Analysis of Annual Reports of BHP Billiton Limited and South 32 Limited

This report consists of analysis of annual reports of 2 companies listed under Australian stock exchange. The report compares equity and debt of both countries along with the preparation of comprehensive income statement with income statement and discusses changes in the comprehensive income statement.

Accounting
Assignment

1
By student name
Professor
University
Date: 23rd Sep 2018.
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Executive Summary
This report consists of analysis of annual reports of 2 companies listed under Australian stock
exchange. Meaning of each item of cash flow statements along with each line item of equity for
2015, 2016 and 2017. The report compares equity and debt of both countries along with the
preparation of comprehensive income statement with income statement and discusses changes
in the comprehensive income statement. The reason behind including the above for evaluation
of the employees and comparative analysis of same over the analysed period is given. Finally
tax expenses, effective corporate tax rate, total taxes paid and deferred tax assets and liabilities
of both companies are included in corporate income tax accounting.
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Contents
Introduction......................................................................................................................................4
Analysis...........................................................................................................................................5
References......................................................................................................................................10
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Introduction
BHP Billiton Limited, world’s largest mining company is listed under Australian stock exchange
and deals in mining, metal and petroleum industry. Also listed under New York stock exchange,
London stock exchange, Johannesburg stock exchange and Financial Times stock exchange 100
operates globally and employs more than 65000 people. It is the third largest revenue earning
company in Australia (Alsagoff, 2010).
The other company analysed in this report is South 32 Limited which is listed under
Johannesburg stock exchange and London stock exchange along with the Australian stock
exchange deals in mining and metallurgy. The chief producer of zinc, nickel, aluminium,
alumina, silver, thermal coal, lead, manganese and cooking coal employees more than 15000
people.
Owner’s Equity
1. The money invested by the shareholders in the company is known as Owner’s Equity
which has higher returns in comparison to debt capital and is more risky. Distributable to
the shareholders this equity contains preference shares, equity shares, dividend, net profit
and different types of reserves (Giacomo, et al., 2013).
The components of equity can be described as follows:
 Share Capital: The money invested by the owners of the company is known as share
capital. These are generally traded in the market in the form of small denominations
called shares. An overall decrease in the shares of South 32 Limited was seen due to
the buyback of shares in 2017. The share capital of BHP Billiton Limited remained
same throughout the analysed period.
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 Retained Earnings: The total undistributed profits of the company which can be used
by the company for dividend distribution is known as retained earnings. South 32
Limited paid dividends for both 2016 and 2017 although the company faced huge
losses in 2016 which depreciated the already negative balance of retained earnings
but the same increased in 2017 because of the accumulated profits of $1231 Mn. BHP
Billiton also paid dividend in 2016 in spite of incurrence of losses which led to an
overall decrease in the balance of retained earnings. The company earned profits in
2017 and also paid dividends from the same (Durtschi, 2004).
 Reserves: Consisting of forfeited employees share awards, comprehensive income of
the year and employee share awards net of employee contribution and unexercised
awards, reserves are the undistributed profits of the company. Due to awards and
losses in comprehensive income statement, it decreased drastically in 2017 for BHP
Billiton Limited but remained almost constant for the remaining period. It also
remained constant for South 32 Limited throughout the analysed period (Antle &
Smith, 1985).
 Treasury Shares: Mainly allotted in the form of ESOPs or dividend reinvestment plan
to the employees, Treasury shares can be purchased by ESOP trusts which later on
pays to the employees. Treasury shares has decreased for BHP Billiton Limited over
the past 3 years due to which exercise of option by the employees is lower than
purchases made by ESOP trusts (Coate & Mitschow, 2017).
 Non- Controlling Interest: Shareholders having no control over the decisions of the
company and owns less than 50% shares are also known as Minority interest whose
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share of profits is calculated on the basis of net assets position. The minority
shareholder of South 32 Limited is very low at $1 Mn. whereas there is proportional
increase in Non- Controlling Interest as that of controlling interest and other
shareholders.
(Amt in US$M)
South 32 - Owner's Equity
Particulars 2015 2016 2017
Share Capital 14,958 14,958
14,74
7
Treasury Shares - (3)
(
26)
Reserves (3,557) (3,555)
(3,50
3)
Retained Earnings (365) (1,977)
(9
82)
Total attributable to equity
shares 11,036 9,423
10,23
6
Non-controlling interest (1) (1) (1)
Total Equity 11,035 9,422
10,23
5
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(Amt in US$M)
BHP Billiton - Owner's Equity
Particulars 2015 2016 2017
Share Capital
BHP Billiton
Ltd.
