Comparative Analysis Of Financial Reporting Of BHP And Rio Tinto

Owners Equity

Analysis of financial reporting may be considered to be one of the most crucial aspects of business studies as the process of such analysis and evaluation may involve consideration of different success-critical business matters that are both internal and external to the operations of the firms. Such analysis shows the comparative position of the financial reporting of two or more companies belonging to an industry. The report discusses the same in subsequent sections.

The comparative analysis of each and every line items of owners’ equity of both the companies is conducted in the subsequent parts of the report.

Owners’ equity of the group may consist of the share capital of BHP Billiton Limited and BHP Billiton Plc. In addition, there are some treasure shares and reserves which primarily include share premium account, foreign currency translation reserve, employee share awards reserve, hedging reserve, financial assets reserve, shares buy-back reserve. In addition, there are retained earnings which may be construed to be the accumulation of past profits. Since the consideration is about the owners, the non-controlling interests have not been taken into consideration here (Bhp.com, 2018).

As far as change is concerned, the total equity has increased in the last three years under review i.e. 2015 to 2017. In the current year, there has been a rise from $60,071 million in the year 2016 to $62,726 million in the year 2017 (Bhp.com, 2018). Such increase is primarily attributable to the increase in reserve as the share capital has remained stagnant throughout.

Rio Tinto:

On the other hand, the owners’ equity of Rio Tinto includes almost similar line items that have appeared in the books of accounts of BHP. The items are primarily shared capital of Rio Tinto Plc and Rio Tinto Limited, other reserves and retained earnings. It is interesting to note that the management of Rio Tinto has excluded share premium reserve out of the reserves and shown it separately as separate line items in the Balance Sheet. The other reserves of Rio Tinto have consisted of capital redemption reserve, hedging reserve, sale revaluation reserve and foreign currency translation reserve (Riotinto.com, 2018).

The growth story has almost been similar in the case of Rio Tinto as well. However, there has been a marginal increase in share capital and the lion’s portion of growth has been occurring due to the growth in reserves (Riotinto.com, 2018).

Both the firms have largely reliant on debt as may be evident from the last three year’s balance sheets. The debt part of the entire liabilities bucket has been substantially high and almost equal to the equity position. In other words, the management has been aggressive to grow on debt probably because of the leverage benefit as may be derived therefrom. Moreover, the debt, being the cheaper source of funding than equity, may easily be an easy option for the management to choose for the purpose of sourcing (Finocchiaro and Mendicino, 2015).

Debt-Equity Mix

However, the comparative position may show that Rio Tinto has more debt burden in its capital structure than that of BHP in the year 2016.  However, the figure for 2017 depicts the almost the same proportion of debt-equity mix for both the firms.  

Cash flow statement is a critical financial statement which reflects the net cash flow position of the business and the comparative analysis of cash flow statement establishes the mutual comparison between two firms with respect to their respective liquidity stand point. The discussion has been briefly performed as below.

Cash generated from operations (CGO) for the company in last three years has been declining from $21,620 million in the year 2015 to $12,671 million in 2016 and finally revived to $19,377 million in 2017 (Bhp.com, 2018). There has been a sharp fall in cash generation in the last year, because of loss booked by the group. Investment in PP&E has been declining continuously in the last three years from $11,947 million (2015) to $4,252 million (2017). In addition, the repayment of loan has also been a substantially huge line item of the company and the same has been fluctuating showing an overall increasing trend during the period under review (from $4 billion in 2015 to $7 billion in 2017 approximately). However, the dividend payments to the stockholders have also shown a downward trend in the last three years to the extent of 50% decline ( from $6.5 billion to less than $3 billion).

Rio Tinto:

On the other hand, the company has been able to increase the cash generated from operations substantially from the last two years – almost 50% increase from the figure of 2015. The purchase of PP&E has also been fairly stable throughout the period. In the current year, there has been significant inflow from the disposal of subsidiaries, joint ventures, and associates to the extent of $2,675 million (Riotinto.com, 2018). Dividend payment has also been fluctuating with an overall stable rate as far as figures of 2015 and 2017 are concerned. Repayment of borrowing is another critical item in the cash flow statement which is also very much fluctuating with movement from $3 billion to $9 billion in 2016 and again less than $3 billion in 2017 (Riotinto.com, 2018).

