Comparative Analysis of Equity and Cash Flow Statements of BHP Billiton Limited and South 32 Limited

This report provides a comparative analysis of equity and cash flow statements of BHP Billiton Limited and South 32 Limited. It covers topics like owner's equity, cash flow statement, debt-equity position, and more. The report is useful for students pursuing accounting courses in universities and colleges.

Accounting
Assignment

1
By student name
Professor
University
Date: 25 th Sep 2018.
Executive Summary:
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Annual reports of two different companies are being covered in the report. Item wise details of
equity for the three years from 2015 to 2017 are taken into considerations. Also, elements of cash
flow statement are also explained. A comparison is drawn between the debt and the equity
components of both the countries involved in the study and the discussions about the accounting
of comprehensive income along with preparational aspect of income statement. The logic behind
this is to perform a comparative analysis of employees over the above-mentioned period.
Expenses pertaining to the federal and state taxes incurred, its subsequent impact on the effective
direct taxes paid and deferred taxes if any.
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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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For the assignment, the first company selected BHP Billiton Limited. It is a company engaged in
the exploration of mineral and petroleum. The company is listed on ASX and the shares of the
company are traded widely across several other international stock exchanges including London,
New York and Johannesburg. The company possess a 65,000-strong workforce.
The second company shortlisted for the purpose is South 32 Limited. The company’s principle
business activity is that of mining and metallurgy. Alongside the Australian stock exchange, the
securities of the company are also trade in the London and Johannesburg stock exchanges. The
company has workforce of over 15,000 people. The company is touted as one of the major
producers of aluminium, thermal coal, nickel, manganese, zinc and cooking coal in the whole of
Australia (Gullet, et al., 2018).
Shareholders’ Equity:
1) Also termed as owner’s equity. It represents the contributed capital of the owners of the
business. Cost of raising funds though is significantly higher when compared to debt but
the upside of it is that it results in lower or no risks perception for the company when
compared to debt. The equity owners of a publicly listed company are only liable to the
extent of contribution. The equity owners are entitling to distribution of income by way
of dividend to be paid out of net income of the current year as well as any previous
accumulated reserves out of earnings (Kusolpalalert, 2018).
There are several components that are involved in the equity shareholders’ funds and they
are elaborately described as under:
 Equity Share Capital: These are the funds obtained from the shareholders by issue
of shares through a recognized stock exchange. The number of shares to be
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allotted is based on nominal value of the shares. The shares may be issued at a
premium at times. During the year South 32 Limited had decided to buy back
certain number of shares by passing a resolution in the board of directors and
subsequently obtaining an approval from the shareholders in the annual general
meeting. The buyback will reduce the number of shares outstanding but will also
have a positive impact on the earnings apportioned to each share. On the contrary,
BHP Billiton Limited had no changes in equity capital structure (Sikka &
Willmott, 2010).
 Retained Earnings: Retained earnings is the accumulated profits the entity earns
over a period resulting from activities that are operating in nature. These are the
earnings that are left over after paying dividend to the equity and preference
shareholders. In a year where there are no adequate profits or if there is a loss, the
company can still pay dividends out of the accumulated profits subject to certain
conditions stipulated in the Corporations Act. Taking cue from such provisions
the company paid dividends in the 2016 despite suffering massive losses
(Eisemann, et al., 2017). At the beginning of 2016, the balance in retained
earnings was already standing at a negative balance which further plunged owing
to the payment of dividend. However, this balance saw an upward movement in
the year 2017 owing to some profits, though dividend was declared in 2017 as
well (Gray, 2018). Situation was similar in case of BHP Billion which also paid
dividend out of accumulated profits despite suffering losses in the year 2016 but
the situation improved in 2017 and it paid dividend in that year out of profits
earned for that year (Coate & Mitschow, 2017).
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 Other Free Reserves: In case of South 32 Limited, this balance comprises of
undistributed profits from forfeited shares, other employee awards that have either
lapsed or remain unexercised. The balance also contains comprehensive income.
The balance saw sharp decline in the year 2017 owing to the decline in
comprehensive income (Dan, 1995). However, for South 32 Limited, there was no
movement.
