A Comparative Analysis Of Financial Statements For Two Companies

Equity Items Analysis for BHP Billiton Ltd and CSR Ltd

From the table 1, it can be seen thatthere is no change in the shares capital of BHP Billiton Ltd and BHP Billiton Plc. that means no shares have been issued to them(BHP, 2018).Total Comprehensive income is showing negative balance, which means that income is not fruitful for the company any more(Demirgüç-Kunt & Maksimovic, 2002).There is a slight decrease in the value of Reserves due to the employees shares awarded forfeited and net employee contributions. The retained earnings are reflecting positive balance as entire change was in positive (Chandra, 2008).Non- controlling interest is reflecting a slight change, when compared with the previous year’s figure.

CSR Ltd

From the table 2, it can be seen Issued capital and Reserves for CSR Ltd is almost similar for both the years.In Reserves, at the end of the year, negative balance is reflecting, which means that there is payment for the uncertainty which the company has not accounted in provision(CSR Limited, 2018).Retained Profit has increased in the year 2017, which means that company has retained their profit for their development and smooth functioning for longer run. Non-controlling interest has increased more than double which indicates that the company’s ownership is getting diluted by third parties and hence, liability to pay dividend also increases in future(Ohlson, 2009). 

Cash flow statement

BHP BillitonLtd

From the table 3, it can be inferred that there are has been a good increase of sales and income in the year 2017 when compared with 2016 and 2015. In 2016, the company has experienced uncertainty losses. Non- operating exceptional items has reduced more than ten times when compared with the last year’s figure. Depreciation and amortization expense has slightly reduced when compared with the last two years, which means the company has disposed their assets. Impairment of property, plant and equipment, financial assets and intangibles has reduced more than fifty percent in 2016 when compared with 2015.

However, in 2017 these values have slightly decreased. The company has disposed few assets in 2016 and 2017 due to which, impairment of assets also got reduced. Net finance cost has increased by almost fifty percent when compared with 2016, which means liability increases in the current year. In 2016, the value of net finance cost was just half when compared with 2015. The company has increased their loans and hence, their cost also increases(Henderson et al., 2015).

Shares of operating profit of equity accounted income were following a decreasing trend from 2015, as the performance level reduced from the previous years. Trade and receivables have fallen down drastically in the year 2017 compared with 2015 and 2016. It may be because of reduction in sales or the company has received the amount before the completion of the financial year. Inventories were reflecting negative balance which means the company is facing inventory issues in the year 2017. Trade and payables both have a positive balance when compared with 2016 and 2015. Hence, the company is either unable to pay their vendor on the due date, whichleads to increase in creditors list or they are making purchases at the end of the financial year which enhances the creditors list.Provisions and other assets and liabilities have shown a slight decrease in 2017(BHP, 2018). Dividend received has just increased to double when compared with the last year’s figure, which means the company has invested their fund in shares and equity accounted investments.

Debt and Equity Position Analysis for the Selected Companies

Interest received and interest paid are following an increasing pattern, which means the company has given a loan to the third party and repayment of interest-bearing liabilities also increased (Mlachila & Chirwa, 2002). Settlement of cash management related instruments is showing a negative balance that means the company is facing adverse consequences while settling the cash related instruments. Purchase of property, plant and equipment has increased almost half times in 2016 when compared with 2015 that means the company has purchased assets in 2016. However, in 2017 there is slight decrease in the purchase of property. Exploration expenditure has increased from 2016, which means the expenses have increased. However, it has reduced in 2016 as compared to 2015 which means the company has not increased exploration.The exploration expenditure form an important part of the cash flow statements (Ronald, 2010).

Proceeds from sale of assets has increased more than five times which means the company has sold their assets in huge quantity in 2017 when compared with  2016.

Proceeds from divestment of subsidiaries, operations and joint operations have decreased in 2016 when compared with 2015. In 2017, it is slightly increased which means the company is increasing the list of subsidiaries. Proceeds from interest-bearing liabilities have decreased drastically when compared to 2016. In 2016,it became half as compared to 2015, which means the company is not taking any further loans on interest. Proceeds from debt related instruments increased in 2016 as compared to 2015 but, it again decreased in 2017 which clearly states that the company is not dependent on debt much(United States. Bureau of Internal Revenue, 2011). Repayment of interest-bearing liabilities has increased drastically in 2017which means that the company paid all loans in 2017.

Purchases of ESOP trust has slightly increased from 2016. However, it got reduced by fifty percent from 2015 that means the company has spent their funds in ESOP in the year 2015. Proceeds from ordinary shares are only reflected in 2015, which means that the company has stopped investing in ordinary shares. Dividend paid has decreased in 2016 as compared to 2015. Dividend paid to non -controlling interest has decreased drastically in 2016 when compared with 2015. However, it again rises up in 2017. This means that in 2016, the company has low controlling interest and hence, fewer dividends are paid. Net financing cash flow from discontinued operations reflects only in 2015 that mean the company has stopped few operations and hence, their cash flow also stopped(Investopedia, 2018).

