The main purpose of this assessment is to analyze the financial statements of two companies which belong to the same industry and has similar level of operations. The two companies which are selected for this assessment are Ausdrill Ltd and Rio Tinto Ltd which are both engaged in engaged in mining and extraction of mineral resources business. The assessment considers annual reports of both the company for the purpose of analyzing different elements of the financial statements and also make a comparative analysis between the two companies as to which has a better reporting of such elements of the annual reports.
Ausdrill Ltd is engaged in the business of extracting minerals and mining business in Australia. The primary operations of the company are in Australia however, the business has also expanded to certain areas of Africa and United Kingdom. The company specializes in mining services, grade control, drill and blast exploration projects (Ausdrill.com.au. 2018). The company also employ significant number of employees in the business and the revenues of the business are constantly improving.
Rio Tinto Ltd is regarded as one of the leading businesses in Mining industry and has its origin as an Anglo-Australian company which has a majority of its operations in Australia. The company is known for its mining activities and is a leading producer for metals in Australia (Riotinto.com. 2018). The company produces coal, iron ores, uranium, copper and diamonds. In addition to this, the company is also engaged in the business of refining for products like bauxite and some other minerals.
The main focus of the assessment will be to analyze the annual reports of both the companies for a period of last three consecutive years starting from 2017. The assessment also shows analysis and comparative analysis of the elements which are shown in the annual reports of the business. Some of the significant areas which are considered in the annual reports of both the companies are cash flow statements, equity capital used, tax treatments and disclosures. In addition to this, the assessment will also be containing calculations regarding effective tax rate and other tax computations.
The owner’s equity represents the equity capital and retain earnings of the business which is used for financing the activities of the business. The annual report of 2017 is considered for both the companies for the purpose of analyzing the owner’s equity of the business. As per the annual report of 2017 for the Ausdrill Ltd, the owner’s equity is shown in the balance sheet. The owner’s equity comprises of contributed equity, retained earnings and other reserves. The contributed equity relates to the share capital which the company has accumulated by issues of shares to the public. The contributed equity of the business for the year 2017 is shown to be $ 546,447,000 which is same as the figure which was shown for previous year (Needles, Powers and Crosson 2013). There have been no changes in the figure of equity as per previous year estimates and also as per 2015 estimates. The retained earnings of the business reflect a part of the profits which are kept aside either for reinvesting the same in the business or meeting certain future obligations of the business. The retained earnings of the business for the year 2017 has significantly increased in comparison to previous year analysis and the same is shown to be $ 121,444,000. The estimate which is shown for 2015 is $ 38,027,000. Therefore, there is a general trend which shows increase in the retained earnings of the business. This may be due to the improvement in profitability of the business and also due to improvement in the operating structure of the business. The reserves of the business are shown in negative which represents accumulated losses of the business which are from previous year.
On the other hand, the components of owner’s equity which is shown in the annual report of the business for 2017 is shown to be equity share capital of the business, share premium, retained earnings and reserves. The equity share capital which is shown for the business for 2017 comprises of equity capital of Rio Tinto Plc and Rio Tinto Limited. The equity capital represents the funds which are used by the business for the purpose of meeting the obligations of the business. The reserves figure which is shown in the balance sheet of the business is shown to be positive which represents that the business has accumulated parts of earnings which the management of the company can use in any manner possible (Chambers 2014). The share capital of the business is shown to be US$ 4,140 million which has significantly improved in comparison to previous year. This is due to the fact that the company has issued certain number of shares during the year in order to draw capital from the same (Warren, Reeve and Duchac 2013). The retained earnings of the business are shown to be US$ 23,761 million. The retained earnings of the business have also increased which is due to increase in profit generating capability of the business. The annual report further shows that the reserves of profits of the business are appropriate for meeting any obligations of the business.
The capital structure of Ausdrill ltd as per the balance of the business for the year 2017 is shown to be more relying on equity capital rather than debt capital of the business. The debt capital is shown to be $ 385,815,000 for the year 2017 and the same was $ 395,019,000 in 2016 as shown in the balance sheet of the company for 2016 which shows that the management of company repaid a part of the loan during the current year. In case of equity share capital, the business has increased equity capital of the business during the year as shown in the balance sheet of the business. The borrowings of the business for the year 2015 is shown to be $ 407,307,000 which is higher than 2016 estimate. The analysis for 3 years reveals that the management is systematically reducing the debts of the business and thereby focusing on application of more equity capital of the business.
In the case of Rio Tinto Ltd, the balance sheet of the company for the year 2017 shows that the borrowings of the business are US$ 15,148 million which is lower than the estimate which is shown for the year 2016 which is US$ 17,470 million. The borrowings of the business for the year 2015 is shown to be US$ 21,140 million which is more than debt capital which is shown for 2016. This shows that the management of the company is trying to reduce the debt capital of the business on year by year basis (Ampenberger et al. 2013). The company has also equity capital which is shown in the annual reports of the business during the year which is shown to be US$ 4,140 million for 2017 and the same was US$ 3,950 million in 2015 which shows that the management of the company is trying to increase the equity capital in the capital structure of the business. The management of Rio Tinto Ltd is trying to increase the equity capital of the business and is relying more on debt capital of the business.
