Accounting Standard and Governance

This assessment analyzes the annual reports of Rio Tinto Ltd and BHP Billiton Ltd to evaluate the impact of AASB 16 on financial reporting and environmental/social reporting. It includes an analysis of key financial ratios and discusses the implementation of the new accounting standard on leases.

Running head: ACCOUNTING STANDARD AND GOVERNANCE
Accounting Standard and Governance
Name of the Student:
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Author’s Note

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ACCOUNTING STANDARD AND GOVERNANCE
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................3
Implementation of AASB 16.......................................................................................................3
Effect on the Financial Statements..............................................................................................5
Ratio Analysis..............................................................................................................................6
Reporting of Environmental and Social Aspects.........................................................................9
Overall Impact of AASB 16......................................................................................................11
Summary for Investment Company...........................................................................................11
Conclusion.....................................................................................................................................12
Reference.......................................................................................................................................12

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Introduction
The main purpose of this assessment is to analyze the annual reports of two companies
which are engaged in the same industry. The companies which are selected are Rio Tinto Ltd and
BHP Billiton ltd and for these companies, the annual report for 2017 is considered for the
purpose of analysis. The assessment aims to analyze the reporting standards which are followed
by the business for leases and whether the new standard on leases AASB 16 can impact the
reporting framework which is applied by both the companies. The assessment also involves
evaluating the environmental and social reporting which is undertaken by the management of the
company and whether the same is appropriate or not. The assessment would also be included
computation and analysis of key financial ratios which are useful in determining the financial
performance of the business. The computation of key financial ratios of the business would on
the basis of the annual reports of both the companies for the year 2017.
Discussion
Implementation of AASB 16
The changes which have been brought about in the reporting of leases which are shown
in the financial statements of the business. The changes have been brought in the accounting
standards for leases so as to improve the reporting process for operating leases and ensure that
proper disclosures are provided in the financial statements of the business. In earlier standard,
operating leases was not recognized in the financial statements and therefore there was a scope
for manipulations in the transactions which are included in the annual reports (Barone, Birt and
Moya 2014). The new standards require mandatory disclosure of operating leases in the balance

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sheet of the business, In addition to this, the identification of leases can be appropriately done
with the help of AASB 16 and also lease payments can be done in an more efficient manner.
The changes in the leasing standard is expected to bring about more transparency in the
reporting framework and thereby also ensure that the financial aspects of the business are
appropriately reported. The changes would restrict any manipulations which was done when the
operating leases were not recognized in the financial statements of the company (Fitó, Moya and
Orgaz 2013). In the case of BHP Billiton, the annual report of the company shows that the
business does not have any operating lease but has financial lease which is on equipment. The
operating leases is on rental payments for which adjustment are showing in the income statement
of the business.
Figure 1: (Extract showing leases of the BHP Billiton ltd).
Source: (Bhp.com. 2018)
In the case of Rio Tinto Ltd, the annual report shows that there are certain financial leases
which is taken by the business for which appropriate disclosures are provided in the annual
report of the business (Dakis 2016). The management of the company has mining properties on

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leases and there are also certain operating leases which is shown in the annual report of the
business which is shown in the notes to account section of the business.
Figure 1: (Extract showing leases of the Rio Tinto Ltd).
Source: (Riotinto.com. 2018)
The above extract shows the operating leases of the business of Rio Tinto ltd and the
payment period for the same. In case of both the companies the introduction of the new standard
would mean that the reporting framework of both the companies would significantly improve
and proper disclosures can be provided for both the companies. The implementation of the new
AASB 16 would also mean that the business would be reporting more efficiently on the reporting
of leases of the business (Joubert, Garvie and Parle 2017). The new standard would effectively
help the management of both companies to effectively identify the nature of the lease whether
the same is operating or financial lease and thereby also help in the disclosure process of the
business. Therefore, in an overall estimate, it can be said that the changes which has taken place
in the reporting of leases due to the new standard would be beneficial for both the companies.

