Financial Reporting Analysis of BHP and Rio Tinto

This report analyzes the financial reporting of BHP and Rio Tinto, two ASX listed companies in the mining industry. The report covers owners' equity, cash flow statement, other comprehensive income statement, and corporate income tax. The report also includes a discussion on debt and equity position and effective tax rate.

FINANCIAL REPORTING ANALYSIS

Executive Summary
Corporate financial reporting plays a major role in assessing the firm's value and financial
capabilities not only in terms of financial strength and health but also in terms of reporting
regulations compliance, disclosure requirements, transparency, and efficient reporting
presentation. The instant report briefly analyses the financial reporting of two ASX listed
companies. Such companies are BHP Billiton Plc (hereinafter may be referred to as “BHP”) and
Rio Tinto Plc (hereinafter may be referred to as “Rio Tinto”). These two companies are chosen
as both the companies are huge in size and occupy a significant position in the overall Australian
mining industry.
The entire report has been divided into four different parts. At the very beginning of the study,
the researcher provides a comparative analysis of the owners' equity section of the annual report
of both the companies. The second section focuses on the comparative analysis of the cash flow
statement. In the subsequent part of the study, the report performs a comparative analysis of
another comprehensive income statement of both the companies and the last sections focuses on
the corporate income tax position for both BJP and Rio Tinto. The researcher finally wraps up
the discussion by way of ending note.
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Table of Contents
1.0 Introduction................................................................................................................................4
2.0 Comparative Analysis of Owners’ Equity.................................................................................5
2.1 Comparative Analysis of Line Items.....................................................................................5
2.2 Comparative Analysis of Debt and Equity Position..............................................................6
3.0 Comparative Analysis of Cash Flow Statement........................................................................7
3.1 Comparative Analysis of Line Items.....................................................................................7
3.2 Comparative Analysis of Cash Position.................................................................................8
4.0 Comparative Analysis of Other Comprehensive Income Statement.........................................9
4.1 Comparative Analysis of Line Items.....................................................................................9
4.2 Comparative Analysis of Comprehensive Income Position................................................10
5.0 Comparative Analysis of Corporate Income Tax....................................................................11
5.1 Tax Expenses.......................................................................................................................11
5.2 Effective Tax Rate...............................................................................................................11
5.3 Deferred Tax Position..........................................................................................................11
5.4 Cash Tax Payment...............................................................................................................12
5.5 Cash Tax Rate......................................................................................................................13
6.0 Conclusion...............................................................................................................................14
References......................................................................................................................................15
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1.0 Introduction
Analysis of financial reporting may be considered to be one of the most crucial aspects of
business studies as the process of such analysis and evaluation may involve consideration of
different success-critical business matters that are both internal and external to the operations of
the firms. Such analysis shows the comparative position of the financial reporting of two or more
companies belonging to an industry. The report discusses the same in subsequent sections.
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2.0 Comparative Analysis of Owners’ Equity
The comparative analysis of each and every line items of owners’ equity of both the companies
is conducted in the subsequent parts of the report.
2.1 Comparative Analysis of Line Items
BHP:
Owners’ equity of the group may consist of the share capital of BHP Billiton Limited and BHP
Billiton Plc. In addition, there are some treasure shares and reserves which primarily include
share premium account, foreign currency translation reserve, employee share awards reserve,
hedging reserve, financial assets reserve, shares buy-back reserve. In addition, there are retained
earnings which may be construed to be the accumulation of past profits. Since the consideration
is about the owners, the non-controlling interests have not been taken into consideration here
(Bhp.com, 2018).
As far as change is concerned, the total equity has increased in the last three years under review
i.e. 2015 to 2017. In the current year, there has been a rise from $60,071 million in the year 2016
to $62,726 million in the year 2017 (Bhp.com, 2018). Such increase is primarily attributable to
the increase in reserve as the share capital has remained stagnant throughout.
