Analysis Of Equity, Debt, Cash Flows, And Tax Expenses Of BHP Billiton And South 32 Limited

Owner’s Equity

The company BHP Billiton Limited is one of the companies listed on the Australian Stock Exchange, which deals in metal, mining and petroleum industry. It is also listed on New York Stock Exchange, Johannesburg Stock Exchange, London Stock Exchange and Financial Times Stock Exchange 100. IT serves clients all-round the globe and employs more than 65000 people. It is the world’s largest company in terms of mining and third largest in terms of revenue in Australia.

On the other hand, South 32 Limited is one of the Australian listed companies, which deals in Mining and metallurgy. It is also listed in London Stock Exchange and the Johannesburg Stock Exchange and is a chief producer of alumina, silver, zinc, aluminium, manganese, nicked, lead, coking coal and thermal coal. It employs more than 15000 employees and has been rising in Australia off late (Bizfluent, 2017).

Owner’s Equity

1. The owner’s equity represents the capital being invested by the shareholders in the company. It is known as the own capital and has high returns as compared to the debt or loan capital simply because of the fact that it bears more risk. It can have different components namely equity shares, preference shares, dividend, retained earnings, net profit and various types of reserves, which are distributable to the shareholders(Alexander, 2016).

A brief description of each of the items under the head of equity is shown below:

1. Share capital: This is the owner’s capital or fund which is being invested in the business. This is usually being divided in the form of the small denominations or parts called shares of the company, the same is traded in the market, and the holders of share capital are called owners of the company. In BHP Billiton, it has remained constant over the 3 years with no substantial change. On the other hand, in case of South 32 Limited, the company bought back few shares in 2017 and hence the same has decrease(Bromwich & Scapens, 2016)
2. Treasury Shares: Again, these shares of the company are allotted to the preferential people mainly the employees in the form of the ESOP or the dividend reinvestment plan. This may be purchased by ESOP trusts later on the employees may be paid up the company. For BHP Billiton, the same has decreased over the past 3 years indicating that the purchase by ESOP trusts have been more than the exercising of options by the employees(Choy, 2018).
3. Reserves: These are the profit share of the company, which has been kept aside as reserves. This comprises of comprehensive income for the year, the employee share awards forfeited, employee share awards net of employee contributions and unexercised awards(Chron, 2017). For BHP, it has remained more or less constant however; in 2017, it decreased substantially due to awards and loss in comprehensive income section. For South 24, there was no substantial change in all the 3 years.

Retained earnings: These are the cumulative profits and losses of the past year of the company. The dividends may be declared and paid by the company from time to time. For BHP Billiton, the balance decreased in 2016 because of the loss incurred and the payment of dividend. In 2017 again, the same increased due to the profits earned during the year and payment of dividend out of the same. IN case of South 32, the balance has been primarily on the negative side and again in 2016 the same decreased further due to company incurring losses and in 2017, it increased due to the cumulative profits of $ 1231 Mn. The company paid dividends during both the years(Werner, 2017).

1. Non-controlling interest: It may be defined as those shareholders who own less than 50% of the shares and do not have control over the decisions of the company. It is also known as the minority interest and their share of profit is calculated based on the net assets position, they do not enjoy the potential voting rights. In BHP, the same has increased in almost the same proportion as controlling interest or the other shareholders. In South 32, the non-controlling interest has remained constant at $ 1 Mn indicating that the company has very low minority interest shareholders(Farmer, 2018).
2. The comparative analysis of the debt and equity position of the company has been shown below for the last 3 years and it is indicative of the fact that both the companies have had control over the proportion of debt in the capital and has been maintained it on the lower side so as not to dilute the shareholder’s interest in company(Dichev, 2017). In South 32 especially, the proportion has been very minimal as can be seen from the debt equity ratio below:

Cash Flow Statement

• The extract of the cash flow statement of both the companies (BHP followed by South 32) has been attached below to give a brief idea of the line items appearing in the cash flow statement. Some of the items and changes in them are as follows:

1. Cash flow from operating activities: In this segment, cash generated from operations is the net of receipts from customer and payment to the creditors, here the dividend received from other companies, the interest received and paid, the income tax being paid, all these items appears as they directly relate to the operations of the company. The changes in the current assets and current liabilities is also being reported here(Gooley, 2016). For BHP, the revenue from operations has increased and there was a net inflow from discontinued operation in 2015. For all the years, the operating cash flow has been on positive side. For South 32 again, the net cash inflow from operating activities has been on increasing trend but the level of operation is far less as compared to BHP, which shows that BHP is one of the industry leaders.
2. Cash flow from investing activities: In this section of the cash flow statement, all the investing activities do appear like purchase and sale of property, plant and equipment, sale and purchase of investments, investment in entities and divestment of subsidiaries, operations and joint ventures, etc.(Jefferson, 2017). For BHP, the purchases of property, plant and equipment has been on the decreasing side over the years and the exploration expenditure has been increasing. Furthermore, the proceeds from the sale of PPE has also been on the increasing side. On the other hand, for South 32 as well, the investment or the purchase of PPE has been on the decreasing side but the company made a huge investment in 2015 in subsidiaries, operations etc. aa part of BHP demerger and made an investment of around $ 12734 Mn. The overall cash outflow in 2015 from the investing activities was $ 15165 as compared to mere $ 454 Mn in 2016 (Heminway, 2017).