1,18
6
1,18
6
1,18
6
BHP Billiton
Plc.
1,05
7
1,05
7
1,05
7
Treasury Shares
BHP Billiton
Ltd.
(1
9) (7) (2)
BHP Billiton
Plc.
(5
7)
(
26) (1)
Reserves
2,55
7
2,53
8
2,40
0
Retained Earnings
60,04
4
49,54
2
52,61
8
Total attributable to equity
shares
64,76
8
54,29
0
57,25
8
Non-controlling interest
5,77
7
5,78
1
5,46
8
Total Equity
70,54
5
60,07
1
62,72
6
2. Analysis of 3 years debt equity position of the company shows that the companies have
maintained a lower debt proportion to protect the interest of shareholders in the company.
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South 32 Limited has maintained a lower debt proportion in debt equity ratio as shown
below:
(Amt in US$M)
South 32 - Owner's Equity
Particulars 2015 2016 2017
Debt Interest bearing liabilities
68
2
63
1
64
4
Other financial liabilities -
1
6 -
Total Debt
68
2
64
7
64
4
Equity
Equity attributable to BHP
shareholders
11,03
6
9,42
3
10,23
6
Non-controlling interests
(
1)
(
1)
(
1)
Total Equity
11,03
5
9,42
2
10,23
5
Debt Equity
ratio 6% 7% 6%
(Amt in US$M)
BHP Billiton - Debt and Equity Position
Particulars 2015 2016 2017
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Debt Interest bearing liabilities 27,969 31,768 29,233
Other financial liabilities 1,031 1,778 1,106
Total Debt 29,000 33,546 30,339
Equity Equity attributable to BHP shareholders 64,768 54,290 57,258
Non-controlling interests 5,777 5,781 5,468
Total Equity 70,545 60,071 62,726
Debt Equity ratio 41% 56% 48%
Cash Flow Statements
To give an idea of the line items an extract of cash flow statements of both companies is
provided below along with changes made in them:
i. Cash Flow from Operating Activities: Items that directly relates to the operations of the
company such as dividend received from other companies, payment to creditors, receipts
from customers, income tax paid, interest received and paid, etc. are recorded here along
with changes in current assets and liabilities of the company (Abdullah & Said, 2017).
For BHP Billiton Limited the operating cash flow was positive throughout the analysed
period. An increase in revenue from operation led to a net inflow from discontinued
operations in 2015. A positive trend in net cash inflow from operating activities is seen
for South 32 Limited but the magnitude was very less making BHP Billiton Limited the
industry leaders (Mubako & O'Donnell, 2018).
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ii. Cash Flow from Financing Activities: All the finances arranged by the company to do
business such as issue of share capital, payment of dividend and interest, issue of
preference shares and debt, redemption of shares, etc. are recorded here. In 2017, BHP
Billiton Limited repaid most of the debt and interest bearing liabilities of $ 7239 Mn.
raised in 2016. Although the company had a constant inflow and outflow throughout the
analysed period, a fall in the dividend payment for the company was seen for this period.
South 32 Limited raised debt, paid dividend and bought back equity shares in 2017 which
was missing in 2016.
iii. Cash Flow from Investing Activities: All Investing activities such as purchase sale of
Investments, Property, Plant and Equipment, Investment in Joint Ventures, Entities and
Subsidiaries, etc. are recorded here. For BHP Billiton Limited, inflow from sale of PPE
and exploration expenditure has increased during the years with a fall in the purchases of
plant and equipment and property (Mock, et al., 2018). South 32 Limited invested
$12734 Mn. as a part of BHP Demerger in 2015 in subsidiaries, operations, etc. but
investment in PPE has decreased. There was a huge fall in the cash outflow from
Investing Activities from $15165 Mn. to $454 Mn. in 2016 when compared to 2015.
