Financial Analysis Report: Mining and Manufacturing Company Comparison

This report provides a financial analysis of four companies from the mining and manufacturing industries, specifically Evolution Mining Limited, Fortescue Metals Group, ALS Limited, and CSR Limited. The analysis focuses on key accounting principles such as revenue recognition, asset recognition, and liability recognition, comparing the approaches taken by companies in these two distinct sectors. The report examines the annual reports of these companies, highlighting differences in how revenue is recognized based on the transfer of risk and ownership (mining companies) versus the proportion of work completed (manufacturing companies). It also delves into asset valuation, differentiating between long-term and short-term assets, and the specific accounting treatments for each industry. Furthermore, the report addresses the recognition of liabilities, distinguishing between short-term and long-term obligations, and the importance of fair value in financial reporting. The study aims to provide insights into the financial reporting practices and the application of accounting standards within these industries, using the ASX 100 listed companies as case studies.

Financial Analysis
2018

1
By student name
Professor
University
Date: May 12 , 2018.
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Executive Summary
In this assignment the company has selected four companies that belongs to two different
industry and has provided an analysis on the overall financial statement of the two companies.
There are different ways in different industries function but the basic essence of accounting
remains same all over. The two industries that are targeted in this assignment are manufacturing
and mining industry and both function differently. The annual reports of the companies have
been downloaded and overall assertion on the net income, expenses and other aspects have been
made to show the proper use of accounting principles and accounting standards.
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Contents
Introduction………………………………………………………………….....................................................3
Analysis………………………………………………………………………………………………………………..……….…4
Conclusion…………………………………………………………………………………………………………………….….…6
Recommendations…………………………………………………………………………………………………………….…7
References.....……………………………………………………………............................................................9
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Introduction
The two mining companies that have been selected for this assignment are Evolution Mining Limited
and Fortescue Metals Group. Both the companies are listed in the ASX 100 list. Evolution mining
Industry is one of the leading gold mining company in Australia and is listed on the ASX 100 list. The
company is having more than 5 gold mines through which in operates in whole of Australia and nearby
countries. It came into operation in 2011, and the company has shown massive growth through the
acquisition of Cowal and Mungari in 2015. The company has shown a lot of consistency and reliability in
their overall approach and that is responsible for their success. It also been awarded the NSW Mining
Safety Excellence Award and many other international accolades are there on the company. It is one of
the pioneers in the mining industry and that is evident from the huge profit that the company makes.
The other mining company that would be covered in this assignment would include Fortescue Metal
Group that is a leading iron ore company in Australia. It is also listed on the ASX 100 list and have been
in operation since 2011. It is one of the largest tenant holder in Western Australia and carries out iron
mining on a wide scale. The company has two main areas of operations that would include, Pilbara
Region and the Chichester Hub. The company is recognized for its world class assets and mining
structures that it has developed through years of operations. The company produces more than 170
million of Iron Ore every year and that suffice to millions of people in and around the world. The
company is having great trade based relationship with China where the company supplies more than 17
percent of the total sea borne iron ore for the country.
The two-major manufacturing company includes ALS Limited, and CSR Limited. Both the companies are
listed on the Australian Stock Exchange.
ALS Limited.
The company is one of the leading soap and chemical manufacturer that also provides testing based
services, the company was formed in 1863. It has four major division of operations that includes
lifestyle, mineral, energy and operations. It also provides laboratory based testing solutions in and
around the world and is very famous for their operations in this regard. The main organizational
structure includes that the company operates in various sector and is not limited to one so that causes
disbursement of revenue for the company in different areas, it also helps the company in maintaining a
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more stable attitude. The major business achievements include that the company is listed on the top
ASX 100 companies and is also very widely known for its laboratory based services, making it one of the
largest company in this sector (YUAN, 2018).
CSR Limited.
The other manufacturing company that is covered in this assignment is CSR Limited, the company have
been in operations since 1870. It is a major producing company that also diversified into other regions
also that includes production of plaster and building materials and has holds stocks in mining shelters
too. The company is one of the top producers of fiber sheets, bricks, aerated concentrated materials and
other system that would support the plasterboard construction through Rondo. Given this the company
has other diversified business also that includes insulation, sugar refinery etc. and have been in this
industry since a long time. The business structure of the company includes that it has diversified into so
many sectors that it gives them an edge over other companies as they have revenue flowing from all
sides. The major business achievements include getting stakes in the iron ore shelters that helped them
to amplify their revenue to a large extent (Abbott & Kantor, 2017).
Analysis
In the given assignment the different aspect of the companies with respect to their accounting principles
and policies would be discussed on how the companies are going forward with their financial reporting
and its deliberations. The difference between the approach followed by the mining company and the
manufacturing company would also be shown in this assignment.
Revenue Recognition.
It refers to the policy that the company follows while recognizes their total revenue with respect to their
accounting standards and principles. Revenue recognition plays an important role as it deals with when
