest among the three. Both Rio Tinto and BHP Billiton however has been able to reduce the debt to Equity in the last two years and continues to be of moderate risk bracket (ANTHONY A ATKINSON, 2012).
i) the collection of the cash flow and items listed under the same for the three companies are shown as follows:
Cash flow statement is one of the most important statements in the annual reports and the same helps the investors know how the companies receive cash and from which sources and how the same cash is being spent by companies for meeting business needs and increasing the scope of the business. Cash flows listed by the chosen companies are shown as follows:
|BHP BILITON||ADELAIDE BRIGHTON||RIO TINTO|
|Operating cash flow (net)||16,804.00||10,625.00||224.20||248.40||13,884.00||8,465.00|
|Investing Cash flows (net)||-4,161.00||-7,245.00||-154.10||-64.70||-2,373.00||-2,104.00|
|Financing Cash Flows (net)||-9,133.00||284.00||-34.00||-195.50||-9,141.00||-7,491.00|
|cash flows (net changes)||3,510.00||3,664.00||36.10||-11.80||2,370.00||-1,130.00|
|Opening Balance of Cash||10,276.00||6,613.00||21.50||21.30||8,189.00||9,354.00|
|Closing Balance of cash||14,108.00||10,276.00||57.60||9.50||10,547.00||8,189.00|
As evident form the above cash flow statement items all the three companies have been able to generate positive operating cash flows. However the Operating cash flow for Adelaide Brighton has declined in 2017 as against 2016, where as he same has increased for the BHP and RIO TINTO.
Investing cash flows on the other hand is negative for all the three companies in both the years. However, for BHP limited the cash flow on account of investing has declined considerably in 2017.
The financing cash flows for BHP has been negative in 2017 but the same for the other companies are negative in both the years which means the companies are trying to pay off interest bearing debts and other long-term liabilities to reduce debt-equity imbalance. All the three analyzed companies including BHP Billiton and RIO Tinto have proceeded to report acquisition of new assets through new subsidiaries and joint ventures as well. However, the highest spending is done through acquisition of PPE (Deegan, 2015).RIO Tinto has undertaken a large amount share buyback programme in 2017 amounting to $2312.00 million.
Operating cash flows
All the three companies have been able to generate positive operating cash flows. However, the Operating cash flow for Adelaide Brighton has declined in 2017 as against 2016, whereas the same has increased for the BHP and RIO TINTO. The decline in the positive cash inflows for the Adelaide Brighton company can be accounted to an increase in the payments to suppliers and higher income tax payments.
Investing cash flows
All the three analysed companies including BHP Billiton and RIO Tinto have proceeded to report acquisition of new assets through new subsidiaries and joint ventures as well. However, for BHP limited the cash flow on account of investing has declined considerably in 2017 as compared to 2016. In the case of Adelaide Brighton company there is a significant increase in the investment in the form of property, plant, equipment and intangibles, Acquisition of new businesses and loans to other joint venture partners. In 2017 the company was able to generate significant cash inflows from the sale of assets such as PPE (KIMMEL, 2012).
Financing cash flows
The financing cash flows for BHP has been negative in 2017 but the same for the other companies are negative in both the years which means the companies are trying to pay off interest bearing debts and other long-term liabilities to reduce debt-equity imbalance.
From the analysis of the cash flow statement the following insights have been observed:
- While the investments of both the firms have been robust, the management of the BHP Billiton Limited is showing a conservative approach to new investments and is willing to undertake longer economic evaluation before committing funds.
- As investing is done sparingly more funds were made available by the BHP Billiton management used larger base of cash flows to pay off long term debts amounting to $7133 million and taken only $1500 million of new debts (Britton, 2012).
- It’s quite clear that the management of both the firms are willing to reduce debts and bring financial leverage significantly.
- In comparison to the strategy adopted by BHP, Rio Tinto management has identified growth opportunities and invested approx. $4,482 million in new long term assets. The funds committed in investing is 50% higher than what was committed in 2016.
- The management of Rio Tinto has also paid significantly higher dividend to make sure the stock prices are maintained at a steady value and shareholders not panic. However, Rio Tinto is yet to fully recover from the post 2012 debacle (Dagwell, 2014).
Items which are shown below are found in the other comprehensive income statement of BHP Billiton limited.
- Losses and gains arsing out of revaluation of assets
- Cash flow hedges (losses and gains)
- Exchange rate related gains and losses
- Taxes arising out of gains and losses on hedges and assets.
Items which are shown below are found in the other comprehensive income statement of RIO Tinto Limited and Adelaide Brighton Limited.
- Losses and gains arsing out of revaluation of assets
- Cash flow hedges (losses and gains)
- Exchange rate related gains and losses
- Taxes arising out of gains and losses on hedges and assets.
- Losses and gains arising because of gains on actuarial variations in relation to retirement obligations.
