Regulation Of Financial Accounting And Reporting – Analysis Of ASX Listed Companies

Critical Analysis of Financial Accounting and Reporting Regulation

Financial Accounting is very important aspect as through this the financial statements of the company is prepared  which shows the position of the company to outside people like shareholders, creditors, suppliers ,buyers and investors. Taking the help of the standardised accounting procedure financials of the company is prepared which include a lot of detailed report and future aspects of the company(Accounting Edu.org, n.d.).There are various reasons which talk about the need to control the financial reporting, as the users to the financial statement are many and on the basis of financial information interpretation the users make the investing decision in the company, but these different users to the financials are allowed to prepare the financial statements on their own way than it will be prepared accordingly to meet there individual demand. If this happens than different financial statements will be interpreted in a different manner. All the country follow different set of accounting standards and accounting procedure so there to need for accounting regulation and parity.

These disclosures solve many issues between the management of the company and users to the financial statement. It also states that the directors not only present the financial statement to the outside people but also appoint an independent auditor to express opinion on the financial statement and state whether the financial statement reflects a true and fair view and are free from any material misstatements .It also becomes users to do make comparison with other group company in similar industry.( The Student Room Group Ltd. , n.d.)

Therefore all the transactions recorded in the financial statement must be only monetary in nature. The choice of accounting method must be such which is reliable and easy to understand for others and make comparison with other report easily. However accounting standards sometimes may have a negative impact for the prepares of financial statement as no experiment can be done on accounting transactions treatment, but still there is a need that the financial statement and accounting are regulated so that the users can easily interpret it and comparable and saving of time.

The Australian Accounting Standard Board is a Government Agency, which reports to parliament of Australia while International Accounting Standard Board is a private organisation which is set up in London as is of independent nature. The AASB contributes to the IASB through funding and co-operating with IASB by replying to the draft discussion, reviews, aligning vision with IFRS, adopting IFRS etc.  The IASB in turn cooperates with its members for convergence in accounting standard in the world.(Australian Accounting Standard Board, n.d.)

The role of the Australian Accounting Standards Board in the IFRS Setting Process

The process flow is detailed here-in-below:

• AASB identifies technical issue  which require look through;
• Theissues are referred to IASB;
• The issue shall be added to agenda;
• The AASB shall do research and consider the issue;
• A consultation shall take place with stakeholders;(Australian Accounting Standard Board, n.d.)
• Issuing of standard or other pronouncement;
• The report shall be submitted to IASB for comment;
• Implementation and compliance

IFRS is not mandatory on member countries of IASB on account of following reasons:

• To adopt IFRS is not a simple process it requires a lot of convergence from national standard to IFRS.

The company that have chosen under part B of the report are four Australian listed entities under basic mineral category. These companies are engaged in the exploration of minerals. The name of the entities chosen is:-

• Orica Limited:
• Newcrest Mining Limited;
• Orocobre Limited;
• Santos Limited;

Brief Profile of the companies

Orica Limited is engaged in providing commercial explosives for blasting in mines and infrastructure market. It is global leader in providing ground service for the purpose of mining and tunnelling.

The equity profile breakup of the company has been provided here-in-below:

        ($Mio)

Sl NO	Particulars	2014	2015	2016	2017
	Equity
1	Ordinary Shares	1975	1954.4	2025.3	2068.5
2	Reserves	-607	-216.8	-489.9	-565.8
3	Retained Earnings	2895	1247	1247.1	1459.6
	Total Equity attributable to ordinary shareholders of Orica Limited	4263	2984.6	2782.5	2962.3
4	Non -controlling interest in controlled entities	136.1	2.6	0.7	1.2
	Total Equity	4399.1	2987.2	2783.2	2963.5

(Anon., 2014)    (Orica Limited, 2015) (Orica Limited., 2016)(KPMG, 2017)

The following elements are part of equity of the company:

• Ordinary shares which are issued by the company under Initial public offer to the public or at the time of incorporation of shares. These shares are the base of the setup of the company and holders of such shares are owners of the company. Further, these shares are repaid at last in case of winding up of the company. On perusal of the above table one can understand that the ordinary shares of the company have undergone a change on account of issue of further shares under various schemes of the company like dividend reinvestment plan, GEESP plan. The breakup of the same has been provided here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Opening Balance of the ordinary share issued	1877.9	1877.9	1975	2025.3
2	Share issued under dividend reinvestment plan (13-12-13)	47.4	47.4
3	Share issued under dividend reinvestment plan (01-07-14)	34.5	34.5
4	Share Issued – Loan Repayment	13.9	13.9
5	Share issued under GEESP Plan	1.3	1.3
6	Balance at the end of year	1975	1975
7	Share movement under buy back		-21.7	-21.7
8	Share issued under GEESP Plan		1.1	1.9	0.6
9	Share issued under dividend reinvestment plan			70.1	39.2
10	Deferred shares issued to settle Short Term Incentive				3.4
11	Ordinary Share		1954.4	2025.3	2068.5

Further, it can be seen that company has bought back its own share in 2015.  