Cash flow statement of CSR Ltd

From the table 4, it can be inferred that receipts of the customer is following an increasing trend since 2015 which indicates that the company is able to clear its debts on due date. Payment to supplier and employees has increased from year to year which states that expenses is increasing proportionately to the increase in income.

Dividend and distribution received enhances, which indicates that the company is diverting its fund into operations, which lead to the generation of the dividend since 2015. Interest received and purchase of controlled entities, and businesses, net of cash acquired are following decreasing trend since 2015, which means that the company is not advancing to any other third party. Income tax paid enhances has increased more than twenty times since 2015 which indicates that income of the company increases, which leads to increase in the tax also. Purchase of property, plant, and equipment and other assets have reduced which indicates that the company has not undertaken any new assets (Robbins & Bush, 2015).

Cash Flows Statement Analysis for BHP Billiton Ltd

Proceeds from the sale of property, plant, and equipment, and other assetsis showing decreasingtrend since 2015 which means that few assets have attained their life, due to which they have to dispose of. The cost associated with the acquisition of businesses has reduced to almost ten times compared to last year. The main reason for this could possibly be that the business cost has decreased or less development of business leaders has led to reduced cost(Snow, 2011). Loans and advances have increased more than five times which indicates that the company has funded to some other company in the form of loans and advances.

Net (repayment) drawdown of borrowings is showing positive balance when compared to the last year which states that the company has not repaid any of its loans. The company has repaid its borrowing in 2015. Dividend paid increased slightly that indicates that the company has not issued more shares. However, dividend paid has increased almost double since 2015. Acquisition of share by CSR employee trust has reduced which indicates that employees have sold their share or, the acquisition by the employees is less(Visser et al., 2015). Interest and other financial cost paid are almost similar to last year. However, it became half since 2015 which indicates that the company has reduced their debt and hence, their finance cost also reduces.

Comparative analysis of cash flow statement of BHP Billiton Ltd

Net cash flow from operating activities shows an increase in 2017 when compared to 2016. However, 2015 has more cash flow when compared to both the years which means that expenses have increased. Net cash flow from investing activities has a negative balance since 2015. However, in 2017 the value has reduced which means that the company is not investing in any other assets or any other company’s operations or joint operations. Net cash flow from financing activities is negative only in 2017 which clearly states that the company has paid off their loans along with interest. However, the net cash after combining from all the three activities in 2017 has more cash balance as compared to  2016 and 2015, which means that though the company is paying off their debt and interest, they also have good operating income simultaneously(Jury, 2012).

Comparative Analysis of Cash Flow Statement of CSR Ltd

Net cash flow from operating activities is following an increasing trend since 2015, which clearly states that the company is performing positively and able to maintain healthy cash flow. Net cash used in investing activities have increased to almost double in 2016 since 2015 but, it again reduced in 2017which indicates that the company has invested their fund in 2016 excessively.Net cash used in financing activities, reflecting negative balance since 2015, has become almost double in 2017 which means that company is operating under debt from the third party and hence,is ending up with paying interest and dividend to the third party (Wahlen et al., 2010).

Comparison between cash flow statements of both companies

In both the companies cash flows from operating activities have increased in 2017 when compared to the last year. Further, the common factor in both the companies is that, they has not invested their fund in the acquisition of any new asset, ownership in controlled entities, loans and advances in 2017. The cash flow is negative in finance activities for both the companies in 2017, which shows that they are paying either loans or interests.  However, BHP Billiton Ltd is performing effectively well when compared with CSR Ltd.

Comparative Analysis of Three Broad Categories of Cash Flows

Items reported in comparative income of BHP Billiton Ltd and CSR Ltd

1) The items reported in comparative income of both companies are as follows:

• Gain or loss arises from the sale of investments
• Gain or loss from cash flow hedges
• Exchange fluctuations of translation of foreign operations

2) Tax recognized within other comprehensive income

3) Items which are not under income statement:

• Re-measurement gains or losses on pension and medical science
• Tax recognized within other comprehensive income(Plewa Jr. & Friedlob, 2009)
• Items not reported in Comparative Income Statement

In Comparative income statement, the profit or loss arising from the discontinued operations of the company are taken into account such as cash flow hedges, sales of investment which have led to the equity or transferred to the income statement, foreign exchange fluctuations, gain or loss from pension and medical schemes, income tax related to such operations etc.(Reeve et al., 2011).

Reason for not reporting these items

 If the items which are listed under comparative income statement are taken under the profit and loss account, then it will lead to inappropriate accounting as these items relate to the discontinued operations and hence, it will not give the true and fair value of the company. The shareholder wealth will get affected due to the presence of these items in the profit and loss account (Nikolai et al., 2009).

Should comprehensive income be included?

Yes, other comparative income statement should be taken into consideration while evaluating the performance of the manager of the company. The item of the other comparative income statement speaks about discontinued operations which were parts of the running business but due to inefficient management, the operations needed to be disrupted. A manager should be able to understand the business complexity and must deal. (Clarke, 2012).

