Regulation of Financial Reporting System and Analysis of Equity and Debt Components in Mining Industry

This report consists of a detailed analysis over the level of disclosure that should be maintained by an organization and also it has been discussed that it should be regulated in the managerial framework of an organization or not. The report also contains a discussion about IFRS and the AASB. The report will also be concluded with the study of four public companies based on their equity and debt components.

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HA2032 Corporate and Financial Accounting

Financial accounting
Executive summary
It has been noticed that in today's world, organizations have increased the uses of financial
reporting in their systems and also have maintained levels of disclosure for maintaining good
relationships with their investors. However, the company should also maintain a level under
which it is disclosing the information to the investors. This report consists of a detailed analysis
over the level of disclosure that should be maintained by an organization and also it has been
discussed that it should be regulated in the managerial framework of an organization or not. The
report also contains a discussion about IFRS and the AASB. The report will also be concluded
with the study of four public companies based on their equity and debt components.
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Financial accounting
Contents
Introduction.................................................................................................................................................4
i. Corporate regulations..........................................................................................................................5
ii. Accounting standard setting.................................................................................................................5
Owner’s equity............................................................................................................................................7
iii. Item of equity.........................................................................................................................................7
iv. Comparative analysis of the debt and equity position...........................................................................10
Conclusion.................................................................................................................................................11
References.................................................................................................................................................12
Appendix...................................................................................................................................................13
Appendix – 1 Owner’s Equity.....................................................................................................................13
Appendix 2 - Comparative analysis of the debt and equity position.........................................................14
3

Financial accounting
Introduction
Every organization should try and disclose the required terms and conditions to various type of
user so that the decision-making process can be carried out by them. In today's world, it has been
observed that the principle of disclosure is not being able to fulfil the needs of the financial
reporting of users. The environment is divided between two groups of people among which half
are satisfied with the information they have been provided with and the other half is not satisfied
with the information and is earthling to know more about the financial statements of the
organization (Porter & Norton, 2014). Hence a regulation of financial reporting system should be
carried out so that the management can disclose certain information in relation to the financial
position of the company to the users. If the company or disclose the information voluntarily, then
it can face many issues in near future.
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Financial accounting
i. Corporate regulations
There are a various set of information that is not to be disclosed by the organization as the
information is of no use to the normal public but if disclosed can damage the managerial
framework of the organization.
All the organizations of a similar industry should try and regulate under a common approach to
making any type of disclosure. The manager should try and not make any type of immaterial
disclosure which makes cause a loss to the organization. It is also the duty of the auditor to help
and make the particular disclosures that are needed to be disclosed by an organization and also
stop any irrelevant disclosures that are already being made by it (Vaitilingam, 2014). Every
organization should be regulated through a structured financial accounting system which will
help the manager to gain the freedom of disclosure of information on a voluntary basis. The use
of financial regulation will also help the users to compare the organization start with other
companies in the same industry. Regulation of control should be made in order to get more
reliable sources for disclosure of information. It should be duly noted by the manager that the
information is disclosed only on the basis of requirement and not on the voluntary basis.
Transparency should be maintained in the accounting statements as it satisfies the major
objective of financial reporting (Petty et. al, 2012). Hence, it can also be concluded that the
process of financial reporting is idealistic in nature and every organization should have a limit on
the information which is disclosed by them. The basic idea of transparency in the financial
reporting system means that necessary information should be conveyed to the users but not all
information should be conveyed voluntarily to them. Too much information will hamper the
objective of financial reporting and thus may lead to an insensible act to be carried out by the
organization (Parrino, Kidwell & Bates, 2012).
ii. Accounting standard setting
The international financial reporting system or IFRS can be defined as the unified term which
helps the organization to collect data and present them under the prescribed regulations of IASB.
The concept of IFRS contains broad strategic implementation which has been observed by the
FRC and AASB, thus making it necessary for the organizations reporting under Corporations Act
2001 to adopt this method in order to prepare their financial statements. The adoption of this
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Financial accounting
method also helps the organization to ensure if the financial statements have been prepared under
the guidelines of AASB. The AASB is said to have a neutral policy in relation to the transactions
which states that every event should be recorded in the accounts whether it is in the profit or non-
profit sector of the organization (Deegan, 2011).