Rio Tinto:
On the other hand, the owners’ equity of Rio Tinto includes almost similar line items that have
appeared in the books of accounts of BHP. The items are primarily shared capital of Rio Tinto
Plc and Rio Tinto Limited, other reserves and retained earnings. It is interesting to note that the
management of Rio Tinto has excluded share premium reserve out of the reserves and shown it
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separately as separate line items in the Balance Sheet. The other reserves of Rio Tinto have
consisted of capital redemption reserve, hedging reserve, sale revaluation reserve and foreign
currency translation reserve (Riotinto.com, 2018).
The growth story has almost been similar in the case of Rio Tinto as well. However, there has
been a marginal increase in share capital and the lion's portion of growth has been occurring due
to the growth in reserves (Riotinto.com, 2018).
2.2 Comparative Analysis of Debt and Equity Position
Both the firms have largely reliant on debt as may be evident from the last three year’s balance
sheets. The debt part of the entire liabilities bucket has been substantially high and almost equal
to the equity position. In other words, the management has been aggressive to grow on debt
probably because of the leverage benefit as may be derived therefrom. Moreover, the debt, being
the cheaper source of funding than equity, may easily be an easy option for the management to
choose for the purpose of sourcing (Finocchiaro and Mendicino, 2015).
However, the comparative position may show that Rio Tinto has more debt burden in its capital
structure than that of BHP in the year 2016. However, the figure for 2017 depicts the almost the
same proportion of debt-equity mix for both the firms.
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3.0 Comparative Analysis of Cash Flow Statement
Cash flow statement is a critical financial statement which reflects the net cash flow position of
the business and the comparative analysis of cash flow statement establishes the mutual
comparison between two firms with respect to their respective liquidity stand point. The
discussion has been briefly performed as below.
3.1 Comparative Analysis of Line Items
BHP:
Cash generated from operations (CGO) for the company in last three years has been declining
from $21,620 million in the year 2015 to $12,671 million in 2016 and finally revived to $19,377
million in 2017 (Bhp.com, 2018). There has been a sharp fall in cash generation in the last year,
because of loss booked by the group. Investment in PP&E has been declining continuously in the
last three years from $11,947 million (2015) to $4,252 million (2017). In addition, the repayment
of loan has also been a substantially huge line item of the company and the same has been
fluctuating showing an overall increasing trend during the period under review (from $4 billion
in 2015 to $7 billion in 2017 approximately). However, the dividend payments to the
stockholders have also shown a downward trend in the last three years to the extent of 50%
decline ( from $6.5 billion to less than $3 billion).
Rio Tinto:
On the other hand, the company has been able to increase the cash generated from operations
substantially from the last two years - almost 50% increase from the figure of 2015. The
purchase of PP&E has also been fairly stable throughout the period. In the current year, there has
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been significant inflow from the disposal of subsidiaries, joint ventures, and associates to the
extent of $2,675 million (Riotinto.com, 2018). Dividend payment has also been fluctuating with
an overall stable rate as far as figures of 2015 and 2017 are concerned. Repayment of borrowing
is another critical item in the cash flow statement which is also very much fluctuating with
movement from $3 billion to $9 billion in 2016 and again less than $3 billion in 2017
(Riotinto.com, 2018).
3.2 Comparative Analysis of Cash Position
The relative cash position of both the companies has been fairly rich in the sense that both the
firms have been able to accumulate a substantial amount of cash balance at the end of 2017.
However, a closer look into the cash movement of both the groups’ shows that BHP has been
extremely efficient in terms of cash accumulation which may be corroborated from the fact the
cash position of BHP was $6,613 million in 2015 which increased to $10,276 million in 2016
and subsequently $14,108 million in 2017.
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4.0 Comparative Analysis of Other Comprehensive Income Statement
Comprehensive income statement mainly lists the revenue items that are not being considered in
the income statement but critical to consider while finalizing the share of profit to be transferred
to stockholders account and retained earnings (Damant, 2003). The section below briefly
discusses the line items and their respective changes in yearly basis for both the companies.
