Financial Performance Analysis of Iluka Resources: A Detailed Report

This report offers a comprehensive analysis of Iluka Resources Ltd's financial performance, examining key aspects such as revenue, share value, and adherence to Australian Accounting Standards (AASB). The report delves into the company's business summary, segmental information, and the impact of a bribery scandal on its performance. It explores the application of accounting structure theory and normative theory, highlighting the importance of the AASB conceptual framework for transparent financial reporting. The analysis covers the company's financial results from 2016 to 2017, including revenue, net loss, and debt levels. The report also addresses the recognition of assets and liabilities, impairment of assets, and the impact of AASB standards like AASB 9 and AASB 15. The report highlights the importance of applying the accounting concepts according to normative theory for the improving the future profitability and performance by changing the conceptual framework applied by the organisation for preparing the financial statements. The study also provides recommendations for improving the company's financial performance and decision-making processes.

ANALYSIS OF FINANCIAL
PERFORMANCE OF ILUKA
RESOURCES

Executive Summary
The financial performance can be analysed from financial statements prepared by
company. With reference to analyse financials in effective manner, firm is required to follow
accounting standards so that transparency may be gained in a better manner. Iluka Resources
Ltd which is engaged in mining will be analysed and accounting issue will be carried out by
applying accounting theory. Moreover, overall performance will be assessed.

Table of Contents
Introduction to the company.......................................................................................................1
Share value of Iluka Resources Ltd ...........................................................................................2
Analysing Company’s financial performance.............................................................................2
Business Summary......................................................................................................................3
Adherence to Conceptual Framework.........................................................................................4
Critique's ....................................................................................................................................5
Summary.....................................................................................................................................6
Conclusion and Recommendations.............................................................................................6
REFERENCES................................................................................................................................8

Introduction to the company
Iluka resources is an Australian based company and it is the largest producer of zircon
and titanium dioxide derived rutile, and synthetic rutile. It is operating in various states of
Australia. This organisation is involved in mining industry and providing various resources.
Illuka resources is having employees equals to 1100 and it generated revenue equals to $726
million in 2016. Illuka resources was involved in the bribe case after the company added one of
the world's largest Rutile mines to its portfolio and takeover the London listed Sierra Rutile Ltd
for $375 million. The corruption includes about the bribe payment to the senior government
officials to secure mining license of iluka. This issue of bribe payment affected the performance
of iluka resources to the great extent. There are various accounting standards that organisation
have to follow which are set by AASB ( Australian accounting standards board).
The accounting standards consist of AASB 1023 that deals with general insurance
contracts. AASB 1031 deals with materiality, AASB 1038 provide standards relating to life
insurance contacts. AASB 101 provide guidelines for presentation of financial statements etc.
The organisation have to apply the concepts as per the conceptual framework of AASB for
reporting the financial information. This assignment will include the “ accounting structure
theory” which will helps in understanding of various task of this study. This study will help in
identifying the performance of illuka resources. Accounting theories is a set of assumptions,
frameworks and methodologies used in the study and application of financial reporting
principles. The accounting theory that will be included in this assignment will be accounting
structure theory that is as follows.
Accounting structure theory : This theory is also known by other names that includes
classical theory, traditional theory, descriptive theory etc. This theory provide understanding a
bout the accounting practices and the methods to report specific events. This theory helps in
understanding the structure of data collection process in accounting and financial reporting.
Thus, this theory is directly connected to accounting practices. This theory focusses on
mechanical tasks that were performed by accountants traditionally (Nandwa, 2018). This theory
provides that the objective of financial statements is concerned with stewardship concept of the
management role. The theory including the traditional practices helps the organisation in getting
greater insight into current accounting practices. According to this theory, traditional accounting
practices must be followed by organisation to have proper understanding of the information
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contained in the financial statements. This theory lays emphasis on the activities performed by
accountants. This theory provides that structure of accounting musty be designed properly to
identify the defect in the accounting practices followed by organisation. Accounting structure
theory helps in changing the accounting practices and by generally accepting the accounting
principles makes the relationship theory and practice a circular one. This theory includes
business entity concepts, going concern assumption and periodicity. Traditional accounting
theory consist of assumptions, measurement, principles etc. that have their influence on
accounting practices.
