The report is prepared for evaluating the business activities and financial performance of company listed in Australian stock exchange. For this purpose, company operating in materials industry named Newcrest Mining limited is selected. Newcrest Mining limited is one of the largest mining companies of the world that is based in Australia. Main activities of organization are to engage in development, exploration and sale of gold (Newcrest.com.au, 2018). Financial performance of company is analyzed by evaluating the capital structure and source of funding of company. Any changes in the accounting policies have been identified for elucidating its compliance with applicable accounting standards. Furthermore, assets such as plant, property and equipment along with intangible assets are evaluated by describing the related accounting policies and the impairment.
Core business of company:
The principal activities of Newcrest mining is to explore and involve in the operations and development of mining along with selling gold and copper concentrate. Operations of mining are subjected to particular environmental regulations as a part of environmental approval and operating license. Organization has world class portfolio of substantial reserves of gold, operating mines and strong pipeline of options for growth that is primarily located in Asia pacific region. In addition to this, the group has experience in commissioning and developing both smaller and larger scale operations. The recovery of higher grade epithermal deposits is optimized by usage of underground methods of mining and range of low cost bulk. One of the key objectives of exploration activities of Newcrest is to establish long term mining operations by securing large mineral provinces and districts. Some of the principal targets of company are epithermal gold silver deposits, large porphyry of deposits of gold and copper, sediment and orogenic gold deposits. Moreover, it is recognized by Newcrest that risk is inherent to business and value of business is protected by the effective management of risks. Techniques of risk management are an integral part of decision making and process of crisis management is implemented by the group. For ensuring the management of risks, effective risk financing strategies are employed by group.
Industry in which company operates:
Newcrest Miming limited operates in metal and mining industry prioritizing on importance of sustainability and safety. By virtue of geographies and industry in which Newcrest operates, group is exposed to number of financial risks. Mining industry of Australia is experiencing boom and creating high level of demand for the specialized technologies development. There are over seven hundred companies involved in the development, exploration and production of mineral resources and the sector includes largest diversified resource companies such as Rio Tinto and BHP Billiton Limited. Some of the top competitors of Newcrest Mining limited involve BHP Billiton Limited, Freeport Mcmoran Inc and Newmont Australia Pty Limited.
Finances and financial performance:
The financial performance of company is illustrated by analyzing the capital structure, source of funding and applicable accounting standards.
The financial performance of Newcrest Mining limited is driven by continued focus on operational discipline, safe cash generation and profitable growth. A final unfranked dividend of US 7.5 cents per share was paid as determined by company in regard to financial performance. Financial and operating performance of company in current period is considerably impacted by geotechnical events that results in the suspension mining activities. There has been decline in sales revenue from US $ 3295 in year 2016 as against US $ 3477 in year 2017. A considerable increment has been witnessed in gross profit from US $ 694 in year 2016 as against $ 868 in year 2017 (Newcrest.com.au, 2018).
Over the last three years, there has been considerable improvement in the financial metrics of Newcrest mining limited. Financial performance and capital commitments of company is completely balanced by the dividend policies of Newcrest Limited. The capital structure of company comprised of net debt that involves $ 1991 million of corporate bond less $ 492 million of cash and cash equivalent. Total amount of equity comprised of reserves, accumulated losses and issued capital of amount US $ 53 million, US $ 4154 and US $ 11657 respectively for year 2017. The amount of equity that is attributable to owners of parent company stood at US $ 7540. In the current year, total amount of current liabilities stood at $ 664 and current assets stood at US $ 1249. Current assets comprised of cash and cash equivalent, trade and receivables, other financial assets, inventories, current tax assets and other assets. Current liabilities on other hand comprised of borrowings, trade and other payables, current tax liability, provisions and borrowings (Schaltegger & Burritt, 2017). Noncurrent liabilities comprised of provisions, borrowings, deferred tax liabilities and other financial liabilities totaling to US $ 3385.
The directors report present several elements of financial performance that includes statutory profit, underlying profit, cash flow from operating profits, free cash flow, EBITDA margin, EBIT margin, gearing ratio, net debt to EBITDA, ROCE, price of shares, earnings or loss per share, dividends and gold price. The underlying profit in year 2017 stood at US $ 394 million as against US $ 424 million and US $ 393 million in year 2015 and 2014 respectively indicating that overall level of profits reported has reduced. There has been consistent increase in cash flow from operating activities to US $ 1467 million compared to $ 1241 million and US $ 1280 million in year 2016 and 2015 respectively. Furthermore, considerable growth has been witnessed in dividend payment at 15 cent per share in year 2017 as against 7.5 cent per share in year 2016. ROCE stood at 7.9% in year 2017 as against 6.2% in year 2016 indicating that return generated from employed capital has increased. Share price of Newcrest on other hand has declined to $ 20.16 in year 2017 as against $ 23 in year 2016 (Newcrest.com.au, 2018).
The Newcrest group has changed its accounting policies in relation to change its presentation of currency to US dollars from Australian dollars. As effective from January, 2016 the group adopted accounting standard AASB 9 financial instruments. In addition to this, the group has earlier adopted accounting amendment AASB 2015-2 disclosure Initiatives. Adoption of AASB 9 financial instruments by group did not have any material impact on the measurement and classification of any financial instruments. Adoption of AASB 2015-2 disclosure initiative has made some amendments to presentation of financial statements of AASB 101 that arises from disclosure initiative project of IASB. Such amendments are designed for facilitating improvement in reporting that involved clarification on disaggregation and aggregation of line items, material disclosures and subtotals presentation (Kumar & Zattoni, 2016).