Therefore, the analysis of the debt and equity capital which is used by both the companies, it is revealed that the business of Ausdrill ltd is more reliant on using debt capital to finance the activities of the business while on the other hand the management of Rio Tinto ltd is relying more on equity capital as the business is trying to reduce the debt capital which is used by the business. However, in current scenario, the management of Rio Tinto ltd is still using much more debt capital than equity capital of the business.
The cash flow statement represents the cash position of the business and demonstrates each activity which is either a cash inflow and cash outflow for the business. The cash flow statement of Ausdrill ltd shows cash from operating activities which mainly comprises of cash receipts which the business receives from operating activities of the business and also cash payments which are made by the business to suppliers (Nurnberg 2015). Another significant item which is included ion the cash flow statement is income tax paid by the business during the year. The net cash flow for the year 2017 is shown to be $ 94,613,000 which has increased from 2016 estimates which is shown to be $ 91,006,000. The receipts from customers and also the payments which are made to the suppliers of the business have increased on the basis of estimates of 2016 which shows that the level of operations of the business has increased significantly. The cash from investing activities of the business effectively shows that main cash flow during the year is from purchase of property, plant and equipment during the year which is shown to be $ 147,418,000. The cash outflow suggest that the management has made significant investments in assets during the year (Pavlovi? and Bogdanovi? 2013). The cash flow from financing activities include various repayments which are undertaken by the business during the year such as repayment of borrowings, repayment of Hire purchase and also dividend paid to the shareholders of the company (Sayari and Mugan 2013). The net cash equivalents which is shown for the year 2017 is shown to be $ 166,710,000 and the same is shown to be $ 181,157,000 for the year 2016. Therefore, the cash balance of the business has slightly fallen in comparison to previous year results.
As per the cash flow statement which is prepared by Rio Tinto ltd, for the year 2017 the cash from operations of the business is shown to be US$ 16,670 million which is higher than the figure which is shown for 2016 which suggest that the operations of the business has increase. The main item which is shown in cash from operating activities are Dividends from equity account units and the tax expenses which the business incurs during the year (Brusov, Filatova and Orekhova 2013). The net cash which is generated from operating activities of the business is shown to be much higher than any of 2015 or 2016 estimates which is shown to be US$ 13,884 million. The cash from investing activities of the business which is shown for the year 2017 comprise of purchase of properties, plant and equipment, sales and purchase of financial assets. The business has also sold subsidiary units which was held by the business during the year. The net cash flow from investing activities of the business are shown to be negative which suggest that the cash outflows from investing activities are much more than cash inflow from the same. The cash flow from financing activities of the business for the year 2017 shows more cash outflows which is due to the repayments of loans, buyback of shares and also dividend which is paid by the business during the year. The net cash balance for the business is shown to have increased significantly in comparison to previous year analysis. The net cash is shown to be US$ 10,547 million for the year 2017 and the same figure is shown to be US$ 9,354 million. Therefore, the increase in the cash balance is clearly evident from comparative analysis of the cash flow statement of the company.
The cash flow statement of both the companies which are shown in annual reports of the business are effectively prepared considering the format showing cash from operating activities, cash from investing activities and cash from financing activities. The cash from operating activities of the business is shown to be $ 94,613,000 in 2017 and the same is shown to be $ 91,006,000 for 2016 which shows that the cash from operations of the business has improved significantly. The cash from operation of the business for the year 2015 is shown to be $ 117,936,000. The cash flow from operations of the business shows that the operational efficiency of the business has improved tremendously which is a favorable factor for the business (Farshadfar and Monem 2013). The cash from operations of Rio Tinto Ltd for the year 2017 is shown to be US$ 13,884 million and the cash from operations of the business is shown to be US$ 8,465 million for the year 2016 whereas the cash from operations of the business for 2015 is shown to be $ 9,383,000. The cash from operating activities shows that the figure shown for 2017 is more for Rio Tinto Ltd in comparison to Ausdrill Ltd. This may be due to the higher scale of operations of the business. The cash from investing activities of Ausdrill Ltd for the year 2017 is shown to be negative and the figure is shown to be $ 101,127,000 which is mainly due to the payments which has undertaken for purchase of assets, purchase of financial assets (Farshadfar and Monem 2013). The cash flow for Rio Tinto ltd for the year 2017 is also shown to be negative which is also due to the increasing amount of payments which are related to purchases which are undertaken by the business. The cash flow from investing activities of the business is shown to be better in case of Ausdrill Ltd. The cash from financing activities of the business mainly comprise of repayments of loans and hire purchase agreements and the proceeds includes loans which are taken by the business during the period. The cash flow from financing activities is shown to be in negative which is $ 6,965 million for the year and the same has improved from last year analysis. In the case of Rio Tinto ltd, the financing cash from operations is shown to more which means that the company has made quite a few cash payments during the year.
