HI5020 Corporate Accounting - Assignment

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HI5020 Corporate
Accounting

Rio Tinto
The chosen company for the analysis is Rio Tinto. Rio Tinto is a public limited company.
The chosen company has its operations across continents and is an enormous multinational
mining and minerals and metals company. It is listed on the Australian Stock Exchange as
well. It has profits of around 8851 USD as on 31st December 2017. The financial statements
of Rio Tinto are analyzed below:
Cash Flow Statements
i) It is seen that the Net Income or NI is evaluated in the company’s Income statement. It is
also noticed that the evaluated net income comprises of many notional expenses and income
that are an item reflected in the company’s balance sheet. It is required for the company to
either add back or deduct its noncash items depending on what the case is. After adjusting the
NI, it is required for the management to identify and account for changes in asset accounts
which can affect the financial position of the organization (Rio Tinto, 2017). The company
adds back its non-cash items in the name of dividend from equity accounted unit to the Net
Income so as to ascertain operational cash flows. Once it is done, the transactions impacting
the cash position of operating assets are adjusted. Then, operating income is reduced by
subtracting interest from it. The subsidiary portion of the company is ignored and excluded
from the capital of the company while non-controlling assets form the equity portion of the
capital of the company. Dividends that are paid to holders who have a non-controlling
interest in subsidiaries should be deducted as it forms a part of operating income or expenses
(Petty et. al, 2012). Further, it is seen that the tax paid for the year is also accounted for.
It is worth a thought that the rates of interest have fallen down in 2017 yet there is an
increment in taxes. The sales have enormously risen and as a result of which there has been a
considerate increment in the interest amount.
The operating activities yielded net cash worth $13884 million. The investing activities of the
company that adjusted all the gains and losses from the cash flows were further adjusted from
cash flow from such activities. The company makes a lot of investments by purchasing of
plants and equipment, properties and intangible assets. For the year 2017, the company
invested around $4482 million into purchasing of such assets. It was also seen in the same
year that the company enormously sold its investments in joint ventures, subsidiaries, and
associates. The company invested in financial assets that acted as the liquid fund for the
company worth $723 million (Rio Tinto, 2017). The annual sales were around $2675 million.
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Rio Tinto
The company’s decisions are quite foolish as there have been enormous purchases and
investments while the sales are fewer and weaker as there were only $40 million annual sales.
$138 million was assembled from the sales proceeds of property, plants, and equipment and
intangible assets (Rio Tinto, 2017).
The company has made relatively fewer investments in the mutual funds. Approximately
around $18 million is the reported figure accounted for the miscellaneous investments. The
company did not make investments in acquiring joint ventures, associates or shares of
subsidiaries. Around $2373 million of the net cash utilized in investing activities (Rio Tinto,
2017).
A company manages to arrange its funds through its financing activities so as to run its day to
day operations. These activities are the source through which a fund is drawn primarily.
The dividend paid to shareholders is around $4250 million. This shows that the shareholders
are informed about the high sales and high profits. The figures clearly reflect that the
company almost had zero borrowings in the current year. This year the borrowing was of $18
million which is almost a negligible amount as compared to the borrowing in the last year
that was for around $4413 million (Rio Tinto, 2017).
ii) In order to form an understanding of how Rio Tinto is performing and where are its
funds being utilized, it is required to compare the activities of the past 3 years. Non-cash and
non-operating expenses, incomes, net income from the profit and loss statement, cash flows
from operating income has accounted for cash flows from consolidated operations. The cash
flows from operating income for the year 2015 were $12102 million, and $11368 million in
2016 and $16670 million in 2018. The net cash that was generated from operations in 2015
was $9383 million and $8465 million in 2016 while $13884 million in 2018. The expense
associated with the interest was reduced this year on account of fewer borrowings this year.
Mutual funds yielded more dividend. In comparison to the last 2 years, the profits
encountered this year were enormous which resulted in huge net cash flows from operations
in the present year.
To maximize the funds available and earn operating income companies opt for investing
activities that are making investments in properties, assets, etc. Activities like investments
and financials have a base of operating income. These 2 activities are in sync with one
another.
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Rio Tinto
Considering upon investing activities it is seen that the cash flow in 2017 is increased as
compared to the last year but still is very low as compared to 2015. The company had cash
outflows from investing activities of around $4600 million in 2015, $2104 million in 2016
and $2373 million in 2017. There has been the disposal of investments in subsidiaries and
joint ventures and purchase of plant and machinery, property, intangible assets and equipment
in the current year like other years (Rio Tinto, 2017).
Considering the financing activities it is seen that in the current year there has been an
enormous outflow of such activities as compared to last 2 years. The outflow of financing
activities was around $7670 million in 2015, $7491 million in 2016 and $9141 million in
2017. The shareholders are reportedly paid higher dividends in the current year as what
compared to past years. The additional borrowings were also negligible. The repayment of
borrowings was less this year as compared to 2015 and 2016. The company has relatively
controlled its short-term borrowings in the current year as compared to 2015 and 2016. The
company purchased the non-controlling interests from its subsidiaries. The company has also
purchased its own shares from the shareholders as disinvestment of shares is reflected in the
statements.
