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

This report provides a brief analysis of the annual reports of South 32 Limited and BHP Billiton Limited listed in the Australian Stock Exchange. It includes changes made in each line item of equity, analysis of cash flow statement, comparison between equity and debt, and accounting for corporate income tax.

Accounting
Assignment

1
By student name
Professor
University
Date: 20 th Sep 2018.
Executive Summary
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A brief analysis on the annual report of last 3 years has been done for 2 companies which are
listed in the Australian Stock Exchange. Changes made in each line item of equity has been
analysed for 2015, 2016 & 2017. Analysis of cash flow statement of both the companies along
with the meaning of each item in the cash flow statement and the changes under all 3 categories
has been done. Comparison between the equity and debt in each company is also reflected in this
report. The report states the reason behind preparation of other comprehensive income statement
separately along with the income statement and discusses the changes made in the
comprehensive income statement. The statements have been analysed together to find whether
they should be included for evaluation of performance of employees. Lastly the tax paid by the
companies, the effective corporate tax rate, the deferred tax liabilities and total tax expenses of
both the companies has been highlighted in the accounting for corporate income tax.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Owner’s Equity............................................................................................................................................4
Cash Flow Statement...................................................................................................................................7
Other comprehensive income statement..................................................................................................11
Accounting for Corporate Income Tax.......................................................................................................13
References.................................................................................................................................................16
Introduction
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The company South 32 Limited which is listed under Australian Stock Exchange deals in mining
and metallurgy. The chief producer of zinc, alumina, nickel, silver, lead, aluminium, thermal
coal, cooking coal and manganese has been rising of late in Australia. Also listed under
Johannesburg Stock Exchange and London Stock Exchange, the company employs more than
15000 people (Andiola, et al., 2018).
On the other hand BHP Billiton Limited which deals in mining, petroleum and metal industry is
also listed under Australian Stock Exchange. The company having operations all over the globe
is also listed under London Stock Exchange, Johannesburg Stock Exchange, New York Stock
Exchange and Financial Times Stock Exchange 100. The third largest revenue making company
of Australia & the world’s largest mining company employs 65000 employees.
Overview
A brief analysis on the annual report of last 3 years has been done for 2 companies which are
listed in the Australian Stock Exchange. Changes made in each line item of equity has been
analysed for 2015, 2016 & 2017. An overall analysis of the cash flow statement, income
statement, owneers equity and the overall taxation of the two companies have been taken into
consideration. This will help the investors in analysing which company do they want to invest in.
Owner’s Equity
1. The Owner’s Equity also known as the Owner’s capital is the total sum invested by the
shareholders in the company. There is huge degree of risk in the equity capital because of
which it has higher returns in comparison to the debt capital. Equity shares, Preference
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shares, Retained earnings, Net profit, dividend and different types of reserves are the
components of this equity capital. So these are also distributable to the shareholders
(Appelbaum, et al., 2018).
Each of the items mentioned above can be described as follows:
a) Share Capital: This is the fund invested by the Owners of the company which is
divided into small denominations called shares. These shares are traded in the market
and the buyers of these shares are called the shareholders. The total shares of South
32 Limited have decreased due to the buyback of shares in 2017 whereas there is no
change in the total capital of BHP Billiton Limited over the last 3 years.
b) Reserves: These are the profits earned by the company in past years which has not
been distributed as dividends to the shareholders but are kept aside for some future
endeavours of the business. These reserves also include the amount collected on
forfeited shares and employee share awards net of employee contributions and
unexercised awards. There was no change in the reserves of South 32 Limited in last
3 years and it also remained more or less constant for BHP Billiton Limited (Axelsen,
et al., 2017).
c) Treasury Shares: These are the shares which are generally allotted to the employees
in form of ESOP or dividend reinvestment plan. The ESOP trust purchases these
shares and the employees are later on paid by the company. The Purchase by ESOP
trusts has been more than exercising the option by the employees for BHP Billiton
Limited which resulted in the decrease in the Treasury shares of the company over the
analysed period.
