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HA2032 Financial Accounting | Study of Mining industry

Corporate Regulation

(i) Do your own research and critically discuss whether the financial accounting and reporting should be regulated or manager should be allowed to disclose financial accounting information voluntarily. 

Accounting Standard Setting

(ii) Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB?

Owners Equity

Select 4 public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name.

In this section, go to your firms’ annual reports and save to your computer your firms’ latest annual reports consecutively for last four years. Do not use your firms’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firms’ financial statements carefully and include information from these footnotes in your answer.

You need to do the following tasks:

(iii) From your firms’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past four years articulating the reasons for the change.

(iv) Provide a comparative analysis of the debt and equity position of the four firms that you have selected. 

Answer:

Introduction

Every organization should try and disclose the required terms and conditions to various type of user so that the decision-making process can be carried out by them. In today's world, it has been observed that the principle of disclosure is not being able to fulfil the needs of the financial reporting of users. The environment is divided between two groups of people among which half are satisfied with the information they have been provided with and the other half is not satisfied with the information and is earthling to know more about the financial statements of the organization (Porter & Norton, 2014). Hence a regulation of financial reporting system should be carried out so that the management can disclose certain information in relation to the financial position of the company to the users. If the company or disclose the information voluntarily, then it can face many issues in near future.

i.Corporate regulations

There are a various set of information that is not to be disclosed by the organization as the information is of no use to the normal public but if disclosed can damage the managerial framework of the organization.

All the organizations of a similar industry should try and regulate under a common approach to making any type of disclosure. The manager should try and


not make any type of immaterial disclosure which makes cause a loss to the organization. It is also the duty of the auditor to help and make the particular disclosures that are needed to be disclosed by an organization and also stop any irrelevant disclosures that are already being made by it (Vaitilingam, 2014). Every organization should be regulated through a structured financial accounting system which will help the manager to gain the freedom of disclosure of information on a voluntary basis. The use of financial regulation will also help the users to compare the organization start with other companies in the same industry. Regulation of control should be made in order to get more reliable sources for disclosure of information. It should be duly noted by the manager that the information is disclosed only on the basis of requirement and not on the voluntary basis. Transparency should be maintained in the accounting statements as it satisfies the major objective of financial reporting (Petty et. al, 2012). Hence, it can also be concluded that the process of financial reporting is idealistic in nature and every organization should have a limit on the information which is disclosed by them. The basic idea of transparency in the financial reporting system means that necessary information should be conveyed to the users but not all information should be conveyed voluntarily to them. Too much information will hamper the objective of financial reporting and thus may lead to an insensible act to be carried out by the organization (Parrino, Kidwell & Bates, 2012).

ii. Accounting standard setting

The international financial reporting system or IFRS can be defined as the unified term which helps the organization to collect data and present them under the prescribed regulations of IASB. The concept of IFRS contains broad strategic implementation which has been observed by the FRC and AASB, thus making it necessary for the organizations reporting under Corporations Act 2001 to adopt this method in order to prepare their financial statements. The adoption of this method also helps the organization to ensure if the financial statements have been prepared under the guidelines of AASB. The AASB is said to have a neutral policy in relation to the transactions which states that every event should be recorded in the accounts whether it is in the profit or non-profit sector of the organization (Deegan, 2011).  

The AASB has been observed to adopt different accounting standards in the Australian accounting standards in order to fulfil the strategic guidance policy of the financial reporting Council. It is very important for the ascertainment of the fact that every Organisation in the industry is using the IFRS system issued by IASB in Australia because of the continuous nature of the principle that is required by the financial accounting. It's been observed that the international market will be strongly influenced by the adoption of IFRS system in the accounting sector of the organizations because all the companies of Australia will have a decreased capital displayed in their balance sheet.

It has also been clearly observed that the implementation of IFRS is not compulsory for all the members using are applying IASB because of the huge changes in the process that will be required to be made in the financial sector of the industries (Davies & Crawford, 2012). Making changes in the financial sector of the organizations is not very easy because of the diverse reach of these applications. Hence, it is not being made necessary for every country in the IASB be to follow the IFRS based accounting system. However, it should also be noted that the adoption of IFRS system in the accounting sector of the organization will help to boost the economy of the country and will also provide various benefits to the organization. Many countries that are following the principle of GAAP should also try and dropped the IFRS accounting system so that uniformity can be maintained and convergence will not become a problem in future. Hence, it is not necessary for every organization to adopt the IFRS system but they should try to adopt it so that uniformity can be maintained and the users can also differentiate and compare the forms in a much-elaborated manner.