Normative Theory-
This theory can be applied with reference to Iluka Resources Ltd as it should focus on
recommendations. In simple words, conceptual framework is one of the important part which
should be taken into account. By implying, AASB conceptual framework, transparency can be
achieved to attained and stakeholders may be serve financials in a better manner. Thus, on the
basis of such theory, all constraints, costs are accounted to Iluka Resources Ltd in effective
manner. This theory will help the illuka resources in improving its financial performance. The
case study provided about Illuka resources provide information about the scandal due to which
the share prices and also the performance and profitability of illuka resources is declines and in
order to improve that It is recommended to the company to apply the accounting concepts
according to this theory. This theory will help the company in making various decisions for the
improving the future profitability and performance by changing the conceptual framework
applied by the organisation for preparing the financial statements. This theory is not based on
observation but rather it focusses on how the accounting process should be done.
Share value of Iluka Resources Ltd
The company's performance has not being good over recent years. The share value for the
current session comes to $7.46 AUD at 15 December 2018 following results of company. The
share prices are gone down despite of strong revenue in its mineral activities. The financial
performance of Iluka Resources Ltd can be analysed that performance of company has not good
at all which is reflected from the income statement. The revenue was 774.4 in 2016 which
increased to 1077.8 in 2017 highlighting that revenue is increased. However, despite of good
sales in the financial year, net loss is arrived of 165.6 in 2017. This is arrived expenses are
incurred more in comparison to income in effective manner.
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It can be analysed that investors always look for profit in terms of good return and
consecutively good news regarding company . This is evident from the fact that with the effect of
good news, share price goes up and in case of bad news, price goes down. This is relevant from
the report that share value of Iluka Resources Ltd has turned down as it has recorded a net loss of
$52.4 million (AUD) after the annual report of 2017 has been generated (McKenzie and Baker.
2017). This shows that company's share prices are decreased.
Analysing Company’s financial performance
The performance of company has been in accordance with the Australian Accounting
Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and
also Corporations Act 2001. Firm is for-profit entity and standards have been complied with.
This is evident from the fact that AASB 9 relating to Financial instruments which includes
information such as recognition, classification and measurement of financial assets and financial
liabilities, also including derecognition, impairment and changes to hedge accounting rules are
complied with (Barth,2018). However, it can be found that AASB 9 has no material impact on
company. The faithful representation of financial statements are carried out with reference to
company's performance in the financial year.
The recognition of assets and liabilities are required to be made if firm terms any of its
assets in the name of 'assets'. The recognition of assets provides clarity that in accordance to
AASB which in paragraph 89 says that asset is recognised in balance sheet when it is probable
that from the asset future economic benefits will be flowed to the business entity and such asset
has a cost or value that can be measured reliably. This means that asset is recognised when it is
probable that economic benefits will be recognised from it. In relation to this, firm has recently
acquired 100 % stake in Sierra Rutile on December 2016 and it can be found out that $144
million of deferred assets has been recognised from it, primarily consisting the anticipated
benefit of existing tax losses reducing future tax liabilities up to certain extent (Annual report of
Iluka Resources 2017. 2017). Moreover, it has been analysed that firm has also provided
depreciation and amortisation description in the section Notes to the financial statements.
Business Summary
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Segmental
Information 2017 2016
AUS US SRL MAC Total AUS US SRL MAC Total
Total segment sales
to external customers 833.7 40 143.8 0 1017.5 690.2 18.3 17.8 0 726.3
Total segment result* 43.2 -126.3 -2.5 59.2 -26.4 -63.5 -77.2 0.9 47.1 -94.5
Impairment of assets 155 0 0 0 155 201 0 0 0 201
Depreciation and
amortisation expense 67.7 0 39.4 0.4 107.5 74.3 0 2 0.4 76.7
Rehabilitation and
holding costs for
closed sites 7.9 119.5 0 0 127.4 1.7 40.9 0 0 42.6
Segment assets 1073.3 73.2 487.9 18.1 1652.5 1478.6 103.6 485 18.8 2086
Segment liabilities 458.5 225.9 108.5 0 792.9 448.2 127.6 116.5 0 692.3
Additions to non-
current segment
assets 49.7 0 58.1 0 107.8 39.4 9.8 2.3 0 51.5
The above business segment report is prepared of Iluka Resources Ltd for two years.
AUS stands for Australia, SRL (Sierra Rutile), US (United States) and MAC ( Mining Area C).