The AASB has been observed to adopt different accounting standards in the Australian
accounting standards in order to fulfil the strategic guidance policy of the financial reporting
Council. It is very important for the ascertainment of the fact that every Organisation in the
industry is using the IFRS system issued by IASB in Australia because of the continuous nature
of the principle that is required by the financial accounting. It's been observed that the
international market will be strongly influenced by the adoption of IFRS system in the
accounting sector of the organizations because all the companies of Australia will have a
decreased capital displayed in their balance sheet.
It has also been clearly observed that the implementation of IFRS is not compulsory for all the
members using are applying IASB because of the huge changes in the process that will be
required to be made in the financial sector of the industries (Davies & Crawford, 2012). Making
changes in the financial sector of the organizations is not very easy because of the diverse reach
of these applications. Hence, it is not being made necessary for every country in the IASB be to
follow the IFRS based accounting system. However, it should also be noted that the adoption of
IFRS system in the accounting sector of the organization will help to boost the economy of the
country and will also provide various benefits to the organization. Many countries that are
following the principle of GAAP should also try and dropped the IFRS accounting system so that
uniformity can be maintained and convergence will not become a problem in future. Hence, it is
not necessary for every organization to adopt the IFRS system but they should try to adopt it so
that uniformity can be maintained and the users can also differentiate and compare the forms in a
much-elaborated manner.
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Financial accounting
Owner’s equity
iii. Item of equity
The basic equity component comprises three factors:
• Contributed equity
• Reserves
• Retained earnings
Contributed equity- this generally contains the share capital of the organization and also the
shares that are held in trust by the organization. The contributed equity of the organization
depicts the amount of share capital that is owned by the company itself. The shareholders are the
owners of the company and an increase in the contributed equity is noticed at the time of issue of
new shares (Ross et. al, 2014). The new shares are issued in order to collect cash from the public
in return for a share in the company. Bonus shares are also issued to the existing shareholders as
compiled with the policy of the company.
In the below listed for public companies the major items that constitute the equity funds are as
follows:
• Contributed equity
• Reserves
• Retained earnings
Reserves: the reserves consist of different type of hedging reserves, translation reserves of
foreign currencies, remuneration reserves and general reserves. Any gain or loss on a particular
derivative instrument is being settled with the help of hedging Reserve. The remuneration
reserve is being made in order to derive the amount payable as remuneration but is not been
calculated accurately. The main reason behind this inaccuracy is the constant enhancement or
decline in the remunerations that take place with the change in time. Asset revaluation reserve is
also maintained by the organization in order to revaluation results going to the depreciation or
any other fluctuation in their prices because of the environmental impacts. Whereas the general
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Financial accounting
reserve is maintained in order to protect the organization in the time of need so that the functions
can be carried out at ease and flexibility.
Retained earnings: retained earnings are designing’s that are kept aside by an organization from
the total profit earned by it in order to enhance the operations of the organization and meet other
contingencies of the company in near future. These types of earnings are very important as they
also mean ploughing back of profit and also a safety reserve can be created with the help of these
earnings.
BHP Billiton
Refer Appendix- 1
It has been observed that the overall business of the organization have declined in the previous
years and may also result in it to fall in the market. The major reason behind this fall will be the
employee share awards that were exercised by the organization (BHP Billiton, 2017). There was
a huge reduction of reserves of the company and also transfers were to be made for the employee
share awards.
Fortescue
Refer Appendix 1
When analyzing fast moving consumer goods, the common stock of the organization was witness
to have an increase while the level of equity of the organization was observed to decline. A
deficiency has been noticed in the accumulated comprehensive income of the organization
because of the problems faced by it in the mining fields and other businesses (Fortescue Metals
Group, 2017).
Rio Tinto
Refer Appendix 1
The organization Rio Tinto was observed to have sufficient retained earnings and also it was
having an accumulated and comprehensive financial statement. The huge retained earnings of the
organization world because of the heavy profits earned by the organization in previous years
(Rio Tinto, 2017). High accumulated and comprehensive income was noticed in the financial
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Financial accounting
statements of the organization because of the strong business conducted by the management staff
of Rio Tinto.
Orica Limited
Refer Appendix 1
It was observed for this organization that the equity component was falling continuously and a
fluctuation may result in its fall. This fall was a result of the huge increase in the material costs
of the organization because of existing contracts (Orica, 2017). However, it was also observed
that the company was having sufficient retained earnings which have been saved by it from the
profits it has earned in the past.