Other Comprehensive Income
iii) Other comprehensive income is an item accounted for net income in the profit and loss
statement. It comprises of revenues, gains, and expenses that are not yet been realized. These
are realized after the completion of underlying transactions. Revenues, expenses, profits, and
losses that are not included in the net income derived from the profit and loss statement under
IFRS are known as other comprehensive income (Vaitilingam, 2014). For the basis of
preparation of financial statements, companies prefer accrual basis of accounting. This
further means that the basis of recording transactions in the financial statements is the
occurrence of the transaction. When the cash pertaining to the transaction is received or paid
the effects are differently treated and recorded. Take, for instance, a company took the
contract of selling furniture and will account for the proceeds from sales as revenue when the
consumer has got the delivery of the product. The consumer becomes the owner of the risks
associated with the product and it is a valid sales contract (Porter & Norton, 2014). The sale
will be accounted as receivable in the statement of financial position and will also be
accounted in the statement of comprehensive income for the year.
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Rio Tinto
iv) Pension payment can be made in a way which has a gap between the paid amount and the
amount thought of by the receiver. The company suffers a loss if the thought of amount is
lower than the received amount (Rio Tinto, 2017). Expectations are common because the rate
of the pension depends on the employee’s span of working, position in the company which is
taken into account during the evaluations. There can be either profit/loss if alterations are
made. It was seen that according to the record, Rio Tinto actuarial gain/loss in postretirement
benefit plan was about USD 619 million as in the year 2015 which decreased to USD 90
million in 2016 to USD 6 million in the year 2017 (Rio Tinto, 2017). It was also seen that the
pension provided was way higher than thought off. But this change could not be due to the
alteration in the post-retirement benefit but has happened due to the alterations in the
actuarial assumptions.
The upcoming writing is about the tax payment in which some of the reimbursement can
happen but this cannot be put into the profit/ loss section of a company. This amount was
reported to be USD 175 million in the year which had a collapse to about USD 12 million in
the year 2016. There are some new additions in the form of postretirement benefit plans
which were made by the government of US and France in the corporate tax section.
v) It is seen that some adjustments in the financial statements are made so that it can be
shown that the subsidiary transactions and foreign equity investments in the form of
functional currency which is valid for a specific period. It is seen that the equity foreign
currency changes its place from the financial statements to the reporting presenting
statements when it is seen to be similar to foreign currency which also includes gain/loss on
foreign currency as forwarding exchange contracts (Deegan, 2011). A type of capturing can
be seen of the foreign currency transactions in the form of foreign entity invested along with
intercompany foreign transactions which have an extended span of time which can only
happen if the equity methods evaluate the transactions in the financial statements of the
company to be stiff and well structured. Indulgence of gain/loss on a copied instrument or no
unoriginal financial instrument that can take the form of a foreign currency transaction gain
and that has been designated and has qualified as prevarication instruments for evasion of the
foreign currency exposure of a net investment in a foreign operation (Needles & Powers,
2013).
Corporate Income tax
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Rio Tinto
vi)According to the records it is seen that the tax expenses that were collected during the year
were about USD 3965 million which can be calculated to be two and a half times more than
the preceding year.
vii) The above figure does not show the percentage of tax collected. It is seen that the
company has to pay 19 percent of income as the tax but there are some other areas were some
reimbursement can happen which decreases the amount a little bit.
viii) It was in the year 2017 that the deferred tax liability was about USD 233 million. There
has been a bridge between the accounting and the taxing of timing related issue but this
amount cannot build up the bridge. USD 233 million of deferred tax liability was
accumulated by Rio Tinto. The deferred tax arises when there are certain expenses that are
charged to profit and loss account for a certain amount in the current year but are disallowed
or allowed for a different value or are based on different calculations in the taxation rules that
are applicable to the company.
ix) For Rio Tinto, the current tax is the deferred tax that is taken into consideration. In
addition, the tax expense that was noted was the liability of tax that stands at USD 3965
million. However, it needs to be considered that the payment of income tax does not mean the
same as income tax expense. This is considering the fact that deferred tax, arrears, as well as
advances, need to be adjusted from the payment of tax to come at the income tax figure
(Choi & Meek, 2011).
x) The profit and loss account projects the tax that is concerned with the company for the
year. On the contrary, the tax item is projected as an outflow from the cash flow statement.
The tax value that is accrued is reduced in the profit and loss statement (Rio Tinto, 2017).
The final payment is considered by considering all the payment of TDS, advance taxation,
interest, penalty, etc (Davies & Crawford, 2012). Therefore, a difference appears between
the two statements.
xi) The general disclosure of taxation differs from the one that is shown in the financial of
Rio Tinto. The component of tax is projected in the parent and subsidiary and even a
combination exists. Such a presentation is difficult for a normal investor to ponder. There is a
difference when it comes to reconciliation.
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Rio Tinto
References
Choi, R.D. and Meek, G.K. (2011) International accounting. Pearson .
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
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Needles, B.E. and Powers, M. (2013) Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
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 19 May 2018]
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT
Prentice Hall.
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