4.1 Comparative Analysis of Line Items
BHP:
In case of BHP, the line items that have appeared in the other comprehensive income statement
of the company are primarily of two types namely the items that are being reclassified in the
income statement subsequently and the items that are not being reclassified in the income
statement. Proceeds from available for sale investments, cash flow hedges and related gains
transferred to equity, exchange fluctuations are taken to equity, tax recognized within the ambit
of other comprehensive income are some of the examples of other comprehensive income
reclassified in the income statement (Bhp.com, 2018). On the other hand, re-measurement gains
on medical and pension schemes, related tax expenses are those items that are not being
reclassified in the income statement but have appeared in the other comprehensive income
statement of the company for the years under review (Bhp.com, 2018).
Rio Tinto:
In the case of Rio Tinto, the actuarial gains or losses on post-retirement benefit plans, related tax
implications on both current tax change and deferred tax charge are reclassified in the income
statement. In addition, the cash flow hedges, gains or losses on the revaluation of available for
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sale securities and assets are not being reclassified in the income statement. Therefore, it may be
noted that both the companies have followed similar types of standards and policies with respect
to income recognition and tax charging thereon leading to a similar approach for another
comprehensive income statement (Riotinto.com, 2018).
4.2 Comparative Analysis of Comprehensive Income Position
For Rio Tinto, the other comprehensive income has increased sizably in the last three years. In
the year 2015, the same was a loss of $3,749 million which increased almost 4 times to $11,939
million in the year 2017. Such increment is primarily attributable to the huge amount of currency
translation adjustment in the current year. However, such adjustment excludes the gain arising
out of the translation arising from Rio Tinto Limited's share capital. The same has been taken to
the group's statement of changes in equity. However, as far as BHP is concerned, the other
comprehensive income for the group has been increasing with fluctuations in the year 2016.
However, it may be observed that such an increase has happened because of higher profit and not
because of items in OCI statement in the year 2017.
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5.0 Comparative Analysis of Corporate Income Tax
Corporate income tax is an important line item in the financial statement of the companies. The
report shows the different aspects of corporate income tax and related deferred tax assets and
liabilities position of both the companies.
5.1 Tax Expenses
Current tax expenses for BHP are increasing in the last three years. In the year 2015, the same
was $3,168 million, which reduced to $2,456 million in the year 2016 before increasing to
$4,288 million in the year 2017. On the other hand, the same for Rio Tinto has also been
increasing but such increase has shown a consistent growth during the period. The charge has
been increased from $1,132 million (2015) to $3,270 million (2017), which is almost three times.
5.2 Effective Tax Rate
The tax rate for BHP has been considered as Australian prima facie tax rate of 30%, whereas, the
same for Rio Tinto has been taken as UK prima facie tax rate of 19%. Therefore, it may be
observed that BHP has comparatively higher tax rate.
5.3 Deferred Tax Position
Deferred tax position may be discussed from two view point; one is related to income statement
which shows how much charges have been, made against the profit for deferred tax purpose and
the second one is related to balance sheet which establishes the deferred tax assets or liabilities
position of the business (Warsono, 2018).
For BHP, the deferred tax charge to the revenue has been heavily fluctuating from $498 (2015)
to negative $3,508 (2016) and then again negative $188 (2017). The balance sheet of BHP has
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shown deferred tax assets of $5,788 million in the current year, whereas, the business also
created a provision for deferred tax liabilities to the extent of $3,765 million during the same
period (BHP, 2018).
On the other hand, for Rio Tinto, deferred tax charge has been increasing yearly basis; from
negative $139 million in 2015 to $695 million in 2017. As far as assets and liabilities position is
concerned, the management has created $3,395 million in deferred tax assets and $3,628 deferred
tax liabilities (Riotinto.com, 2018).