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Financial accounting
iv. Comparative analysis of the debt and equity position
Refer Appendix - 2
After the clear analysis of all the above data, it can be said that fast moving consumer goods are
having high debt to equity ratio which will affect the operations of the company and also may
cause a problem in fulfilment of the obligations. More points are needed to be driven towards the
payment of interest. The BHP Billiton organization is having equilibrium in the debt to equity
ratio which shows the efficiency of the management in relation to the financial structure of the
company. The company Orica make face problems in future if they continue to expand because
of the high debt to equity present in their financial structure. Rio Tinto even after having high
debt to equity can balance the same because of the high retained earnings that can be used in
order to fulfil the obligations. Even after a high debt to equity ratio the firm will recover all
losses with the help of exponential growth that is shown by it in the recent years.
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Financial accounting
Conclusion
After the clear analysis of all the data present above, it can be stated that the managers of the
organization should try and not disclose any materials voluntarily. Also, proper disclosure of
financial documents should be regulated. The study of the top four companies in the Mining
industry has also helped us to understand the importance of maintaining equilibrium in the debt
to equity of an organization so that proper functioning can be achieved.
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Financial accounting
References
BHP Billiton. (2017) BHP Billiton annual report and accounts 2017. Available from:
https://www.bhp.com/investor-centre/annual-reporting-2017 [Accessed September 2018]
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Fortescue Metals Group. (2017) Fortescue Metal Group Annual report and accounts 2017
[Online]. Available at: https://www.fmgl.com.au/docs/default-source/default-document-library/
fy2017-annual-report.pdf?sfvrsn=1f931875_2 [Accessed 17 September 2018]
Orica. (2017) Orica Annual Report and accounts 2017 [online]. Available from:
http://www.orica.com/Investors/company-reports#.W5_QB84zbIU [Accessed 17 September
2018]
Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas:
Cengage Learning
Rio Tinto. (2017) Rio Tinto Annual Report and accounts 2017 [online]. Available from:
http://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 16 September
2018]
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT
Prentice Hall.
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Financial accounting
Appendix
Appendix – 1 Owner’s Equity
BHP Billiton
Stockholders' equity 2014 2015 2016 2017
Common stock 2255 2243 2243 2243
Retained earnings 74548 60044 49542 52618
Treasury stock -587 -76 -33 -3
Accumulated other comprehensive income 2927 2557 2538 2400
Total Stockholders' equity 79143 64768 54290 57258
Fortescue Metal Group
Stockholders' equity
Common stock 1368 1685 1752 1676
Other equity 71 60 44 51
Retained earnings 6593 8052 9504 10910
Accumulated other comprehensive income 2 0 0
Total Stockholders' equity 8035 9797 11301 12637
Rio Tinto
Stockholders' equity 2014 2015 2016 2017
Additional paid-in capital 9053 8474 8443 8666
Retained earnings 26110 19736 21631 23761
Accumulated other comprehensive income 11122 9139 9216 12284
Total Stockholders' equity 46285 37349 39290 44711
Orica Ltd
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Financial accounting
Stockholders' equity 2014 2015 2016 2017
Common stock 1975 1954 2025 2068
Other Equity -70 -147 -149 -123
Retained earnings 2895 1247 1247 1460
Accumulated other comprehensive income -537 -70 -341 -443
Total stockholders' equity 4263 2985 2782 2962
Appendix 2 - Comparative analysis of the debt and equity
position
FMG
Debt 16056 18016 14739 12214
Total Stockholders' equity 8035 9797 11301 12637
Debt equity ratio
1.99825
8 1.83893
1.30422
1
0.96652
7
BHP Billiton
Debt 72270 59812 64663 59748
Total Stockholders' equity 79143 64768 54290 57258
Debt equity ratio
0.91315
7
0.92348
1
1.19106
6
1.04348
7
Orica
Debt 4576 4337 3813 3823
Total stockholders' equity 4263 2985 2782 2962
Debt equity ratio
1.07342
2
1.45293
1
1.37059
7
1.29068
2
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Financial accounting
RIO Tinto
Debt 61542 54215 49973 51015
Total Stockholders' equity 46285 37349 39290 44711
Debt equity ratio
1.32963
2
1.45157
8
1.27190
1
1.14099
4
15