These items were not included in the financial statements (income statements) because:
- These items were found to be irregular items of earnings and losses and hence required to be reported separately.
- Many items in the OCI are of provisional nature and not realized yet by the company.
- A major portion of the OCI in the case of RIO Tinto has come from Hedging gains in 2017 amounting to $308 million.
- For the BHP Billiton company a major portion of the OCI have accrued in the form of losses and gains form hedging as well amounting to $32.4 million.
- For Adelaide Brighton limited a large portion of the OCI has come in the form of Exchange differences on translation of foreign operations ($.7 million) and Actuarial gain on retirement benefit obligations ($1.9million) (Carl S Warren, 2011)
iv) Should other comprehensive income be included in evaluating the performance of managers of the company?
There is a general consensus among the analyst community that OCI must be included in the evaluation of the managerial performance because:
1.Managers are primarily responsible for the management of the cash assets, business operations and business of the foreign operations and hence they are responsible for the cash flows and gains.
2. the mangers of the company are entrusted with the responsibility to avoid contingency losses and try to minimize any losses arraign out of foreign exchange transactions and translation exposures and hence they are entrusted with managing the hedging of cash flows (Dagwell, 2014).
3.these managers are also given the additional responsibility of manning hedging requirements in relation to selection of the proper derivative instruments and carefully plan the same form time to time. (Britton, 2012).
Tax expenses incurred by the 3 companies are shown below as follows:
|RIO||$1567 million||$3965 million|
|Adelaide Brighton Limited||$ 68.4 million||$72.30 million|
|BHP||$1059 million||$4100 million|
Effective tax rates are estimated as follows:
|RIO Tinto Limited||$3965.00/$12,816.00||30.94%|
|Adelaide Brighton Limited||$72.3/$252.40||28.42%|
|BHP Billiton||$4100.00/ $10,322.00||39.72%|
As evident BHP Billiton has the highest rates of tax among the three companies.
In 2016, Adelaide Brighton Limited has reported a deferred tax asset of $0 million and deferred tax liabilities of $86 million. The same for the year 2017 has been $37.5 million and $89.9 million respectively (AdelaideBrightonAR, 2017-2018).
In 2016, BHP Billiton Limited has reported a deferred tax asset of $6,147.00 million and deferred tax liabilities of $4,324 million. The same for the year 2017 has been $5,788 million and $3,765 million respectively (AnnualReportBHPBiliton, 2017-2018).
In 2016, Rio Tinto Limited has reported a deferred tax asset of $3,728 million and deferred tax liabilities of $3,121 million. The same for the year 2017 has been $3,395 million and $3,628 million respectively (RioTintoAnnualReport(notes27-28), 2017).
in the between the years the deferred tax assets have shown a tendency to rise for all the 3 firms for the deferred tax liabilities has increased for BHP Billiton and declined for the other two firms.
the cash tax amount for the 3 firms are found out as follows:
|BHP Billiton||Adelaide Brighton||Rio Tinto|
|Current tax Provisions||$4,100.00 m||$72.30 million||$3,965 million|
|Deferred tax assets||$5,788.00 m||$37.5 million||$3,395.00 m|
|Deferred tax liability||$3,765.00 m||$89.9 million||$3,628.00 m|
|Cash paid for tax||$2,077.00 m||$19.90 million||$4,198.00 m|
BHP Billiton’s cash tax rate % = $2,077.00 m / $10,322.00 million = 20.10%.
Adelaide Brighton’s Cash tax % = $19.90m / $254.4 m = 7.822%
Rio Tinto Limited’s cash tax % = $4,198.00 m / $12,816 m = 32.66%
As evident from the above estimations the cash tax % is highest for the RIO Tinto Limited at 32.66% (Britton, 2012).
The cash tax % for all the firms are found to be different form the tax rate as per the book profits or PBT simply because the actual cash tax paid because of differed tax adjustments are found to be lower than the current year provisions. The rate has also declined because of other adjustments made in the OCI (ANTHONY A ATKINSON, 2012).
The BHP Billiton and RIO Tinto are dual listed firms with listings both in ASX and London (UK). However, both these firms suffered huge setbacks in the wake of recessionary conditions worldwide and particularly in the Chinese markets after 2012-2013. Since 2016 however both have taken steps to reduce costs significantly and has done better to grow new streams of revenue and paid better returns to the shareholders and also reduced risk comments by reducing the debts. The same has bene shown int heir declining Debt to Equity Ratios. However, the cash flows of the Adelaide Brighton limited is little lesser than expected and it has been lower in 2017. However despite a sizable growth of revenue in 2017 , the company suffered declining margin because of increase in direct and operating costs. The management of the Adelaide Brighton would need to identify costs which are not necessary and increasing operating margins for ensuring better cash flows in the coming years (Carl S Warren, 2011).
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