The measurement and classification of financial liabilities and assets have also changed and the adoption of new standard has removed a requirement for separating embedded derivatives from hosts of financial assets. Instead, the classification of hybrid contract should be done at fair value entirely. Any accounting mismatch regarding this can be considerably reduced by an election made to designate financial measured at fair value through loss or profit initial recognition. As per the new applicable standard, the new standard would provide the option for separately presenting other comprehensive income. The change that was brought into the measurement and classification of financial assets that it does not requires separation of quotational period pricing. The changed accounting policies do not have not impact on financial liabilities and no material changes was witnessed due to nature of short term nature of portfolio of accounts receivables arising from impairment requirement of AASB 9.
Furthermore, adoption of AASB 9 did not bring any material impact on statement of changes in equity and statement of comprehensive income.
Carrying amount under accounting standard:
(Source: Newcrest.com.au, 2018)
The consolidated entity has changed the disclosure and presentation of sales revenue for excluding the impact of present sales revenue at spot prices and hedging. There is a separate presentation of losses and gains that arises from hedging. Revised disclosure format and presentation intends to provide a better understanding of the financial performance of operations of group (Armstrong et al., 2015).
Summary of key changes resulting from change in accounting policies are listed below:
Accounting policies of plant, property and equipment:
The property, plant and equipment of Newcrest limited is carried at cost that is less of any accumulated impairment loss and accumulated amount of depreciation. Such assets initial cost comprise of constriction or any purchase cost and any other costs that are attributable for bringing assets into the operation. The construction cost or purchase price is the fair value or any other amount paid to acquire the assets. Depreciation of items of property, plant and equipment are done at their useful estimated lives. Evaluation and exploration expenditure relating to property, plant and equipment are carrying forward and capitalized to the extent that costs are expected to be recouped and right to tenure of the current interest of area. The value of plant, equipment and property at the reporting period stood at US $ 8852 and US $ 8891 for year ending 2017 and 2016 respectively (Newcrest.com.au, 2018).
Carrying amount of plant, property and equipment:
For impairment, assessment of carrying value of evaluation of assets and capitalized exploration when it is suggested by circumstances that recoverable amount of assets are less than the carrying amount. The carrying amount of property, plant and equipment for the reporting period ending 30th June, 2017 and 30th June 2016 stood at US $ 8852 million and US $ 8891 (Newcrest.com.au, 2018). The carrying value of property, plant and equipment are impacted by any changes in the estimates of reported reserves.
Carrying amount of PPE:
(Source: Newcrest.com.au, 2018)
The development of plant, equipment and mine is done at cost less of any accumulated impairment loss and accumulated depreciation.
Identification of intangible assets:
The intangible assets identified from the evaluation of annual report of Newcrest mining limited is information system development. Value of information system development stood at US $ 44 million and US $ 35 million for year 2017 and 2016 respectively. Value of such intangible assets is derived by deducting impairment and accumulated amortization from the cost of assets. Costs that are incurred in acquisition of such software and development of system of information technology are capitalized as intangible assets. Computation of amortization is done on straight line basis over the range of useful life that usually ranges from three to seven years. Total amount of other intangible assets as reported in the balance sheet stood at US $ 21 million in year 2017 compared to US $ 23 million in year 2016 respectively.
Accounting policies in relation to intangible assets:
The accounting standard of International financial reporting standard (IFRS 3) requires intangible assets to be recognized separately if they are separable from business or they arise from legal or any contractual rights. Intense competition of faced by Newcrest limited for the acquisition of attractive mining and exploration properties that helps in depleting the reserves generated by mining activities. The acquirer should exercise the fair value of all the intangible assets of the acquired business. On other hand, IAS 36 requires goodwill to be tested for impairment to be tested at lowest level and for the purpose of impairment testing, the grouping of cash generating unit should reflect the lowest at which goodwill is monitored by management. Impairment indicators are applied for testing the goodwill on annual basis. In the second stage of impairment testing, the carrying value of amended individual cash generating unit is adjusted for impairment charge (Carnegie & O’Connell, 2014).
Evaluation of impairment of assets:
For each unit of cash generating unit, assessment of indicators of existence of impairment reversal and impairment semi annually is done by the group. Recognition of impairment loss is done when the carrying amount of assets exceeds its recoverable amount. Cash generating unit recoverable amount is estimated based fair value by deducting the amount of cost of disposal. For noncurrent assets such as intangibles, an impairment reversal is recognized.
While conducting impairment resting of plant, equipment and property by Newcrest mining limited, the total amount of gross and net impairment loss stood at US $ 158 and US $ 34. The impairment loss generated from intangible assets stood at US $ 2 million relating to gross value and net value. The total amount of impairment reversal stood at US $ 160 million during year 2015. Net impairment reversal is recognized by group resulting from annual impairment testing and such reversal comprised of impairment reversal of US $ 413 million relating to Tefler.
Conclusion:
The above report is prepared for analyzing the financial structure of Newcrest Mining limited by reviewing different performance metrics and figures related to financials. It can be seen that there has been decline in shareholder value and fall in share price from 43.3 cents per share in 2016 to 40.2 cents per share in year 2017. Moreover, the profits attributable to owner of parents and non controlling interest have reduced from US $ 335 to US $ 319. Therefore, the profits have declined due to decline in the operational activities. The group has implemented new accounting standards in relation to hedging accounting and the prior standard does not have any material impact on the financial liabilities. There was no impairment loss generated in relation to intangible assets in the current year as against previous year. On other hand, impairment loss was generated for property, plant and equipments in the previous year. However, it was ascertained from the annual report of Newcrest mining limited that there was no adequate disclosure about the accounting policies in relation to intangible assets and plant, equipment and property. The group uses different performance indicators for measuring the impact of financial performance.
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