It can be said that AUS comprises operations in Victoria, Western Australia and South Australia.
Hamilton mineral plant located in Victoria was idled in October 2017 while, Jacinth-Ambrosia
operations were idled in 2016 and restarted in December 2017. SRL consists of mineral sands
mining and processing operations. US consists rehabilitation obligation in Florida and Virginia.
MAC is deferred consideration iron ore royalty interest operated by BHP Billiton Iron Ore. Out
of all segments, AUS has attained good revenue for firm, while, SRL has not been more
beneficial to it (Wouters and et.al., 2018).
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The financial performance of company can be analysed from past annual reports. The
mineral sands revenue was $726.3 million in 2016 which increased by 40 % and reached to
$1017.5 million in 2017. However, despite of good revenue, loss for two consecutive years were
attained. It was $-224 million in 2016 and reached $-171.6 million in 2017. While, net debt was
$506.3 million in 2016 which decreased to $182.5 million in 2017 showing that there has been
reduction in debt usage by Iluka Resources Ltd. However, profits are to be attained for meeting
costs and satisfy stakeholders.
Adherence to Conceptual Framework
The AASB provides conceptual framework of accounting involving appropriate
preparation of financial statements. The fair value of measurement should be done in order to
provide company with better benefits to stakeholders for reflecting true value of company in the
best manner possible. The balance sheet reflects that total assets were $2442.3 million in 2016
and decreased to $1947 in 2017. On the other hand, total liabilities were $1339.3 in 2016 and
reduced to $1061.5 in 2017. The impairment of assets policy is also been governed by company.
The assets are reviewed for impairment when events or changes arise indicating carrying amount
would not be recoverable. In simple words, change of impairment is noticed when carrying
amount of asset exceeds recoverable amount of it. According to normative theory Illuka
resources have to prepare the financial reporting according to the conceptual framework.
Organisation has operating assets are grouped at lowest level in which they are cash
generating units. Amount recoverable of each CGU as higher of value-in-use and fair value less
costs of disposal estimated on discounted cash flows. Indication of impaired assets will have
significant changes in performance of business or operating plan in future along with any change
in technology (Chan, Chiu and Vasarhelyi, 2018). Iluka Resources Ltd has identified and
recognised impairment of assets such as Hamilton MSP, Metalysis and Australian land which
means that firm has effectively carried out impairment of assets in effectual manner.
AASB 15 Revenue from contracts with customers has been recognised by firm in
effective manner. It is highlighted that sales revenue is derived form sales to customers which are
domiciled in various geographical regions. The location of customers from China, Asia not
including China, Europe, Americas, Other countries. Thus, accounting standard related to AASB
15 is complied by company in carrying out financial report in the best manner possible. On the
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other hand, AASB 16 Leases is also complied by organisation which will remove distinction
betwwen operating and financial leases which will entail single framework. In this, all leases will
be recognised term longer than 12 months on the statement of financial position. In regard to
this, Iluka Resources Ltd has lease arrangements for offices, equipments in which leases than 12
months will be exempted from recognition on balance sheet (Gupta, 2017). The impact is yet not
analysed which will have on company with relation to AASB 16. It can be analysed that firm is
following the standards have been complied by company in effective manner. There are no other
standards which are yet effective and expected to have material impact on entity in the current or
future reporting periods and also on future transactions which are foreseeable to the organisation.
It can be analysed conceptual framework of company is carried out in while preparation
of financial report in the best manner possible (Vollmer, 2018). The qualitative characteristics of
accounting information are such as relevance, understandability, materiality, timeliness are
included while producing firm's financial report in the best manner possible. This means that
financials are easily understood to stakeholders from which they are able to take decisions in the
best way possible. Furthermore, firm is required to adhere to all conceptual frameworks as
governed by AASB and Corporations Act 2001 so that people may be able to attain fair
information in hand. Thus, financial reports will be worth to seek by stakeholders and take
decisions thereof quite effectually.
Critique's
Sierra Rutile bribery case scandal has led to affect company's operations. The firm has
already listed the same and the takeover of the LSE had been made for $375 million in
December 2016. This bribery has led to involvement of Iluka Resources Ltd, though it is parent
company and Sierra Rutile is its subsidiary. The scandal had been observed in which allegation is
made regarding bribe payments to senior government officials for securing mining licenses
inherited by Iluka Resources Ltd. This has led to danger for company as it has acquired risky
business. Moreover, it has damaged the reputation of company up to a major extent which is also
main reason for its continuous downfall in the share value of firm (Handel, Valerio and Sánchez
Puerta, 2016.). From last two years, net loss is being registered which would not be beneficial for
company in attaining higher growth (Macve, 2015). This would also lead to cut down several
jobs in order to decrease its operational cost.