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d) Retained Earnings: These are the total of undistributed profits & losses of the
company of past years. The company can distribute dividends to the shareholders
from time to time from these retained earnings. For South 32 Limited, it was negative
and it further decreased due to incurrence of losses in 2016. But the company paid
dividends during both the years due to cumulative profits of $1231 Mn. in 2017. Due
to the losses incurred and payment of dividends the balance decreased for BHP
Billiton in 2016. But the same increased in 2017 due to the profits earned & dividend
was paid during the year.
e) Non-Controlling Interest: Also known as Minority Interest, these shareholders do not
enjoy voting rights as they own less than 50% of shares. They do not have any control
over the decisions of the management and the net assets position of the company
determines their share of profit. South 32 Limited constantly has very low minority
interest shareholders at $1 Mn. For BHP Billiton, it has increased proportionately
with controlling interest and other shareholders (Bailey, et al., 2017).
(Amt in US$M)
South 32 - Owner's Equity
Particulars 2015 2016 2017
Share Capital 14,958 14,958
14,74
7
Treasury Shares - (3)
(2
6)
Reserves (3,557) (3,555) (3,503
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)
Retained Earnings (365) (1,977)
(98
2)
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
(Amt in US$M)
BHP Billiton - Owner's Equity
Particulars 2015 2016 2017
Share Capital
BHP Billiton
Ltd.
1,18
6
1,18
6
1,18
6
BHP Billiton
Plc.
1,05
7
1,05
7
1,05
7
Treasury Shares
BHP Billiton
Ltd.
(1
9)
(
7)
(
2)
BHP Billiton
Plc.
(5
7)
(2
6)
(
1)
Reserves
2,55
7
2,53
8
2,40
0
Retained Earnings 60,04 49,54 52,61
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4 2 8
Total attributable to equity
shares
64,76
8
54,29
0
57,25
8
Non-controlling interest
5,77
7
5,78
1
5,46
8
Total Equity
70,54
5
60,07
1
62,72
6
2. Analysis of equity and debt of both the companies shows that both of them has control
over the debt equity ratio and always kept a lower proportion of debt to protect the
interest of the shareholders. The debt equity ratio below shows that South 32 Limited has
specially kept the debt proportion minimal.
(Amt in US$M)
South 32 - Owner's Equity
Particulars 2015 2016 2017
Debt Interest bearing liabilities
6
82
6
31
6
44
Other financial liabilities - 16 -
Total Debt
6
82
6
47
6
44
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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
Debt Interest bearing liabilities
27,9
69
31,7
68
29,2
33
Other financial liabilities
1,0
31
1,7
78
1,1
06
Total Debt
29,0
00
33,5
46
30,3
39
Equity
Equity attributable to BHP
shareholders
64,7
68
54,2
90
57,2
58
Non-controlling interests
5,7
77
5,7
81
5,4
68
Total Equity 70,5 60,0 62,7
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45 71 26
Debt Equity
ratio 41% 56% 48%
Cash Flow Statement
A brief idea of the line items of cash flow statement and the following changes made in the same
is given through the extract of the cash flow statements given below:
a. Cash Flow from Operating Activities: All receipts and payments relating to the
operations of a company are recorded here. These include net of receipts from customers
and payment to creditors, interest received and paid, dividend received from other
countries and income tax paid. It also reports changes in the current assets and current
liabilities. South 32 Limited has a positive trend of net cash inflow from operating
activities (Bumgarner & Vasarhelyi, 2018). BHP Billiton limited has a net inflow from
discontinued operations in 2015 which has increased over the years and is much higher in
comparison to South 32 Limited which makes it one of the industry leaders (Segal, 2017).