Owner’s equity

iii. Item of equity

The basic equity component comprises three factors:

  •    Contributed equity
  •    Reserves
  •    Retained earnings

Contributed equity- this generally contains the share capital of the organization and also the shares that are held in trust by the organization. The contributed equity of the organization depicts the amount of share capital that is owned by the company itself. The shareholders are the owners of the company and an increase in the contributed equity is noticed at the time of issue of new shares (Ross et. al, 2014). The new shares are issued in order to collect cash from the public in return for a share in the company. Bonus shares are also issued to the existing shareholders as compiled with the policy of the company.

In the below listed for public companies the major items that constitute the equity funds are as follows:

  •    Contributed equity
  •    Reserves
  •    Retained earnings

Reserves: the reserves consist of different type of hedging reserves, translation reserves of foreign currencies, remuneration reserves and general reserves. Any gain or loss on a particular derivative instrument is being settled with the help of hedging Reserve. The remuneration reserve is being made in order to derive the amount payable as remuneration but is not been calculated accurately. The main reason behind this inaccuracy is the constant enhancement or decline in the remunerations that take place with the change in time. Asset revaluation reserve is also maintained by the organization in order to revaluation results going to the depreciation or any other fluctuation in their prices because of the environmental impacts. Whereas the general reserve is maintained in order to protect the organization in the time of need so that the functions can be carried out at ease and flexibility.

Retained earnings: retained earnings are designing’s that are kept aside by an organization from the total profit earned by it in order to enhance the operations of the organization and meet other contingencies of the company in near future. These types of earnings are very important as they also mean ploughing back of profit and also a safety reserve can be created with the help of these earnings.

BHP Billiton

It has been observed that the overall business of the organization have declined in the previous years and may also result in it to fall in the market. The major reason behind this fall will be the employee share awards that were exercised by the organization (BHP Billiton, 2017). There was a huge reduction of reserves of the company and also transfers were to be made for the employee share awards.

Fortescue

When analyzing fast moving consumer goods, the common stock of the organization was witness to have an increase while the level of equity of the organization was observed to decline. A deficiency has been noticed in the accumulated comprehensive income of the organization because of the problems faced by it in the mining fields and other businesses (Fortescue Metals Group, 2017).

Rio Tinto

The organization Rio Tinto was observed to have sufficient retained earnings and also it was having an accumulated and comprehensive financial statement. The huge retained earnings of the organization world because of the heavy profits earned by the organization in previous years (Rio Tinto, 2017). High accumulated and comprehensive income was noticed in the financial statements of the organization because of the strong business conducted by the management staff of Rio Tinto.

Orica Limited

It was observed for this organization that the equity component was falling continuously and a fluctuation may result in its fall. This fall was a result of the huge increase in the material costs of the organization because of existing contracts (Orica, 2017). However, it was also observed that the company was having sufficient retained earnings which have been saved by it from the profits it has earned in the past.

iv. Comparative analysis of the debt and equity position

After the clear analysis of all the above data, it can be said that fast moving consumer goods are having high debt to equity ratio which will affect the operations of the company and also may cause a problem in fulfilment of the obligations. More points are needed to be driven towards the payment of interest. The BHP Billiton organization is having equilibrium in the debt to equity ratio which shows the efficiency of the management in relation to the financial structure of the company. The company Orica make face problems in future if they continue to expand because of the high debt to equity present in their financial structure. Rio Tinto even after having high debt to equity can balance the same because of the high retained earnings that can be used in order to fulfil the obligations. Even after a high debt to equity ratio the firm will recover all losses with the help of exponential growth that is shown by it in the recent years.

Conclusion

After the clear analysis of all the data present above, it can be stated that the managers of the organization should try and not disclose any materials voluntarily. Also, proper disclosure of financial documents should be regulated. The study of the top four companies in the Mining industry has also helped us to understand the importance of maintaining equilibrium in the debt to equity of an organization so that proper functioning can be achieved.

References

BHP Billiton. (2017) BHP Billiton annual report and accounts 2017. Available from: https://www.bhp.com/investor-centre/annual-reporting-2017 [Accessed  September 2018]

Davies, T. and Crawford, I. (2012)  Financial accounting. Harlow, England: Pearson.

Deegan, C. M. (2011)  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Fortescue Metals Group. (2017) Fortescue Metal Group Annual report and accounts 2017 [Online]. Available at: https://www.fmgl.com.au/docs/default-source/default-document-library/fy2017-annual-report.pdf?sfvrsn=1f931875_2 [Accessed 17 September 2018]

Orica. (2017) Orica Annual Report and accounts 2017 [online]. Available from: https://www.orica.com/Investors/company-reports#.W5_QB84zbIU  [Accessed 17 September 2018]

Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,

Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.

Porter, G. and  Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning

Rio Tinto. (2017)  Rio Tinto Annual Report and accounts 2017 [online]. Available from: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 16 September 2018]

Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)

Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.

Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.

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