The relative cash position of both the companies has been fairly rich in the sense that both the firms have been able to accumulate a substantial amount of cash balance at the end of 2017. However, a closer look into the cash movement of both the groups’ shows that BHP has been extremely efficient in terms of cash accumulation which may be corroborated from the fact the cash position of BHP was $6,613 million in 2015 which increased to $10,276 million in 2016 and subsequently $14,108 million in 2017.

Cash Flow

Comprehensive income statement mainly lists the revenue items that are not being considered in the income statement but critical to consider while finalizing the share of profit to be transferred to stockholders account and retained earnings (Damant, 2003). The section below briefly discusses the line items and their respective changes in yearly basis for both the companies.

In case of BHP, the line items that have appeared in the other comprehensive income statement of the company are primarily of two types namely the items that are being reclassified in the income statement subsequently and the items that are not being reclassified in the income statement. Proceeds from available for sale investments, cash flow hedges and related gains transferred to equity, exchange fluctuations are taken to equity, tax recognized within the ambit of other comprehensive income are some of the examples of other comprehensive income reclassified in the income statement (Bhp.com, 2018). On the other hand, re-measurement gains on medical and pension schemes, related tax expenses are those items that are not being reclassified in the income statement but have appeared in the other comprehensive income statement of the company for the years under review (Bhp.com, 2018).

Rio Tinto:

In the case of Rio Tinto, the actuarial gains or losses on post-retirement benefit plans, related tax implications on both current tax change and deferred tax charge are reclassified in the income statement. In addition, the cash flow hedges, gains or losses on the revaluation of available for sale securities and assets are not being reclassified in the income statement.  Therefore, it may be noted that both the companies have followed similar types of standards and policies with respect to income recognition and tax charging thereon leading to a similar approach for another comprehensive income statement (Riotinto.com, 2018).

For Rio Tinto, the other comprehensive income has increased sizably in the last three years. In the year 2015, the same was a loss of $3,749 million which increased almost 4 times to $11,939 million in the year 2017. Such increment is primarily attributable to the huge amount of currency translation adjustment in the current year. However, such adjustment excludes the gain arising out of the translation arising from Rio Tinto Limited’s share capital. The same has been taken to the group’s statement of changes in equity. However, as far as BHP is concerned, the other comprehensive income for the group has been increasing with fluctuations in the year 2016.  However, it may be observed that such an increase has happened because of higher profit and not because of items in OCI statement in the year 2017.

Other Comprehensive Income Statement

Corporate income tax is an important line item in the financial statement of the companies. The report shows the different aspects of corporate income tax and related deferred tax assets and liabilities position of both the companies.

Current tax expenses for BHP are increasing in the last three years. In the year 2015, the same was $3,168 million, which reduced to $2,456 million in the year 2016 before increasing to $4,288 million in the year 2017. On the other hand, the same for Rio Tinto has also been increasing but such increase has shown a consistent growth during the period. The charge has been increased from $1,132 million (2015) to $3,270 million (2017), which is almost three times.

The tax rate for BHP has been considered as Australian prima facie tax rate of 30%, whereas, the same for Rio Tinto has been taken as UK prima facie tax rate of 19%. Therefore, it may be observed that BHP has comparatively higher tax rate.

Deferred tax position may be discussed from two view point; one is related to income statement which shows how much charges have been, made against the profit for deferred tax purpose and the second one is related to balance sheet which establishes the deferred tax assets or liabilities position of the business (Warsono, 2018).

For BHP, the deferred tax charge to the revenue has been heavily fluctuating from $498 (2015) to negative $3,508 (2016) and then again negative $188 (2017). The balance sheet of BHP has shown deferred tax assets of $5,788 million in the current year, whereas, the business also created a provision for deferred tax liabilities to the extent of $3,765 million during the same period (BHP, 2018).