b. Cash Flow from Investing Activities: Purchase & sale of property, investments, fixed
assets like plant and equipment, investment in other entities and subsidiaries, joint
ventures etc. forms part of this section. South 32 Limited has made a huge investment of
$12734 Mn. in 2015 in subsidiaries, operations etc. as a part of BHP demerger although
the investment in PPE has fallen. The cash outflow from investing activities was a mere
$454 Mn. in 2016 in comparison to $15165 Mn. in 2015. For BHP Billiton Limited, the
exploration expenditure along with inflow from sale of PPE has increased. Moreover
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there is a decrease in purchase of plant and equipment and property during the analysed
period (Fukukawa & Mock, 2011).
c. Cash Flow from Financing Activities: this section includes cash flow from issue of shares
& debentures, payment of dividends & interest, redemption of shares etc. Unlike 2016,
South 32 Limited bought back equity shares, raised debt and paid dividends in 2017
(Garon, 2018). BHP Billiton Limited raised debt and interest bearing liabilities of $ 7239
Mn. in 2016 which was mostly repaid in 2017. The dividend payment has decreased over
the years although there was constant inflow and outflow.
Cash Flow Statement of South 32 Limited
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Cash Flow Statement of BHP Billiton Limited
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d. A comparative analysis for last 3 years of both the companies is shown below:
(Amt in US$M)
South 32 - Cash Flow Analysis
Particulars 2017 2016 2015
Net operating cash flows
2,1
32
1,03
0
6
70
Net investing cash flows
(28
9)
(34
2)
(14,99
5)
Net financing cash flows
(39
3)
(9
9)
14,8
56
Net increase/(decrease) in cash and cash equivalents from
Continuing operations
1,4
50
5
89
5
31
Cash and cash equivalents, net of overdrafts, at the beginning
of the financial year
1,2
25
6
44
1
45
Foreign currency exchange rate changes on cash and cash
equivalents -
(
8)
(
32)
Cash and cash equivalents, net of overdrafts, at the end of the
financial year
2,6
75
1,22
5
6
44
(Amt in US$M)
BHP Billiton - Cash Flow Analysis
Particulars 2017 2016 2015
Net operating cash flows 16,80 10,6 19,29
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4 25 6
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
3,51
0
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
10,27
6
6,6
13
8,75
2
Cash disposed on demerger of South32
(58
6)
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
14,10
8
10,2
76
6,61
3
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e. The comparative analysis of cash flow statement shows that the cash inflow from
operating activities of BHP Billiton Limited has increased by $6000 Mn. in 2017 whereas
cash outflow from investing activities has decreased to $ 4161 Mn in 2017. The company
also paid off most of its debts which is reflected in the high cash outflow from financing
activities in 2017 (Heminway, 2017). The net cash outflow moved from negative in 2015
to positive in 2016 and 2017. South 32 Limited has a positive cash inflow over the
analysed period although the magnitude of inflow and outflow is less than BHP Billiton
Limited. The company invested in BHP demerger and bought back shares in 2015 which
resulted in major outflow in investing and financing activities and a positive inflow in
operating activities.
Other Comprehensive Income Statement
1. The following items has been reported in other comprehensive income statement for both
the companies:
South 32 Limited: Actuarial gains, equity accounted investments, and losses and tax
benefit on other comprehensive income are included in this statement as they cannot be
classified to consolidated income statement. Investments that can be taken to equity and
expenses and tax benefit on same are also included here (Mock, et al., 2018).
BHP Billiton Limited: Income from sale of investments, exchange fluctuation profits due
to foreign operation translations and gains from cash flow hedges may form part of
income statement whereas Remeasurement profits and losses in pension and medical
schemes cannot be reclassified to the income statement (Kachelmeier, et al., 2018).
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2. Other comprehensive income statement consists of those items which can be reclassified.
It does not relate to the normal business operation of the company due to which it is not
reported in the income statement and is prepared separately. Moreover other
comprehensive income statement needs to be shown separately as per IFRS.