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Effect on the Financial Statements
The new standard on leases AASB 16 would become enforceable from 2019 on all
companies. The new standards have made tremendous improvements in terms of reporting for
leases in a business. The annual report of Rio Tinto and BHP Billiton both shows that the
companies have taken both financial leases and operating leases during the year. The new
standard effectively covers the gap which was present in the previous standard relating to
reporting for operating leases and thereby also allows the business to effectively recognize the
type of risk which is taken by the management of both the companies and assist them to classify
the leases as whether the same is operating lease or financial lease.
Under the new lease standards, the income statement would be showing the lease
payments which are undertaken by the business during the period and also the interest which the
business needs to pay for the assets which are taken on leases. In case of the balance sheet,
operating leases would be disclosed which was not the case in case of previous accounting
standards and thereby this ensures that there is full transparency in the annual reports of the
business and the users are able to effectively analyze the same for taking decisions (Stice and
Stice 2013). The cash flow statement would also be affected as lease payments would involve
cash outflows which would be shown in the annual report of the business. The major changes
which has taken place in comparison to previous standards is that no off-balance sheet treatment
would be allowed in the financial statements. The new standard is very useful for the users of the
financial statement as the same provide full disclosures regarding the treatment relating to leases
of a business. The new standard would enable the users to have full information relating to the
company and according to the same take important decisions which is related to the company.
Therefore, it can be said appropriately that the introduction of the new lease would only enhance

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the quality of reporting of both companies and would also be beneficial for the users of the
financial statements of the business.
Ratio Analysis
Rio Tinto Ltd BHP Bhiliton Ltd
Particulars 2017 2016 2017 2016
US$M US$M US$M US$M
Current Assets A 18,678 15,055 21,056 17,714
Current Liabilities B 11,225 9,362 11,366 12,340
Current Ratio C=A/B 1.664 1.608 1.853 1.435
Inventory D 3,472 2,937 3,673 3,411
Prepayments E
Quick Ratio
F=(A-D-
E)/B 1.355 1.294 1.529 1.159
Total Revenue G 40,030 33,781 38,285 30,912
Net Profit H 8,851 4,776 6,222 -6,207
Net Profit Margin I=H/G 22.11% 14.14% 16.25% -20.08%
Operating Profit J 14,135 6,795 11,753 -6,235
Operating Profit Margin K=J/G 35.31% 20.11% 30.70% -20.17%
Figure 3: (Table Showing Profitability and Liquidity ratios of both the Companies)
Source: (Created by the Author)
The current ratio is an estimate which effectively states the financial status of the
company in terms of meeting the current liabilities of the business. The current ratio of Rio Tinto
ltd and BHP Billiton ltd is shown to have improved significantly from the previous year analysis
which shows that there has been improvement in the liquidity position of the business and it also
signifies that the business has appropriate funds in their hands to meet any current projects or
obligations. If comparison is made between the two companies, the liquidity position of BHP
Billiton ltd is better than Rio Tinto ltd as per the table which is shown above. The quick ratio of

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the business also shows similar estimates and improvements from previous year figure. A
graphical presentation of the liquidity ratios for both the companies is shown in the figure below:
2017 2016 2017 2016
Rio Tinto Ltd BHP Bhiliton Ltd
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1.600
1.800
2.000
Liquidity Ratios
Current Ratio Quick Ratio
Figure 4: (Graph showing liquidity ratios of both the companies)
Source: (Created by the Author)
The above table also shows the profitability ratios of the business of Rio Tinto and BHP
Billiton ltd for the year 2017 and 2016. The profitability ratios of the business for both the
companies shows significant improvements in comparison to previous years. In case of BHP
Billiton ltd, the business has made tremendous improvements as in 2016, the business was in loss
and the same has been improved to profits in the year 2017. Therefore, the estimate of
profitability of the business is shown to be appropriate for the business. The graph which is
shown below shows the profitability ratios of both the companies for the year 2017 and 2016.