On the other hand, for Rio Tinto, deferred tax charge has been increasing yearly basis; from negative $139 million in 2015 to $695 million in 2017. As far as assets and liabilities position is concerned, the management has created $3,395 million in deferred tax assets and $3,628 deferred tax liabilities (Riotinto.com, 2018).

It may, therefore, be shown that BHP has more asset position in terms of timing differences than that of Rio Tinto.  Such situation is subject to adjustment of subsequent year’s reversal of timing differences and income tax provision accordingly. In this context, it may be worth to note that the creation of deferred tax assets or liabilities are because of the variance in treatment of different items of financial statements under both Income Tax Act and Corporations Act (Laux, 2011). For example, the depreciation is a classic example which is charged to profit under two different approaches in both the Income Tax Act and Corporations Act as well. As a result, such differences may occur which may primarily be construed to be arising out of timing differences. 

Corporate Income Tax

Since the tax is provided for in the income statement, the exact amount of cash tax payment may not be traceable from the income statement or the statement of profit or loss. Cash flow statement shows the same for the relevant years.

An insight into the cash flow statement may reveal that Rio Tinto has paid almost $2,307 million income tax to the government during the financial year 2017, whereas, the same for BHP has been $2,585 million. In this context, it may be interesting to note that both the companies have paid the almost similar amount of tax in spite of the fact that both the companies are subjected to different tax bracket with varied degree of income.

The cash tax rate has not been specifically calculated in any of the sections of annual reports of the companies. However, the effort has been made to compute the same based on the earning before tax and a cash payment of tax. The table below shows the same in details.

Particulars	2017 $m	2016 $m	2015 $m
BHP:
Earnings before tax	10,322	-7,259	8,056
Cash tax payment	2,585	2,286	4,373
Cash tax rate	25.04%	-31.49%	54.28%
Rio Tinto:
Earnings before tax	12,816	6,343	-726
Cash tax payment	2,307	1,521	1,792
Cash tax rate	18.00%	23.98%	-246.83%

From the calculation, it shows that the cash tax rate for both the firms has been highly fluctuating.  However, the same for Rio Tinto has been negative at 250% almost which got reduced to 18% in the last three years. Such a situation has happened because of loss position and a cash payment of tax on a provisional basis. On the other hand, the management of BHP has been able to reduce to cash tax rate for them by almost half i.e. from 54% in 2015 to 25% in 2017 (BHP, 2018).

Conclusion

Based on the discussion and analysis performed in the preceding sections of the report, it may be concluded that the financial reporting plays an integral part of overall responsibilities bracket of corporate management. An efficient and understandable reporting helps the stakeholders to assess the financial health of the business in a more efficient manner. Since the audited financial statements have their own gravity in terms of reliability and trustworthiness, the investors and prospective owner groups put much reliance on the facts and figure as mentioned in the annual report of the companies. Therefore, the management should take utmost care while finalizing the annual report in order to ensure smooth stakeholder management. An efficient and lucid financial reporting in line with the related regulations and directives significantly contribute towards a greater transparency, brand building and value creation for the business and thereby attaining sustainability in the market in the long-run.

References

BHP. (2018). BHP | Investor centre. [online] Available at: https://www.bhp.com/investor-centre [Accessed 15 Sep. 2018].

Bhp.com. (2018). BHP Annual Report 2017. [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf [Accessed 15 Sep. 2018].

Damant, D. (2003). The revolution ahead in financial reporting: a new world – what the income statement means to financial reporting. Balance Sheet, 11(4), pp.10-18.

Finocchiaro, D. and Mendicino, C. (2015). Debt, Equity and the Equity Price Puzzle. SSRN Electronic Journal.

Laux, R. (2011). The Association between Deferred Tax Assets and Liabilities and Future Tax Payments. SSRN Electronic Journal.

Riotinto.com. (2018). Results & reports. [online] Available at: https://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed 15 Sep. 2018].

Riotinto.com. (2018). Rio Tinto Annual Report 2017. [online] Available at: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 15 Sep. 2018].

Warsono, W. (2018). Deferred Tax Assets and Deferred Tax Expense Against Tax Planning Profit Management. Shirkah: Journal of Economics and Business, 2(2).