HI5020 Corporate Accounting: Comparative Report of Two Companies

This report presents a comparative analysis of the financial performance of BHP Billiton Limited and South32 Limited, both listed on the Australian Securities Exchange (ASX). The report examines the companies' owner's equity, analyzing components like equity share capital, retained earnings, and other reserves over the period from 2015 to 2017. It also delves into the cash flow statements, categorizing cash flows from operations, investing activities, and financing activities. Furthermore, the analysis includes a comparison of the debt-equity ratios of the two companies, highlighting their financing strategies. The report provides a detailed overview of the financial positions of both companies, offering insights into their performance and financial health. The report follows the structure of the assignment brief, including an executive summary, introduction, body, conclusion and references.

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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