Discuss about the Financial Performance Of BHP Billiton And Qantas.
BHP Billiton is an Anglo-Australian mining company that has its headquarters in Melbourne. The company was founded in 2017 and it is considered as the largest mining company in the world in respect of its market capitalization. BHP Billiton is also regarded as the third largest company in terms of revenue (BHP 2018). BHP Billiton is listed on the Australian Stock Exchange and it is considered as the largest company in Australia in respect of market capitalization.
Qantas Airways is an airline company which is regarded as the flag carrier of Australia and it is regarded as the largest airline in respect of size of fleet, international flights and international destinations (Qantas.com 2018). Qantas is regarded as the third oldest airline company in the world. Qantas was founded in 1920 and the company started its first passenger flights in May 1935. Qantas Airlines occupies 65% Australian domestic market share and carries approximately 14.9% of the passengers in and out of Australia.
The revenue for the BHP Billiton for the financial year of 2016 stood US $30.9 billion reflecting a fall of 31 per cent from the revenue reported in 2015. The net operating cash flow of the BHP Billiton declined by 45 per cent to stand at $10.6 billion (BHP Billiton 2018). The basic earnings per share of BHP Billiton reported a loss as the earning per share stood (120) US cents per ordinary share. In spite of loss the company reported a total dividend per share of 30 US Cents per share. The sustainable productivity gains for BHP Billiton stood US $437 million. The underlying EBITDA for the company stood $12.3 billion with attributable amount of loss of US $6.4 billion.
Qantas reported a strong financial performance with record increase in its margins. The total amount of underlying EBIT in 2016 for the domestic market stood $820 million with 30% rise from the previous year. While the total amount of underlying EBIT of the company’s international operations rose by 107% to stand at $722 million (Investor.qantas.com 2018). The financial position of Qantas Airways strengthened as the operating cash flow for 2016 stood $2.8 billion. The excess amount of cash was used by Qantas for refinancing its aircraft. The company reported a strong balance sheet with more sustainable outlook was identified by the rating agencies. The profit for Qantas increased by 57% to stand at $1.53 billion. The statutory EPS stood 49.4 cents each share with 24 cents rise from previous year. The return on capital invested stood 23% in 2016 and net debt reduced to within target of $5.6 billion.
Business risks for BHP Billiton: For BHP Billiton there are number of risk factors that might have adverse impact on its business operations (Zeff 2016). The key business risk for BHP Billiton are discussed below;
Failure to identify and acquire new resources: The demand for the products and operations is depleting over the time for BHP. A failure in the ability of the business to identify or obtain the new resources along with the maintenance of reserves or development of new operations is regarded as the business risks for BHP Billiton (Vasarhelyi, Alles and Kogan 2018). BHP Billiton faces several uncertainties in its business to estimate the mineral, oil and reserves of gas. The uncertain global financial outlook pose a business risk that can negatively impact its business prospects.
Increasing costs and delays in development projects: Another business risks identified for BHP Billiton is the increasing cost and programmed delay in their schedule may adversely create an impact on BHP Billiton developmental projects (Samsonova-Taddei and Siddiqui 2016). In spite of the company devoting significant amount of time and resources to its business projects but there are certain projects that are very complex and depends on factors that are beyond the control of BHP Billiton.
Business risks for Qantas: The aviation industry has certain inherent risks and Qantas is subject to certain business risk that are as follows
Intensity of Competition: For Qantas Airways market capacity growth ahead of the fundamental demand creates an impact on the profitability of the company (Shaub and Braun 2014). The liberal aviation policy of Australia weakening of international economy in the recent years has enabled more offshore competitors. The increasing intensity of offshore competition is viewed as the business risk for Qantas Airways.
Volatility in fuel and foreign exchange: The operations of Qantas Airways also faces the risk of fuel and foreign exchange. This risk is considered as the inherent business risk of operating in airline industry (William, Glover and Prawitt 2016). The company has increased the emphasis on the forecasting agility for its operations to support in the management of uncertainty business risks.
BHP Billiton has set up a Business Risk and Audit Committee to recommend regarding the business risk. In respect of the business risk identified the auditors have considered numerous changes in the estimations for closure and rehabilitation provision identified throughout the year (Arens et al. 2016). The auditors provided considerations relating to outcomes of currently concluded estimations and considered suitable inclusion of contingency in the costs estimations to enable both the known and residual business risks. The findings of auditors concluded that the assumptions and inputs relating to closure and rehabilitation costs estimations were sensible and associated provisions identified were appropriate.