It may, therefore, be shown that BHP has more asset position in terms of timing differences than
that of Rio Tinto. Such situation is subject to adjustment of subsequent year’s reversal of timing
differences and income tax provision accordingly. In this context, it may be worth to note that
the creation of deferred tax assets or liabilities are because of the variance in treatment of
different items of financial statements under both Income Tax Act and Corporations Act (Laux,
2011). For example, the depreciation is a classic example which is charged to profit under two
different approaches in both the Income Tax Act and Corporations Act as well. As a result, such
differences may occur which may primarily be construed to be arising out of timing differences.
5.4 Cash Tax Payment
Since the tax is provided for in the income statement, the exact amount of cash tax payment may
not be traceable from the income statement or the statement of profit or loss. Cash flow
statement shows the same for the relevant years.
An insight into the cash flow statement may reveal that Rio Tinto has paid almost $2,307 million
income tax to the government during the financial year 2017, whereas, the same for BHP has
been $2,585 million. In this context, it may be interesting to note that both the companies have
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paid the almost similar amount of tax in spite of the fact that both the companies are subjected to
different tax bracket with varied degree of income.
5.5 Cash Tax Rate
The cash tax rate has not been specifically calculated in any of the sections of annual reports of
the companies. However, the effort has been made to compute the same based on the earning
before tax and a cash payment of tax. The table below shows the same in details.
Particulars 2017 $m 2016 $m 2015 $m
BHP:
Earnings before tax 10,322 -7,259 8,056
Cash tax payment 2,585 2,286 4,373
Cash tax rate 25.04% -31.49% 54.28%
Rio Tinto:
Earnings before tax 12,816 6,343 -726
Cash tax payment 2,307 1,521 1,792
Cash tax rate 18.00% 23.98% -246.83%
From the calculation, it shows that the cash tax rate for both the firms has been highly
fluctuating. However, the same for Rio Tinto has been negative at 250% almost which got
reduced to 18% in the last three years. Such a situation has happened because of loss position
and a cash payment of tax on a provisional basis. On the other hand, the management of BHP has
been able to reduce to cash tax rate for them by almost half i.e. from 54% in 2015 to 25% in
2017 (BHP, 2018).
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6.0 Conclusion
Based on the discussion and analysis performed in the preceding sections of the report, it may be
concluded that the financial reporting plays an integral part of overall responsibilities bracket of
corporate management. An efficient and understandable reporting helps the stakeholders to
assess the financial health of the business in a more efficient manner. Since the audited financial
statements have their own gravity in terms of reliability and trustworthiness, the investors and
prospective owner groups put much reliance on the facts and figure as mentioned in the annual
report of the companies. Therefore, the management should take utmost care while finalizing the
annual report in order to ensure smooth stakeholder management. An efficient and lucid financial
reporting in line with the related regulations and directives significantly contribute towards a
greater transparency, brand building and value creation for the business and thereby attaining
sustainability in the market in the long-run.
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References
BHP. (2018). BHP | Investor centre. [online] Available at: https://www.bhp.com/investor-centre
[Accessed 15 Sep. 2018].
Bhp.com. (2018). BHP Annual Report 2017. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf [Accessed 15 Sep. 2018].
Damant, D. (2003). The revolution ahead in financial reporting: a new world – what the income
statement means to financial reporting. Balance Sheet, 11(4), pp.10-18.
Finocchiaro, D. and Mendicino, C. (2015). Debt, Equity and the Equity Price Puzzle. SSRN
Electronic Journal.
Laux, R. (2011). The Association between Deferred Tax Assets and Liabilities and Future Tax
Payments. SSRN Electronic Journal.
Riotinto.com. (2018). Results & reports. [online] Available at:
https://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed 15 Sep. 2018].
Riotinto.com. (2018). Rio Tinto Annual Report 2017. [online] Available at:
https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 15 Sep. 2018].
Warsono, W. (2018). Deferred Tax Assets and Deferred Tax Expense Against Tax Planning
Profit Management. Shirkah: Journal of Economics and Business, 2(2).
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