 Non-Controlling Interest: In simpler terms, these are the small shareholders which
hold less than half of the voting power of the entity. Their share of profits is
computed as a percentage of net asset position. For South Limited, the minority
holding is very low at $1 million (Eisemann, et al., 2017). However, it is
interesting to see a proportional increase of non-controlling interest vis a vis to
that majority shareholders. This could be attributed to a sharp increase in the
retained earning balance (Delone & Mclean, 2004).
(Amount in USD Million)
South 32 - Owner's Equity
Particulars 2015 2016 2017
Equity Share Capital 14,958 14,958 14,747
Treasury Shares - (3) (26)
Reserves (3,557) (3,555) (3,503)
Retained Earnings (365) (1,977) (982)
Total attributable to equity shares 11,036 9,423 10,236
Less: Non-controlling interest (1) (1) (1)
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Total Owner’s Equity 11,035 9,422 10,235
However, the portion of minority interest for BHP Billiton is combatively higher
when compared to South 32 Limited. There have been only minor variations in
the percentage of holding. Below is the chart representing the movement.
(Amount in USD Million)
BHP Billiton - Owner's Equity
Particulars Sub - Entity 2015 2016 2017
Equity Share Capital
BHP
Billiton Ltd.
1,1
86
1,1
86
1,1
86
BHP
Billiton Plc.
1,0
57
1,0
57
1,0
57
Treasury Shares
BHP
Billiton Ltd.
(
19) (7) (2)
BHP
Billiton Plc.
(
57)
(
26) (1)
Reserves
2,5
57
2,5
38
2,4
00
Retained Earnings
60,0
44
49,5
42
52,6
18
Total attributable to 64,7 54,2 57,2
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equity shares 68 90 58
Less: Non-controlling
interest
5,7
77
5,7
81
5,4
68
Total Equity
70,5
45
60,0
71
62,7
26
2) Upon analyzing the debt and equity proportion, we can see that both the companies have
made conscious efforts in lowering the debt chunk in their financing requirements. This is
beneficial to the shareholders as the company would less exposed to risks arising due to
defaults of interest and principal payments in the event of lower profits and liquidity
crunch (Richard & Stephan, 1995).
(Amount in USD Million)
South 32 - Owner's Debt-Equity Position
Category Description 2015 2016 2017
Debt Interest bearing Debts
68
2
63
1
64
4
Other financial liabilities -
1
6 -
Total Debt
68
2
64
7
64
4
Equity Equity attributable to
shareholders of
11,03
6
9,42
3
10,23
6
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South 32
Non-controlling interests
(
1)
(
1)
(
1)
Total Equity
11,03
5
9,42
2
10,23
5
Debt-Equity
ratio 6% 7% 6%
(Amount in USD Million)
BHP Billiton – Debt-Equity Position
Particulars Description 2015 2016 2017
Debt Interest bearing Debt
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
45
60,0
71
62,7
26
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Debt-Equity
ratio 41% 56% 48%
There is a stark contrast in the Debt to equity ratio of the two companies. As can be seen from
the two tables, for South 32 Limited it is drastically on the lower side when compared to BHP
Billiton.
Statement of Cash Flows:
The statement of cash flows depicts the movement on the liquidity front in a company which is
mandated by the Australian accounting standards as well as the Corporation Act 2001. Following
are the major segments that are categorized in the cash flow statement.
a) Cash flow from Operations: This segment covers the cash flows that arise as results of
the actions taken in the ordinary course of business which are revenue transactions in
nature. Such transactions include collections from debtors, cash sales, operating expenses
paid in cash, payment of current liabilities and payment on interest on working capital
loans, etc. BHP Billiton Limited showed a constant positive cash flow all through the
period under review (Abdullah & Said, 2017). This could be attributed to increase in
operating revenue. For South 32 Limited also there was positive increase from last years
but the magnitude of the increase was significantly low making it lag compared to other
companies (MORGAN, 1988).
b) Cash flow from Investing Activities: These activities are related to the cash flow that
arise because investments made by the company either to park their idle funds or expand
their operations. There are several examples of activities that fall under this category such
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as sale and purchase of capital assets, securities, investments in other joint ventures or
subsidiaries, etc. BHP Billiton Limited sold certain Plant, property and equipment and
purchased little compared to that. There has also been a rise in the expenditure incurred
on exploration activities (Vieira, et al., 2017).