Income tax expenses shown in balance sheet

 The Income tax expenses shown in the balance sheet of both the companies are as follows BHP Billiton Ltd

• Current tax payable included in the current liability is 2119 US $million
• Deferred tax liability under non- current liability is 3765 US $million

CSR Ltd

• Deferred income tax liability under non-current liability is nil.
• Tax payable under current liability is 10.3.
• Effective tax rates of both companies

The effective tax rate of both the companiesis as follows:

Effective tax rate = Income tax expenses / earnings before tax

BHP Billiton Ltd

Income tax expenses =3933 US $million

Earnings before tax =1032US$million

Effective tax rate =3933 /1032 = 3.811

Income tax expense = 61. 3

Earnings before tax =266.8

Effective tax rate = 61.3/266.8= 0. 2298

From the above calculations, we will observe that BHP Billiton Ltd has high effective tax rate.

Deferred tax liability

A deferred tax liability arises due to the difference in the company’s financial accounting for reporting purposes as per the stated guidelines and company accounting. It creates a liability which a company needs to pay in the future. It defines the time difference with respect to the company’s tax rate and applicable effective tax rate(Greuning, 2009).

The temporary difference leads to deferred tax balance which includes:

• Depreciation
• Exploration expenditure
• Employee benefits
• Closure and rehabilitation
• Resource rent tax
• Other provisions
• Deferred income
• Deferred Charges
• Investment including foreign tax credit
• Foreign exchange gains and losses
• Tax losses
• Others(Greuning, 2009)
• BHP Billiton Ltd

Deferred tax assets(US $million)
Particulars	2017	2016
Depreciation	(3,454)	(3,223)
Exploration expenditure	543	656
Employee benefits	379	342
Closure and rehabilitation	1,809	1,711
Resource rent tax	559	661
Other provisions	131	145
Deferred income	-2
Deferred charges	-443	-470
Investments, including foreign tax credits	1,145	1,327
Foreign exchange gains and losses	-87	-77
Tax losses	5,352	5,006
Other	-144	69
Total	5,788	6,147

Depreciation is showing a negative balance under deferred tax assets, which means that in the previous year, the company paid more tax due to the time difference. Exploration expenditure, resources rent tax, and other provisions have decreased from the previous year which means that in the previous period, the company had incurred more expenses and hence, now they have to pay less.Employees benefit, tax losses, closure and rehabilitation have increasedthan the previous year which led to an increase in payment (Davies et al., 2013).

Comparative Analysis of Two Companies

Deferred income is showing negative balance when compared to the previous year. Investment including foreign tax credit is showing a positive balance. Deferred charges and foreign exchange gains and losses is following a negative balance. However, deferred charges increased and foreign exchange gains and losses decreased when compared to the last year.Other rates have fallen drastically. In 2016, they are showing a positive balance but in 2017, they show a negative balance.

CSR Ltd

( $ Million)
Particulars	2017	2016
Property, plant and equipment	-11.7	-11.0
Superannuation defined benefit plans	-4.3	2.8
Product liability provision	93.7	100.3
Employee benefits provisions	34.7	34.0
Other provisions	22.2	23.3
Spares and stores	-8.3	-8.7
Fair value of hedges	13.7	-4.7
Other individually insignificant balances	5.6	-2.4
Tax losses	55.6	84.8
Total net deferred income tax assets	201.2	218.4

Property, plant and equipment, employee benefits provision, spares and stores, other provisions are bearing almost same balance in 2017 and 2016, which indicates that in the previous period the company has paid more tax due to timing difference.Superannuation defined benefit plan is negative when compared to the last year, which indicates that the company’s liability is increased in the current year.Product liability provision is considered less in value when compared to the last year which reflects that in the previous period,the company has accounted excess provisions.Fair value of hedges and other rates have led to insignificant balances,which are reflecting positive balance as compared to the last year which means that company’s liability has increased(Stickney et al., 2009).Tax losses reduced from last year and hence, deferred tax asset credit is diminishing from year to year.

Cash tax amount for both companies

The cash tax amount for both the companies are:

BHP Billiton Ltd

Book tax 3933

Change in the deferred tax assets 359

Change in the deferred tax liability 559

Unlevered cash taxes 4651

CSR Ltd

Book tax 61.7

Change in the deferred tax asset 38.1

Change in the deferred tax liability 20.9

Unlevered cash taxes 120.7

Cash tax rates for both companies

The computation of cash tax rate of both company are as follows:

Amount(US $million)
Particulars	BHP Billiton Ltd	CSR Ltd
Unlevered cash tax	4651	120.7
EBITA	10322	266.8
Cash tax rate	2.2193	2.21044

It can be observed that both the companies have the same cash rate tax with the minor difference.

Cash tax rate vs. the book tax rate

The cash tax, states the amount of tax paid to government authorities. The cash tax is calculated on the income reported to the tax return every year. The determination of cash tax depends on the tax rate applicable to that industry(Schutte & Shome, 2012).

Book tax defines the amount of tax that needs to be paid on the basis of company’s financial statement. Generally, the book tax is used by the investors and lenders to understand the financial health and performance of the company efficiently. The book tax is prepared in the accordance of accepted accounting policies applicable to that industry. It is used for performance comparison between two companies. The book rate is the complete picture of the company which helps to analyze their performance and facilitates in improving it consistently(The Tax Council, 2013).

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