The auditors of the Qantas are committed to implanting the practices of risk management to assist the achievement of the business risks and meet the corporate governance obligations. The audit committee approves the company’s audit and internal audit risk charter that offer the company’s audit with the complete access to the Qantas Airways functions. The auditors of Qantas Airways records the property and personnel and creates requirements for independence (Cohen and Simnett 2014). The audit reviews the matter of risks and also undertakes the yearly review of the effectiveness of the Qantas Airways application of risk management system and framework of internal control.
The auditors of the Qantas Airways provides the recommendations to the board regarding the continuous reviews of the corporate financial statement as this would help the company in safeguarding the integrity of financial reporting (Leung et al. 2014). The auditors provide recommendations regarding the timely and balance disclosure of the information. The auditors recommendations also included that timely disclosure by board would help in making sure that the trading in the market share occurs in a timely manner and a transparent information is provided to shareholders. Recommendations have been made to make sure that Qantas Airways adheres with the continuous disclosure obligations. The auditors provides the Qantas Airways with recommendations regarding the objective assurance, risk management, internal control and corporate governance.
The auditors have provided recommendations to the BHP Billiton regarding the appropriateness of the accounting policies and appropriate implementation of practices in the areas of judgement, compliance and accounting standards (Messier, Glover and Prawitt 2015). The auditors have reviewed the financial statements and have also recommended BHP Billiton for the formal adoption of financial reports and statements so that the board can maintain the integrity of financial reports.
The auditors have identified for the inclusion and diversity to promote the culture of safety and productivity priorities (Alles, Kogan and Vasarhelyi 2018). The auditors of BHP Billiton have recommended for inclusion of safety in the business that underpins improve reporting. The auditors of BHP Billiton have also made recommendations relating to the possible conflict of interest and have recommended for constant review of situations that causes actual conflict of interest.
The auditors of BHP Billiton conducted test on the key controls of the group’s valuation of assets along with those that are used in asset impairments and reversals. The auditors tested the correctness of BHP Billiton recognition of CGU to align with the knowledge of the business and its internal reporting structure (Bradbury, Raftery and Scott 2018). The auditors tested vital controls relating to the accounting and disclosure of transactions related to tax. The auditors tested BHP Billiton assumptions and forecasted assessable earnings that supports the deferred tax assets. The auditors tested the consistency of assumptions used in the estimation of contingent liabilities and provisions.
The auditors performed the test on LTIP awards issued by Qantas Airlines under 2014-16 and asserted that the performance measurement were attained in full against the peer groups (Rezaee et al. 2018). The auditors have tested the performance measurement for Qantas Airlines ranging from 2014-16 for the company’s relative with the ordinary shares that are included in the ASX 100. The auditors have also tested performance hurdles ranging from the year 2014-16 and consequently 10,208,000 rights were vested and converted to shares subsequently in 2016.
The audit approach for BHP Billiton comprised of assessment of risk relating to material misstatement (BHP Billiton 2018). The auditor in arriving at their opinions considered including any changes that occurred during the year in the operations of the company and the wider market that might create an influence on BHP Billiton risk profile related to audit (Vasarhelyi, Alles and Kogan 2018). The auditors in their approach considered the application of materiality to perform the audit of BHP Billiton financial statement and noticed that decline in the profit because of the fall in the price of commodity.
The auditors for Qantas Airlines were KPMG. The Auditors approach for Qantas Airlines comprises of assessment of the company financial report that consisted of consolidated balance sheet, income statement, cash flow and equity (Investor.qantas.com 2018). The auditors approach comprised of determination of significance of accounting policies adopted by Qantas Airlines along with the explanatory information provided by the company.
The auditors of BHP Billiton has stated their opinion that the company has prepared their financial statements by applying the standards of IFRS that are issued by the IASB. According to the opinion of auditors the financial statements of BHP Billiton have been prepared correctly and all the material respects are in compliance with the IFRS that are provided by the IASB (BHP Billiton 2018). The auditors opinion also include that the financial reports of BHP Billiton along with the directors declaration are in compliance with the Australian Corporation Act 2001. The financial statements provides true and fair view of BHP Billiton financial position for the year ended 2016. BHP Billiton has complied with the section 5.1 relating to the basis of preparation of financial reports.