South 32 Limited made an investment of $12,734 million following the BHP demerger
which happened in subsidiaries in the year 2015. An Overall view suggest a sharp decline
in the cash flow from this segment plunging to $ 454 million in 2016 from a position of $
15,165 million in 2015.
c) Cash flow from Financing Activities: The cash flows that arise as result of transactions
that are capital in nature are covered under this segment. Some examples of transactions
that occur in this category are issue of shares or debentures, repayment of long term debt,
redemption of debentures, etc. While analyzing BHP Billiton, we see that there has been
a significant movement in this category for the year 2017 as the company has repaid a
major chunk of the loan that it raised in the fiscal of 2016 (Yadao, 2018). We also see
that the company has lesser dividend in 2017. In case of South 32 Limited we observed
that a lot of activities such as raising additional debt funds, buy back of equity and
payment of dividend unlike 2016 when there wasn’t much of a movement (Yadao, 2018).
Cash Flow Statement of BHP Billiton Limited
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Cash Flow Statement of South 32 Limited
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The table presented below is a comparative analysis for a period of 3 years for both the
companies:
(Amount in million USD)
South 32 – Analysis of Cash Flows Periods covered
Particulars 2017 2016 2015
Net cash flow from operating activities
2,13
2
1,0
30
6
70
Net cash flow from investing activities
(28
9)
(3
42)
(14,9
95)
Net cash flow from financing activities
(39
3)
(
99)
14,8
56
Net change, i.e., increase/(decrease) in cash and cash equivalents
from Continuing operations
1,45
0 589
5
31
Cash and cash equivalents, net of overdrafts, at the beginning of
the period
1,22
5 644
1
45
Currency exchange fluctuations on cash and cash equivalents - (8)
(
32)
Cash and cash equivalents, net of overdrafts, at the end of the
period
2,67
5
1,2
25
6
44
(Amount in million USD)
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BHP Billiton - Analysis of Cash Flows Periods covered
Particulars 2017 2016 2015
Net cash flow from operating activities
16,80
4
10,6
25
19,2
96
Net cash flow from investing activities
(4,16
1)
(7,2
45)
(13,1
54)
Net cash flow from financing activities
(9,13
3) 284
(8,2
76)
Net change i.e., increase/(decrease) in cash and cash equivalents
from Continuing operations
3,51
0
3,6
64
(1,7
81)
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
8,7
52
Cash loss on South 32 demerger
(5
86)
Currency exchange fluctuations 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
6,6
13
A look of the cash flow statement of BHP Billiton shows a sharp decline of in the cash flow from
investing activities of around $ 3000 approximate compared to the 2016 figures. Also, there is a
$6,000 million rise from operating activities (Boghossian, 2017). The company as it seems was
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key to reduce its debt burden and hence a significant chunk of the debts were paid off in 2017
that resulted in massive cash outflow. 2015 was also the only year in the last three years that had
a net negative overall cashflow. BHP Billiton has a lead over South 32 in terms of net cash flow
but it also to be noted that unlike BHP Billiton, South 32 did have a net negative cash flow in
any of the three years under review. The reason for a significant negative figure in cash flow
from investing activities of South 32 is the demerger that happened with BHP in 2015.
Statement of Other Comprehensive Income:
1) Following the Australian accounting standards this statement reports the following items:
a) In case of South 32 Limited: Certain items such as gain on actuarial valuation, tax
incidence (Both gains and losses) on comprehensive income cannot be included in
consolidated income statement and hence included here (Antle & Smith, 1985).
b) In case of BHP Billiton Limited: Items such as gain or loss on revaluation of medical
schemes and pension plans which are not part of income statement are included here.
However, there are certain items that remain in other comprehensive income for a
limited period and depending on the circumstance of nature of the transaction in
general may be moved to income statement. These include exchange rate movements
on foreign operations, income or loss from hedging contracts, etc.
2) The income and expenses which do not pertain to the normal operations of the business
are covered under Other Comprehensive income. Some of these items can be reclassified
into the income statement later upon fulfillment of certain conditions prescribed under the
prevailing accounting standards.