The cash from operations of the both the companies shows rise in cash from operations of the business which suggest that the operational efficiency of the business is appropriate, however the cash which is generated from operations of the business is shown to be more appropriate for Rio Tinto ltd as the figure is comparatively much more than the results of Ausdrill ltd. The cash from investing activities of both the companies are shown to be to same as both the companies has undertaken significant amount of cash flows which is related to purchases of property, plant and equipment and also repayment of loans of the business (Gupta et al. 2014). The net cash from investing activities which is generated by both the companies is shown to be negative. The cash from financing activities of the companies include repayments of loans and dividends which is paid by the company during the year.by the company. The net cash which is generated by the companies are significantly more for Rio Tinto Ltd in comparison to Ausdrill Ltd.
The comprehensive income statement comprises of items which are not shown in the profit and loss statement of a business. The comprehensive income statement of Ausdrill ltd includes items such as exchange gains on transaction which are related to foreign operations and the same is shown to be $ 882,000. There is also an income which the business has received from joint ventures which are undertaken by the business. In addition to this, gains on revaluation on financial assets and revaluation gain on property, plant and equipment. As per the annual report of Rio Tinto for the year 2017 shows actuarial gains, adjustments which are made to tax on post-retirement benefit plans (Macve 2015). The business also shows cash flow hedge gains, loss and gains on revaluation which are sale of variable securities of the business.
The items are generally shown separately and not included in the profit and loss statement is because the items are of extraordinary nature and the same is not related to day to day activity of the business. The items which are reported are generally to disclose all the activities of the business during the year and since the items cannot be displayed in profit and loss statement, the same needs to shown in Comprehensive Income Statement.
As per the annual reports of Ausdrill Ltd, the sources of comprehensive income of the business are exchange gains on translation of foreign operations of the business which is shown to be $ 882,000. The business has incurred losses on revaluation of assets which are shown in the annual report of the business during the year. The annual report of Rio Tinto ltd shows actuarial gains, tax adjustments and adjustment of deferred tax post retirement benefits which are shown in the annual report of the business during the year (Khan and Bradbury 2014). The comprehensive income statement prepared also shows hedge cash flow gains and revaluation gains of avaliable sale securities.
The analysis shows that the items of extraordinary nature are more in case of Rio Tinto Ltd than in the case of Ausdrill ltd as per the annual reports. In both the cases, if the items are included in the profit and loss statement, the net profit of the business will either increase or decrease the income of the business. In the case of Ausdrill ltd, the net profit will decrease if the comprehensive items are shown in the income statement while on the other hand the profits of Rio Tinto ltd will increase if profits are included in income statement of the business.
The performance of the business should not be based on comprehensive items which are shown separately in the annual reports of the business as these items are of extraordinary nature and might not be recurring in nature. The items which are shown in the comprehensive income statement are generally of extraordinary nature. Therefore, the items should be included in the decision-making process of the business.
The income tax expense of the business is shown for Ausdrill ltd for the year 2017 is shown to be $ 13,885,000 which has increased slightly from the analysis of previous which is shown to be $ 4,581,000 for the year 2016.
The income tax expenses of Rio Tinto Ltd is shown in the annual report of the business for the year 2017 which is $ 3,965 million and the same was shown to be $ 1,567 million for 2016.
The effective tax rate refers to the average tax rate at which the profits of the business are taxed and the effective tax rate computation is shown in the above figure. The effective tax rate of Ausdrill ltd and Rio Tinto Ltd is shown in the above figure which is 30.63% and 30.94%. Therefore, it is clearly seen that the effective tax rate of Rio Tinto Ltd is better than Ausdrill ltd and the same is also shown to be higher.
Deferred tax assets and liabilities forms major part of the financial statement of the company which is recorded at the year end closing of books of accounts and the same has impacts on the income tax which is shown in the profit and loss statement. The deferred tax assets of Ausdrill ltd is shown to be 4 36,372,000 for the year 2017 and the same is shown to have decreased in comparison to previous year analysis and the deferred tax liabilities of the business is shown to be $ 22,077,000 for the year 2017 which has also reduced in comparison to previous year analysis.
On the other hand, the deferred tax assets of Rio Tinto Ltd for the year 2017 is shown to be $ 3395 million for the year which has also reduced in comparison to previous year analysis (Laux 2013). The deferred tax liabilities of the business for the year 2017 is shown to be 3628 million and the same has increased from previous year estimates.
The reason for occurrence of deferred tax assets and deferred tax liabilities is due to temporary difference and permanent difference between accounting profit and tax profit of the business (Kasipillai and Mahenthiran 2013). Another reason can be carried forward tax liabilities or tax assets from previous year.
The cash tax rate of Rio Tinto is shown to be higher than Ausdrill ltd which is shown in the above figure which is 36.63% for the year 2017.
The main difference between cash tax rate and book tax rate is that cash tax rate is estimated on current year basis while on the other hand book tax rate is estimated on the basis of current and future year. For the computation of cash tax rate, increase in deferred tax liabilities and deferred tax assets are considered and interest burden which can result in tax savings are added back. In the computation of Book Tax rate, no such consideration as in case of Cash tax rate is considered.
Reference
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