Cash Flow Statement of BHP Billiton Limited
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Cash Flow Statement of South 32 Limited
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iv. The below table shows the 3 years comparative analysis of both the companies:
(Amt in US$M)
South 32 - Cash Flow Analysis
Particulars 2017 2016 2015
Net operating cash flows
2,1
32
1,0
30
6
70
Net investing cash flows
(28
9)
(34
2)
(14,99
5)
Net financing cash flows
(39
3)
(
99)
14,8
56
Net increase/(decrease) in cash and cash equivalents from
Continuing operations
1,4
50
5
89
5
31
Cash and cash equivalents, net of overdrafts, at the beginning
of the financial year
1,2
25
6
44
1
45
Foreign currency exchange rate changes on cash and cash
equivalents - (8)
(
32)
Cash and cash equivalents, net of overdrafts, at the end of the
financial year
2,6
75
1,2
25
6
44
(Amt in US$M)
BHP Billiton - Cash Flow Analysis
Particulars 2017 2016 2015
Net operating cash flows 16,8 10,6 19,2
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04 25 96
Net investing cash flows
(4,16
1)
(7,24
5)
(13,15
4)
Net financing cash flows
(9,13
3)
2
84
(8,27
6)
Net increase/(decrease) in cash and cash equivalents from
Continuing operations
3,5
10
3,6
64
(1,78
1)
Net increase in cash and cash equivalents from Discontinued
operations
2
33
Cash and cash equivalents, net of overdrafts, at the beginning
of the financial year
10,2
76
6,6
13
8,7
52
Cash disposed on demerger of South32
(5
86)
Foreign currency exchange rate changes on cash and cash
equivalents
3
22 (1) (5)
Cash and cash equivalents, net of overdrafts, at the end of the
financial year
14,1
08
10,2
76
6,6
13
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v. The comparative analysis of cash flow statement of BHP Billiton Limited shows a fall in
the cash outflow from investing activities to $4161 Mn. in 2017 whereas an increase of
$6000 Mn. was seen in cash inflow from operating activities. The company paid off most
of its debts in 2017 resulting in a massive increase in cash outflow from financing
activities. The net cash flow of the company was positive in 2016 and 2017 in
comparison to a negative inflow in 2015. The company has a higher cash inflow and
outflow in comparison to South 32 Limited, although the later do not have any negative
cash flow during the analysed period. South 32 Limited invested a huge amount in
entities and subsidiaries because of BHP Demerger and raised a large amount of equity
shares in 2015 which resulted in a negative cash inflow in Investing and Financing
activities with operating activities contributing majorly to cash inflows (Lessambo,
2018).
Other Comprehensive Income Statement
1. The other comprehensive income statement of both the companies reports the following
items:
a. BHP Billiton Limited: Remeasurement of gains and losses in medical and pension
schemes cannot form part of income statement whereas items such as income from
investments, cash flow hedges, exchange fluctuations because of translation of
foreign operations, etc. may be reclassified to the income statement.
b. South 32 Limited: Income from sale of investments can be included in consolidated
income statement if it can be taken to equity with expenses and tax benefit on the
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same. But items such as actuarial gains, equity accounted investments and tax benefit
and losses on other comprehensive income cannot be included in consolidated income
statement (Kangarluie & Aalizadeh, 2017).
2. The other comprehensive income statement does not pertain to the normal operating
business of the company due to which it is not reported in the profit and loss account or
the income statement of the firm. This includes those items which can be reclassified
during the year and is reported separately as per the standards mentioned in IFRS.
3. Comparative analysis of comprehensive income statement of both the companies is
shown below:
(Amt in US$M)
South 32 - Comprehensive Income Statement
Particulars 2017 2016 2015
Profit/(loss) after taxation from Continuing and
Discontinued operations
1,23
1
(1,61
5)
(91
9)
Other comprehensive income
Total items that may be reclassified subsequently to the
income statement 20
(2
2) 32
Total items that will not be reclassified to the income
statement 7 3 2
Total other comprehensive (loss)/income during the year 27
(1
9) 34
Total comprehensive income/(loss)
1,25
8
(1,63
4)
(88
5)
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Attributable to Equity shareholders
1,25
8
(1,63
4)
(88
5)
(Amt in US$M)
BHP Billiton - Comprehensive Income Statement
Particulars 2017 2016 2015
Profit/(loss) after taxation from Continuing and
Discontinued operations
6,22
2
(6,20
7)
2,87
8
Other comprehensive income
Total items that may be reclassified subsequently to the
income statement
(5
9) 60
(9
1)
Total items that will not be reclassified to the income
statement 10
(3
7)
(4
5)
Total other comprehensive (loss)/income during the year
(4
9) 23
(13
6)
Total comprehensive income/(loss)
6,17
3
(6,18
4)
2,74
2
Attributable to non-controlling interests
33
2
1
76
97
3
Attributable to BHP shareholders
5,84
1
(6,36
0)
1,76
9
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The unrealised profits hidden in these items would have been recorded and distributed amongst
the shareholders if these items would have been included in the normal income statement of the
companies, thus resulting in lower profit distribution to the shareholders.