3) Below is a comparative analysis performed on the income statement:
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(Amount in million USD)
South 32 Limited- Comprehensive Income Statement
Particulars 2017 2016 2015
Income/(loss) post tax from Continuing and Discontinued
operations
1,23
1
(1,615
)
(91
9)
Other comprehensive income
Items that could be reclassified subsequently to the income
statement
2
0
(2
2)
3
2
Items that cannot be reclassified to the income statement 7 3 2
Total other comprehensive (loss)/income during the year
2
7
(1
9)
3
4
Total comprehensive income/(loss)
1,25
8
(1,634
)
(88
5)
Comprehensive Income Attributable to Equity
shareholders
1,25
8
(1,634
)
(88
5)
(Amount in million USD)
BHP Billiton Limited- Comprehensive Income Statement
Particulars 2017 2016 2015
Income/(loss) post tax from Continuing and Discontinued 6,22 (6,207 2,87
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operations 2 ) 8
Other comprehensive income
Items that could be reclassified subsequently to the income
statement
(5
9)
6
0
(9
1)
Items that cannot be reclassified to the income statement
1
0
(3
7)
(4
5)
Total other comprehensive (loss)/income during the year
(4
9)
2
3
(13
6)
Total comprehensive income/(loss)
6,17
3
(6,184
)
2,74
2
Comprehensive Income Attributable to non-controlling
interests
33
2
17
6
97
3
Comprehensive Income Attributable to BHP shareholders
5,84
1
(6,360
)
1,76
9
Any gains that are unrealized that might have been a part of the items disclosed above are not
recorded in the income statement but in the statement of comprehensive income. This would
have the impact of lowering the profit that would have been available for distribution to the
equity shareholders (Alsagoff, 2010).
4) Among the items included in the above statement are actuarial losses and gains, income
arising on hedging contracts, fair value fluctuations in the carrying amount of assets and
liabilities. Since these items are not of operational nature, it does not warrant the attention
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of the managers for evaluations carried out by them and hence not considered to be part
of income statement.
Treatment related to Corporate Tax:
a) The below table highlights the metrics of the three years for the two companies under
consideration:
(Amount in million USD)
South 32 - Tax details
Particulars 2017 2016 2015
Tax Expenses Incurred 393 70 528
Effective tax Rate 30.7% 36.6% 32.0%
Taxes paid in Cash (127) (52) 1
Profit before tax 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
Deferred tax liabilities 518 501 554
(Amount in million USD)
BHP Billiton - Tax Details
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Particulars 2017 2016 2015
Tax Expenses Incurred 4,100 (1,052) 3,666
Effective tax Rate 39.7% 35.8% 45.5%
Taxes paid in Cash (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
From the above we can see that the tax expense of BHP Billiton Limited is more than ten
times that of South 32 Limited.
b) A brief look at those figures would reflect the fact that South 32 Limited has
comparatively a lower effective tax rate on its income as compared to BHP Billiton
Limited. In 2015 for Billiton the rate was 45.5 % whereas for South 32 it was 32 %. For
2017 BHP was under a tax rate of 39.7 % whereas for South 32 it was 30.7 %. However,
in 2016, the tax rate for South 32 was higher by a slight margin of under 1 %.
c) The temporary differences that arise due to difference in regulations between accounting
and taxable income are accounted for as Deferred tax assets or liabilities. The deferred
tax assets are used in setting off future taxes payable in case the company is earning
adequate profits. The deferred tax assets and liabilities can set off among themselves. In
the balance sheet they are classified under Current assets or liabilities respectively.
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d) Many such instances of differences were observed for the two entities. For South 32 there
has been a decline in deferred tax assets because paying lower taxes. In BHP, it was
observed that the deferred tax liabilities declined which was a result of reversal to
deferred tax assets for a period of 3 years.
e) There was a steady decline in the cash tax paid by BHP since 2015. The situation was
reverse in case of South 32 where it went from a refund of $ 1 million USD in 2015 to a
liability of $ 127 million (Abdullah & Said, 2017)
f) There has been a wide gap in the cash tax rate between the two entities. The cause of this
could be attributed to the presence of enormous of accumulated losses over 2015 and
2016 which resulted in significant deferred tax asset. This benefit was utilized by them to
lower their cash tax rate.
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