the company will recognize the revenue that it has earned. Some companies follow accrual method of
accounting while some follow cash based accounting methods, so in both the case the recognition of
revenue is different. In case of the given companies we can see the annual reports of the company to
have an overview on how these companies deals with revenue recognition and whether they are
following a method for this and abiding by the accounting standards or not (Alexander, 2016).
In case of the mining companies we see that revenue is recognized when risk and ownership is
transferred to the customers and there is no liability on the company going forward. The revenue
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recognition covers the accounting standards that states the definite rules that the company needs to
follow. In case of evolution we see that the revenue has been divided into three sections, that are from
three different metals that the company deals in and the definite cost and expenses are also given along
with it.
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The above picture has been sourced from the annual report of Evolution Limited where they have stated
how they recognize their revenue and how the fluctuations in the stock price is affecting their overall
operations. The overall adjustment in the price of the metal occurs post the shipment date doesn’t
occur and all the dealings are done on a future date by the company (Chariri, 2017).
In case of FMGL, they also follow a different method of revenue recognition which is based on
provisional pricing arrangements where the price is determined after its final discharge to the port.
Initial recognition is done at the shipment date and post that the company reconsiders the price to be
received based on its current spot rate. So we see that in case of mining companies the spot price and
the future price plays an important role and most of the revenue is recognized on provisional basis.
In case of the manufacturing company CSR Limited we see that the company as divided the revenue into
two main segments that includes trading revenue and the other revenue (Anon., 2017). The company
has specified the definite rules that they follow for recognizing of revenue and the same is stated below:
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The company has specified certain conditions that must exist beforehand for the management to
recognize their revenue and post an explanation on it.
In case of ASL Limited the revenue is recognized in the profit and loss statement based on the total
proportion of work completed as per the balance sheet of the company. For assessing the level of work
performed the company depends on surveys that the management conducts in the market to
understand the flow of operation in the company (Maynard, 2017). The entire recognition depends on
the transfer of risk and reward for the company as per the definite accounting principles. This is
specified in the annual report of the company. An extract from the annual report of the company is
given below:
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Asset Recognition
It is an important aspect of accounting as per which the companies need to understand which are the
assets that they need to recognize in their annual reports and which they don’t. Asset recognition deals
with several aspects that is related to the nature of the business, the type of assets they deal in and the
overall revenue that these assets generate. Generally, there are two types of assets long term and short
term. Long term assets that will be in operations for more than 12 months and vice versa. Every
company needs to be specific about the assets that they are recognizing in their balance sheets (Ghofiqi,
2018).
In case of manufacturing companies, we see that the company follows definite method like all the
financial assets of the company are recognized at their fair value at first and then they are updated
accordingly. The companies also put focus on recognizing of assets that are used for exploration as that
forms the main basis for the overall operations of the company. Special accounting principles that the
company needs to apply when they are dealing with the asset based recognition and techniques. An
extract from the annual report is given:
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When it comes to manufacturing companies the recognizing of asset is more simplified as they do not
deal in evacuation assets like mining companies. Manufacturing companies have more raw materials
and in stock items that they need to pay heed to (Boghossian, 2017). Valuation of inventory plays an
important role for the manufacturing industries. The company also pays special heed to recognizing of
long term assets that includes property plant and equipment, this also forms the basis for the
recognizing of assets by the managers of the company in the annual report as per the specific standards.
An extract from the annual report of the company is given below:
In this case also we see that the company has put more focus on recognizing the assets based on their
fair value so that effective result is generated and there is no over valuation or under valuation. Asset
valuation also means that the company needs to research the market so that there is no discrepancies
from their end when it comes to valuation of the assets. Long term assets are depreciated and then
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recognized and impairment loss is also considered on them so that in future the result is generic
enough.
Recognizing the Liabilities
Liabilities refers to those elements that the company needs to pay off in the future. It is the outflow of
money from the company.
In case of mining companies, the long-term liabilities refer to the leasing cost that the company needs to
pay off, it also refers to short term liabilities that includes the trade payables and accrued expenses.
Recognizing of liabilities also includes ascertainment of the fair value so that there is no under or over
valuation. Liabilities should not be deferred as it might lead to heavy loss for the company in the future
(Chron, 2017).
In case of manufacturing companies also liabilities are divided into short term and long-term liability and
specific disclosures are required to be made in the annual report of the company with respect to that. It
is also important for companies to know when they should term certain liabilities as long term or short
term. Long term liabilities can be paid off in later stages but short term needs to be paid off
immediately. Creditors and other trade payables are generally termed as short-term liability and other
long-term liabilities includes loans and advances, bonds, prepaid revenue etc. The companies need to
follow specific accounting principles in recognizing the liability (YUAN, 2018).
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