• Reserves: Reserve means something that has been retained for future use resources forms part of equity and show the intrinsic value of the share of the company.(Web Finance Inc, 2018)A positive reserve indicates a strong future prospect of the company. The reserve in the books of company generally include:
• Share based payment which are paid to employees and key managerial personnel of the company;
• Cash flow hedging reserve is created by an entity to reduce the impact of change in estimated cash flows of a financial asset or liability;
• Foreign currency translation reserve is created in terms of requirement of AASB to account for consolidation of foreign entities under different method like current and temporal;
• Retained earnings: This shows the accumulation of profits of the company which are not distributed as dividend to ordinary shareholders of the company rather they are retained for expansion and emergency projects of the company. The retained earnings of the company have shown a significant decline on account of significant loss reported by the company for that financial year.
• Non- Controlling interest: This represents the share of minority shareholders who do not exercise significant control over the company and are in minority. These generally represent that fraction of the company which is not owned in the subsidiary by the parent company. The flow of non-controlling interest over the 4 year has been presented here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Contributed Equity	66.6	66.6	66.6	66.6
2	Reserves	-16.9	-1.9	-7.8	-12.3
3	Retained Earnings	86.4	-62.1	-58.1	-53.1
4	Non- controlling Interest	136.1	2.6	0.7	1.2

On perusal of the above table one can understand that the non-controlling interest has fallen down drastically on account of retained earning reducing drastically in the backdrop of losses in the company.

• Analysis of debt position of the company: For the purpose of this, only interest bearing liabilities has been considered as debt. Further cash and cash equivalent is reduced to compute net debt for the company. In addition, to estimate the position capital gearing ratio and debt to equity ratio has been computed. The tabulation has been shown here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Interest Bearing Borrowings	2499.9	2300	1877.4	1957.8
2	Less Cash and Cash equivalent	-263.2	-273.9	-328	-516.9
3	Net debt	2236.7	2026.1	1549.4	1440.9
4	Total Equity	4399.1	2987.2	2783.2	2963.5
5	Net debt and Total Equity	6635.8	5013.3	4332.6	4404.4
6	Debt to Equity Ratio	50.84%	67.83%	55.67%	48.62%
7	Gearing Ratio (%)	33.71%	40.41%	35.76%	32.72%

On perusal of the above, the net debt of the company is decreasing on account of increasing cash and cash equivalent in the company.

Newcrest Mining Limited

Newcrest Mining Limited is engaged in gold mining. It is engaged in exploration, mine development and sale of gold etc.(Reuters, 2018) 

The equity profile breakup of the company has been provided here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
	Equity
1	Issued Capital	11679	11673	11666	11657
2	Retained Earnings	-5055	-4679	-4347	-4154
3	Reserves	517	-145	-278	-53
	Total Equity attributable to ordinary shareholders of Orica Limited	7141	6849	7041	7450
4	Non -controlling interest in controlled entities	119	108	79	84
	Total Equity	7260	6957	7120	7534

(Newcrest Mining Limite, 2014)(Newcrest Mining Limited, 2015)

On perusal of the above table, one can understand that the equity of the company has not undergone any significant change. However, minority interest has reduced in the company. Further, the retained earnings of the company are slowly recovering. A detailed analysis is presented here-in-below:

Movement in issued capital

The issued capital of Newcrest mining has not undergone a sea change and the detail of the same has been tabulated here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Opening Balance	11679	11679	11673	11666
2	Share Issued during the year
3	Dividend reinvestment plan				10
4	Share repurchased and held in treasury		-6	-7	-19
5	Issued Capital	11679	11673	11666	11657

Further, the company has bought back its shares of minimal amount during the period of 4 years.

Retained Earnings

The retained earnings of the company are negative symbolising company has incurred huge losses in the past and has been trying to recover the same.

Reserves

The reserves of the company have turned negative on account of losses while consolidating books of subsidiary in the account of parent. The detailed breakup of the same has been tabulated here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Equity Settlement Reserve	No information	70	78	88
2	Foreign Currency Translation reserve	-246	-340	-168
3	Hedge Reserve	6	-16	27
4	Fair Value Reserve	25
5	Total	-145	-278	-53

Further, fair value reserve is created against the valuation of assets in terms of AASB 13 to account for increase in value of asset

Comparative Analysis of the Equity and Debt Position of ASX Listed Companies

Non-Controlling interest

The non-controlling interest has reduced drastically on account of reserve losses.