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2017 2016 2017 2016
Rio Tinto Ltd BHP Bhiliton Ltd
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Profi tability Rati os
Net Profit Margin Operating Profit Margin
Figure 5: (Graph showing Profitability ratios of both the companies)
Source: (Created by the Author)
Reporting of Environmental and Social Aspects
The reporting relating to the environmental and social aspects are included in the
sustainability reports which are prepared by the management of both the companies for the year
2017. In the case of BHP Billiton, the sustainability report shows that the management is
dedicated towards social responsibilities as it undertakes huge amount of social investments,
reduced the emission of greenhouse gases on a year by year basis and prioritize the health of the
employees and community (Bhp.com. 2018). The sustainability report of the company
effectively shows that around 1% of the pre-taxed profits of the business are investment in
developing the needs of society and community. The company invested around US$80.1 million

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in FY2017, which included US$75.1 million in programs that benefitted communities as per the
sustainability report of the business (Solomon et al. 2013). In addition to this, the management
effectively managed the resources and the sites in which operations is carried out in order to
protect the water bodies of the region and no contamination takes place in the same (Bennett,
James and Klinkers 2017). The business also spends extensively on restoration work on the site
where the business has carried out operations.
Figure 6: (Extract Showing performance targets of BHP Billiton)
Source: (Bhp.com. 2018)

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In the case of Rio Tinto Ltd, the management of the company has great emphasis on the
safety of the employees of the business and also the protection of the workers who are working
for the business (Qiu, Shaukat and Tharyan 2016). In terms of protection of the environment, the
business has effectively reduced the emission of green houses gases by 29%. The business has
also reduced the use of renewable resources of the business and has also introduced practices
which are sustainable and environmental friendly (Riotinto.com. 2018). Therefore, it can be said
that both the companies has effectively made disclosures relating to social and environment
activities which are undertaken by the business and the same is shown in the sustainability
reports of the business and the same is also as per the requirements of the loan.
Overall Impact of AASB 16
The introduction of AASB 16 would bring about significant changes in the reporting
framework which is followed by the business of both the companies. The new standard would
bring about transparency in the reporting framework and also ensure that the financial statements
are appropriately presented and showing true view. The new standard is beneficial for the users
of the financial statement as complete information would be available for the purpose of taking
appropriate decisions relating to investment in the business. Operating and financial leases form
part of the liabilities section and therefore with the new standard appropriate estimation of the
financial position of the business can be derived. Therefore, in overall it can be said that the new
standard would be the reporting framework better for both the companies.
Summary for Investment Company
The analysis of both the companies shows that the management of both the company has
appropriately prepared the financial statements following all rules and regulations. The adoption
of new accounting standards on leases would further improve the reporting framework of the

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business. The ratio analysis also show that the financial performance of the business has
improved significantly for both the companies in the year 2017. Therefore, investment can be
undertaken in both the companies but the financial position is better for BHP Billiton ltd.
Conclusion
The above discussion effectively shows that the performance of Rio Tinto Ltd and BHP
Billiton ltd and makes comparison for the same. The above assessment shows the ratio analysis
of both the companies which represent the financial performance of the business. The above
discussion also shows the environmental and social reporting which is included in the
sustainability reports of the business. The investment decisions are also to be taken on the basis
of the results of ratios and reporting framework which is adopted by the business.

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Reference
Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: A review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Bennett, M., James, P. and Klinkers, L. eds., 2017. Sustainable measures: Evaluation and
reporting of environmental and social performance. Routledge.
Bhp.com. (2018). [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpsustainabilityreport2017.pdf? [Accessed 31 Dec. 2018].
Bhp.com. (2018). [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf [Accessed 31 Dec. 2018].
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease
capitalization on key financial ratios. Spanish Journal of Finance and Accounting/Revista
Española de Financiación y Contabilidad, 42(159), pp.341-369.
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance
Sheet. Journal of New Business Ideas & Trends, 15(2).
Qiu, Y., Shaukat, A. and Tharyan, R., 2016. Environmental and social disclosures: Link with
corporate financial performance. The British Accounting Review, 48(1), pp.102-116.

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Riotinto.com. (2018). [online] Available at: http://www.riotinto.com/documents/RT_SD2017.pdf
[Accessed 31 Dec. 2018].
Riotinto.com. (2018). [online] Available at:
https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 31 Dec. 2018].
Solomon, J.F., Solomon, A., Joseph, N.L. and Norton, S.D., 2013. Impression management,
myth creation and fabrication in private social and environmental reporting: Insights from Erving
Goffman. Accounting, organizations and society, 38(3), pp.195-213.
Stice, E.K. and Stice, J.D., 2013. Intermediate accounting. Cengage Learning.