The auditor’s opinion relating to Qantas Airlines states that the company’s annual statement are prepared in compliance with the Corporation Act 2001. The financial statement of Qantas Airlines provides a true and fair view of the organization financial position. The company complies with IFRS standard for disclosure (Investor.qantas.com 2018). The auditor’s opinion of Qantas Airlines also stated that the remuneration report is in agreement with section 300A of the corporation Act 2001.
Even though there are several studies that have analysed the differences regarding the expectations of audit but none of the studies have been performed in a concerted manner (Becker, Stead and Stead 2016). The main factors that have he influence on the audit reports is the discontent of the users of financial report.
On considering the annual report of both the companies the location of frauds is in the interest of the financial information users. On one hand it is viewed as the job that is well done while on the other hand it is regarded as the sign for the auditor’s risk that the clients shows. The fraud and irrelevant materials must be detected because this forms the measuring tool for assessing the performance of the auditors (Dow 2017). Therefore the in adequate detection of frauds and relevant materiality errors creates an influence on the significant method of insufficient performance by the auditors.
The detection of illegal actions is another limitation of audit the users of financial information are unable to obtain the required information regarding the commitment of an enterprise illicit acts (Knechel, and Salterio 2016). The users of the financial information states that the objective of the auditors is provide information that the organization has not committed any illegal acts and their financial report provides a correct view of financial standings. The auditors are also required to apply the principles of continuity to measure the independence of the auditor while applying the principles of continuity.
The responsibilities of the Qantas Airlines management includes the preparation of the financial statement in order to provide the shareholders with the correct view of the financial standings. The directors are responsible for adhering with the principles of AASB and Corporation Act 2001 (Investor.qantas.com 2018). The management responsibilities of Qantas Airlines includes presentation of financial statements with the international financial reporting standards and AASB 101.
The auditors responsibilities includes providing a true opinion of the financial report of Qantas Airlines based on the audit conducted. The auditors are responsible for conducting the audit in compliance with the Australian Auditing Standards. The auditors are accountable for assessing the risks relating to material misstatement and assessing the internal control of Qantas Airlines (Investor.qantas.com 2018). The audit also includes assessment of appropriate accounting policies for determining the reasonableness of accounting estimations.
The management responsibilities of BHP Billiton include preparation of annual reports for both the group and parent company in compliance with the applicable laws and regulations. The managements are accountable to present the financial report in compliance with the IFRS standards to fairly present the financial position and performance of groups with reference to UK Companies Act 2006 (BHP Billiton 2018). The directors are required to select the correct accounting estimations and apply appropriate accounting policies.
The auditors of BHP Billiton are KPMG. The auditors are responsible for the audit of financial statements in compliance with the International standard on auditing and Australian Auditing Standards (BHP Billiton 2018). The auditors are responsible for including the compliance together with necessary ethical standards and express their opinion from thereon.
Conclusions:
On a conclusive note the report has considered the performance of both BHP Billiton and Qantas Airlines. The performance of Qantas has been better than the performance of BHP Billiton. The underlying revenue of BHP Billiton has declined significantly due to the falling prices while Qantas Airways has posted a strong performance with improved underlying revenue and EBIT. Despite the growing competition in the aviation industry Qantas Airways business risks has better risk management abilities. BHP Billiton has posted a difficult financial year with suffering of loss in their earnings and EBIT following the disastrous event at the Samarco Iron Ore operations. For BHP Billiton the financial year of 2016 witnessed a weakening market of commodity prices.
References:
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Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.
Becker, L.L., Stead, J.G. and Stead, W.E., 2016. Sustainability Assurance: A Strategic Opportunity for CPA Firms. Management Accounting Quarterly, 17(3), p.29.
BHP Billiton. (2018). BHP Annual Reporting 2017. [online] Available at: https://www.bhp.com/investor-centre/annual-reporting-2017 [Accessed 21 Apr. 2018].
BHP. (2018). BHP Billiton | Our business. [online] Available at: https://www.bhp.com/our-businesses [Accessed 21 Apr. 2018].
Bradbury, M.E., Raftery, A. and Scott, T., 2018. Knowledge spillover from other assurance services. Journal of Contemporary Accounting & Economics, 14(1), pp.52-64.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.
Dow, K.L., 2017. Strengthening quality assurance in Australian higher education. In Global perspectives on quality in higher education (pp. 135-154). Routledge.
Investor.qantas.com. (2018). Qantas Investors | Sustainability and governance. [online] Available at: https://investor.qantas.com/sustainability/?page=accountability [Accessed 21 Apr. 2018].
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