Debt Position

The analysis of debt position has been presented here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Net debt	3935	2889	2107	1499
2	Total Equity	7260	6957	7120	7534
3	Net debt and Total Equity	11195	9846	9227	9033
4	Debt to Equity Ratio	54.20%	41.53%	29.59%	19.90%
5	Gearing Ratio (%)	35.15%	29.34%	22.84%	16.59%

On perusal of the above table, one can understand the net debt of the company is falling. Further, the gearing ratio has decreased on account of significant reduce in net debt on account of increase in cash reserve of the company.

Orocobre Limited

The company primarily operates in Argentina and is a mining giant. (Reuters, 2018)The movement of equity of the company over the period of four years have been presented here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
	Equity
1	Issued Capital	123	158.46	242.24	243.18
2	Retained Earnings	83.04	82.19	60.28	80.7
3	Reserves	-54.353	-76.53	-111.79	-105.86
	Total Equity attributable to ordinary shareholders of Orica Limited	151.687	164.12	190.73	218.02
4	Non -controlling interest in controlled entities	-1.132	-1.06	-1.31
	Total Equity	150.555	163.06	189.42	218.02

       ( Orocobre Limited Pty Ltd, 2017)

 On perusal of the above table, one can understand that the equity of the company has increased over the period and the non-controlling interest of the company has been wiped off from the balancesheet.

Movement in issued capital

The issued capital of the company has increased significantly on account of fresh issues and exercise of options.

Retained Earnings

The retained earnings of the company are falling over the years of account of losses in the business

Reserves

The reserves of the company have been falling drastically over the year. The movement of the same has been detailed here-in-below

Sl NO	Particulars	2014	2015	2016	2017
1	Option Reserve	1.7	2.62	3.22	2.97
2	Foreign Currency Translation reserve	-47.64	-74.37	-109.61	-104.92
3	Hedge Reserve	-2.56	-4.5	-5.22	-3.75
4	Other Reserve		-0.28	-0.18	-0.17
5	Total	-48.5	-76.53	-111.79	-105.87

The main reason for such fall is the consolidation of accounts of subsidiary in the books of parent on account of which losses have been recognised as FCTR.

Non-Controlling interest

The non-controlling interest has been negative for three years and wiped out in 2017.

Debt Position

The analysis of debt position has been presented here-in-below:

Sl NO	Particulars	2014	2015	2016	2017
1	Net debt	-11.49	10.45	-21.92	-40.82
2	Total Equity	150.555	163.06	189.42	218.02
3	Net debt and Total Equity	139.065	173.51	167.5	177.2
4	Debt to Equity Ratio	-7.63%	6.41%	-11.57%	-18.72%
5	Gearing Ratio (%)	-8.26%	6.02%	-13.09%	-23.04%

On perusal of the above table, one can understand that the company is having significant cash reserves on account of which net debt is negative.

Santos Limited

Santos Limited is a natural gas company. The company is engaged in exploration, development, production and sale of natural gas.(Reuters, 2018) 

The movement of equity of the company over the period of four years have been presented here-in-below:

Sl. No.	Particulars	2014	2015	2016	2017
	Equity
1	Issued Capital	5,762	8,119	8,883	9,034
2	Reserves	-335	-699	-510	51
3	Retained Earnings	2,278	1	-1,293	-1,934
4	Non-controlling Interest	-4	–	–	–
	Total Equity	7,701	7,421	7,080	7,151

(Santos Ltd, 2016)(Anon., 2017)

On perusal of the above table, one can understand that the equity has not undergone much movement but has decreased by 10% on account of falling retained earnings of the company. Further, the losses are on account of market prices of gas. The non-controlling interest has been wiped off from the balance sheet. Further, the reserves have decreased on account of foreign currency translation reserve as stated above.

Debt Position

The analysis of debt position has been presented here-in-below:

Sl. No.	Particulars	2014	2015	2016	2017
1	Net Debt	7,490	4749	3492	2731
2	Total Equity	7,701	7,421	7,080	7,151
3	Net Debt and Total Equity	15,191	12,170	10,572	9,882
4	Debt to Equity Ratio	97.26%	63.99%	49.32%	38.19%
5	Gearing Ratio	49.31%	39.02%	33.03%	27.64%

On perusal of the above table, one can understand that net debt of the company has fallen near about three fold on account of cash reserves of the company.

References:

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Available at: https://www.orocobre.com/news/mdocs-posts/annual-report-2017/
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[Accessed 21 September 2018].

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[Accessed 21 September 2018].

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[Accessed 21 September 2018].

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[Accessed 21 September 2018].

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[Accessed 21 September 2018].

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[Accessed 21 September 2018].

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Available at: https://www.santos.com/media-centre/announcements/2016-annual-report/
[Accessed 21 September 2018].

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[Accessed 21 September 2018].