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Summary
According to present condition of Iluka, company engaging in problem regarding bribe
payments. Company's overall policy to develop financial statements are unmanaged because if
this allegation is been arises in the company. After highlighting of this scandal, owner of
company has fired its top executives which throughout the development of company has helped
in making business of top level.
Allegation is developed to company regarding bribe payment to the senior officer
government for securing mining licenses which inherited by Iluka. This allegation impacted
overall performance and profitability of the company. Company also has to pay many penalties,
prosecution and fines and also has to face legal actions by the shareholders of the company.
This scandal happen because company did not follow the conceptual framework in
maintains their financial reports (Libby, 2017). All this happened when a senior government
officer provide license fr its operation of mining. During investigation, executive of company
offered bribe payment to officer to secure its mining license.
By opening of this scandal, shareholders of company sue to return their amount which
they have invested in organisation. Therefore, it is compulsory for every organisation to maintain
its financial report in accordance with the conceptual framework so that transparency and
honesty in maintaining financial report is developed by organisation. Financial accounting plays
an important role in disclosing overall financial performance of the organisation. Jurisdiction in
which organisation is located will always demand financial accounts of the company to measure
amount of tax-ability to imposed on organisation (Spiceland and et.al., 2018).
Conclusion and Recommendations
From the above report it can be concluded that financial accounting plays an important
role for developing overall goodwill of the organisation in business market. If company prepares
effective financial reporting, more investors and shareholders with the support of government
they will able to achieve for their organisation. This report is based on the scandal of Iluka
organisation which is related to bribe payment. In this report, details of accounting concept with
theory is explained with its applicability in financial reporting. Importance of conceptual
framework is also explained in this report for presenting financial accounts of company.
Therefore, it can be concluded that in disclosing its financial statements to its user, company
have to prepare its financial report in accordance with the conceptual framework of accounting.
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From the above report it is recommended that in each and every organisation has to
develop conceptual framework while preparing financial statements of the company. Iluka
organisation is get trapped in offering bribe payment to government officials. They are offering
bribe payment to government officials for securing their papers of mining licenses. Therefore, it
is recommended to organisation in preparing their financial accounts with proper accounting
theory so that it provides a clear understanding of financial performance of organisation to its
managers, auditors, investors, creditors and to corporate authorities. This will help managers in
developing effective policy by which Iluka will able to overcome with this issue. Therefore, it is
importance for organisation to make financial statements in accordance with conceptual frame
work in determining correct transactions of the company.
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REFERENCES
Books and Journals
Barth, M.E., 2018. The Future of Financial Reporting: Insights from Research. Abacus. 54(1).
pp.66-78.
Chan, D. Y., Chiu, V. and Vasarhelyi, M. A. eds., 2018. Continuous Auditing: Theory and
Application. Emerald Publishing Limited.
Gupta, S. L., 2017. Financial Derivatives: Theory, concepts and problems. PHI Learning Pvt.
Ltd..
Handel, M. J., Valerio, A. and Sánchez Puerta, M.L., 2016. Conceptual Framework.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion
to Behavioural Accounting Research (pp. 42-54). Routledge.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Spiceland, D and et.al., 2018. Intermediate accounting.
Vollmer, H., 2018. Accounting for tacit coordination: The passing of accounts and the broader
case for accounting theory. Accounting, Organizations and Society.
Wouters, M and et.al., 2018. T Course: Management Accounting 1 [T-WIWI-102800]. Module
Handbook Industrial Engineering and Management (B. Sc.).
ONLINE
McKenzie and Baker. 2017 Iluka Resources caught up in African bribery scandal [Online]
Available Through: <https://www.smh.com.au/business/companies/iluka-resources-caught-
up-in-african-bribery-scandal-20170815-gxwzzd.html>
Annual report of Iluka Resources 2017. 2017 [Online] Available Through:
<http://iluka.com/docs/default-source/asx-releases/iluka-annual-report-2017-including-
appendix-4eedecf2a9140e66fb8b60ff0000e79da7>
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