3. Following is the comparative analysis of comprehensive income statement of both the
companies:
(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)
2,8
78
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)
2,7
42
Attributable to non-controlling interests
33
2
1
76
9
73
Attributable to BHP shareholders
5,84
1
(6,36
0)
1,7
69
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If these items were included in the normal income statement of each company, then the
unrealised profit hidden in these would be recorded and distributed to the shareholders. The
lower profit distribution to the shareholders is the impact of this statement.
4. Evaluation of the managers should not be done on the basis of items in other
comprehensive income statement because these items such as changes in value of assets
and liabilities, gains and losses from hedging,, actuarial gains and losses, retirement
benefits, etc. does not relate to the normal business operations and are not directly being
monitored by the managers (Kangarluie & Aalizadeh, 2017).
Accounting for Corporate Income Tax
1. The tax expenses of both the companies are 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
The tax expense of South 32 Limited is $ 393 Mn. for 2017 and that of BHP Billiton Limited is $
4100 Mn.
2. On analyzing the annual reports of both the companies it can be seen that BHP
Billiton Limited has a higher effective tax rate as compared to South 32 Limited in all
the years. The effective tax rate of South 32 Limited has been 30.7% in 2017, 36.6%
in 2016 and 32% in 2015. Whereas for BHP Billiton Limited, the effective tax rate is
39.7% in 2017 and 35.8% and 45.5% in 2016 and 2015 respectively (Lessambo,
2018).
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3. The financial statement of both the companies reports about the deferred tax assets
and deferred tax liabilities which arise due to difference in accounting profit and
profit as per tax base. These deferred tax assets or liabilities can be used in future
years and can be set off against each other (Knechel & Salterio, 2016). These are
shown under the heads current assets and current liabilities. Deferred tax is formed
because of the following reasons:
a. Different tax base of assets for accounting purposes and taxation purposes.
b. Difference in revenues recognized in one period as per taxation and accounting
books.
c. Recording of such incomes and losses in the accounting statement which are
disallowed under income tax rules.
d. Recorded in the balance sheet to be in line to the reporting requirements as per
IFRS and GAAP.
4. Due to changes in the tax bases many permanent and temporary differences were
found which led to several changes in deferred tax assets and liabilities of both the
companies. For South 32 Limited, deferred tax liabilities remained almost constant
throughout the analyzed period whereas the lower tax payable in last 2 years has led
to the decrease in the deferred tax assets of the company (Mubako & O'Donnell,
2018). The Deferred tax liabilities of BHP Billiton Limited have decreased during the
analyzed period whereas the deferred tax assets have increased over the same period.
5. The cash tax paid by South 32 Limited has been $127 Mn. and $52 Mn. in 2017 and
2016 respectively with a refund of $1Mn. in 2015. Whereas on the other hand the
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cash tax paid by BHP Billiton Limited has been $2585 Mn., $2286 Mn. & $4373 Mn.
in 2017, 2016 & 2015 respectively.
6. The cash tax rate of South 32 Limited has been 0.3%, 3.4% & 7.8% in 2015, 2016
and 2017 respectively. On the other hand BHP Billiton Limited has a higher cash tax
rate of 54.3%, 31.5% and 25% respectively for the same period.
7. Availability of deferred tax assets to South 32 Limited because of accumulated losses
of 2015 and 2016, and difference in the size of operations of the 2 companies are the
reasons behind the huge difference in the cash tax rate of both the companies. The
book tax rate of 30% is levied straightaway and is same for both the companies for all
the years as per income tax laws, whereas cash tax rate is the tax computed after
adjustments of deferred tax assets and liabilities and other tax adjustments (Rimmer,
2017).
Conclusion
Based on the overall analysis it can be said that financial statements are presented in such
a manner that companies can be compared just on the basis of them. It provides investors with
the great information and they can understand which companies they want to invest and which
not. In the given case we see that both the companies are doing extremely good, but investors
can decide which company they want to invest in based on the overall position of the capital and
other elements.
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