4. The above items includes changes in the fair value of assets and liabilities, revaluation of
assets, actuarial gains and losses, retirement benefits, hedging gains and losses which
does not relates to the normal business operations of the entity and are not being directly
managed and monitored by the Managers. So, these items should not be taken into
consideration for evaluation of managers (Garon, 2018).
Accounting for Corporate Income Tax
a. The tax expenses of both the companies as per the latest financial statement is as follows:
(Amt in US$M)
South 32 - Tax details
Particulars 2017 2016 2015
Tax Expenses 393 70 528
Effective tax Rate 30.7% 36.6% 32.0%
Cash tax paid (127) (52) 1
Profit before taxation 1,624 (1,545) (398)
Cash tax Rate -7.8% 3.4% -0.3%
Book tax rate 30.0% 30.0% 30.0%
Deferred tax assets 276 382 376
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Deferred tax liabilities 518 501 554
(Amt in US$M)
BHP Billiton - Tax Details
Particulars 2017 2016 2015
Tax Expenses 4,100 (1,052) 3,666
Effective tax Rate 39.7% 35.8% 45.5%
Cash tax paid (2,585) (2,286) (4,373)
Profit before taxation 10,322 (7,259) 8,056
Cash tax Rate -25.0% 31.5% -54.3%
Book tax rate 30.0% 30.0% 30.0%
Deferred tax assets 5788 6147 2861
Deferred tax liabilities 3765 4324 4542
South 32 Limited had a tax expense of $ 393 Mn. in 2017 compared to $ 4100 Mn. for
BHP Billiton Limited.
b. BHP Billiton Limited has a higher effective tax rate in comparison to South 32 Limited
for the entire period. The effective tax rate for BHP Billiton Limited was 45.5% in 2015,
35.8% in 2016 and 39.7% in 2017, whereas the same for South 32 Limited has been 32%,
36.6% and 30.7% respectively (Charles H, et al., 2015).
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c. The deferred tax Assets and Liabilities are the permanent and temporary differences
between taxes calculated as per tax base and as per accounting base. These are reported in
the financial statements of the company and can be used in the future years. The deferred
tax assets and liabilities, shown under current assets and current liabilities respectively
can be set off against each other. Reasons for formation of deferred tax assets and
liabilities are as follows:
 Incomes and losses which are disallowed under income tax rules but are recorded in
the accounting income statement.
 Revenues recognised in one period are different for accounting and tax purposes.
 Different tax base of assets for taxation and accounting purposes (Bumgarner &
Vasarhelyi, 2018).
 Recorded in the balance sheet as per the reporting requirements of IFRS and GAAP.
d. Many permanent and temporary differences were found due to changes in tax bases
which led to several changes in deferred tax assets and liabilities of both the companies.
The deferred tax assets of South 32 Limited decreased because of lower tax paid in the
last 2 years with deferred tax liabilities remaining almost constant for the entire period.
For BHP Billiton Limited, there was a fall in the deferred tax liabilities of the company
for the last 3 years and it is reverse for the deferred tax assets during the same period.
e. The cash tax paid by BHP Billiton Limited was $ 4373 Mn. in 2015 which decreased to $
2286 Mn. and $ 2585 Mn. in 2016 and 2017 respectively. Whereas cash tax paid by
South 32 Limited was $ 127 Mn. in 2017 which was much higher than $ 52 Mn. paid in
2016 and a refund of $ 1 Mn. in 2015.
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f. The cash tax rate of South 32 Limited has been 0.3% in 2015 which increased to 3.4% in
2016 and further to 7.8% in 2017. Whereas for BHP Billiton Limited it decreased
constantly from 54.3% in 2015 to 31.5% in 2016 and 25% in 2017.
g. The reason behind the huge difference in the cash tax rate for both the companies is
availability of benefit of deferred tax assets to South 32 Limited because of accumulated
losses from 2015 and 2016 and the difference in size of operation of both the companies.
Cash tax rate is the tax computed after adjustments of deferred tax assets and liabilities
and other tax adjustments whereas as per income tax laws the book tax rate of 30% which
is same for all the companies for all the years is levied straightaway (Andiola, et al.,
2018).
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Antle, R. & Smith, A., 1985. Measuring Executive Compensation: Methods and an Application. Journal of
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Forensics, 3(1), pp. 183-202.
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Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in
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