1. Cash flow from financing activities: This section of the cash flow comprises of all the finances that the business has arranged to do business. This includes items like issue of share capital, issue of debt securities and preference shares, redemption of shares, payment of interest and dividend etc., For BHP, the company raised debt capital and interest bearing liabilities of $ 7239 Mn in 2016 and repayment of most of it was done in 2017(Knechel & Salterio, 2016). For rest of the years, the inflow and outflow has been constant, the dividend payment for the company has been on the decreasing trend. For South 32, the company raised debt in 2017, it also bought back equity shares and paid dividend in 2017 which was not there in 2016.
2. The comparative analysis of both the companies BHP Billiton and South 32 for last 3 years has been shown below in the table.

1. From the comparative analysis of the cash flow statement it can be seen that the for BHP Billiton, the major contributor to the cash inflows has been the operating activities which has increased by ~6000 MN in 2017. On the other hand, the cash outflow from the investing activities has decreased over the past years and is just $ 4161 Mn in 2017, the company also had a major cash outflow from financing activity in 2017 as it paid off most of its debts. The net cash flow was negative in 2015 and was positive in rest of the 2 years. Contrary to this, though the magnitude of inflow and outflow of South 32 has been less compared to BHP, but it has has positive cash flows in all the 3 years. The major cash inflow contributor has been operating activities and rest both the investing and financing activities have contributed to the outflow. The company raised huge equity shares in 2015 and invested in entities as part of BHP demerger.
2. Other comprehensive income statement

1. The items which have been reported in the other comprehensive income statement for both the companies is as follows:

BHP Billiton: Items that may be reclassified subsequently to the income statement, which includes income from investments, which are available for sale, the gains from the cash flow hedges, the exchange fluctuations that are because of translation of foreign operations. It also has items that will not be reclassified to the income statement, which includes Remeasurement gain and losses on pension and medical schemes, and tac recognised in other comprehensive income (Linden & Freeman, 2017).

South 32: This also includes income from “available for sale” investments that can be taken to equity and the tax benefit and expenses on account of the same, the items which cannot be classified to consolidated income statement like Equity accounted investments, actuarial gains and losses and tax benefit on other comprehensive income.

• Items, which can be reclassified during the year, are included in the other comprehensive income statement. It is being prepared separately and not reported in the income statement or the profit and loss account of the entity because it does not pertains to the normal operating business done by company. Furthermore, reporting of OCI has been clearly explained in IFRS and hence it needs to be separately shown to adhere to the standards(Saeidi, 2012).
• The comparative analysis of the items included in the other comprehensive income statement for both the given companies has been shown below:

In case these items would have been included in the normal income statement of each of the given companies, then the profit, which has not been realized as of now, would also have been accounted and distributed amongst the shareholders. The impact would have been seen in the form of lower profit distribution amongst the shareholders.

1. The items included in the other comprehensive income statement should not be considered for evaluation of the managers simply because of the reason that it does not relates to normal business operation and includes items like hedging gains and losses, revaluation of assets, change in the fair value of assets and liabilities, retirement benefits actuarial gains and losses which are not directly being monitored and managed by the managers(Raiborn, Butler, & Martin, 2016).
2. Accounting for Corporate Income Tax

1. The tax expenses being shown in the latest financial statements for both the companies has been shown below:

Thus for BHP, the tax expenses is $4100 Mn for the year 2017 and for South 32, it is $ 393 Mn.

1. As per the annual reports of the given companies, the effective tax rate of BHP Billiton has been 39.7% in 2017 (35.8% in 2016 and 45.5% in 2015) and for South 32 Limited, the same has been 30.7% in 2017 ( 36.6% in 2016 and 32% in 2015). BHP has had higher tax effective rate as compared to South 32 in all the years(Erik & Jan, 2017).

• The deferred tax assets and the deferred tax liabilities are being reported in the financial statements of both the companies because the tax, which is calculated as per tax base and tax, which is calculated as per the accounting base is all different. There are some temporary and permanent differences based on which the tax paid by the company may be more or less leading to the formation of deffered tax asset or liabilities respectively which can be used in the future years. Both can be offset against each other and are shown under the head current assets and current liabilities respectively. Some of the major reason why deferred tax asset may be created are:

1. Revenue recognized in one period for tax purposes are different under accounting books.
2. Asset having different tax base for taxation purposes and accounting purposes.
3. Company recognizing the incomes and losses in the accounting income statement but the same being disallowed under the income tax rules.
4. This is reported in balance sheet to adhere to the reporting requirements as per GAAP and IFRS(Félix, 2017).

• Yes, there were several changes in the balances of deferred tax assets and liabilities of both the companies due to the changes in tax bases, the permanent and temporary differences. For BHP, the deferred tax assets has increased over the years whereas the deferred tax liabilities have gone on to decrease in the last 3 years as can be seen from the table above.

For South 32, the deferred tax asset has been decreasing because of the lower tax payable in the last 2 financial years and the deferred tax liabilities has remained fairly constant throughout.

• The cash tax amount being paid by the BHP has been $ 2585 Mn, $ 2286 Mn and $ 4373 Mn for the years 2017, 2016 and 0215 respectively. On the other hand, the cash tax being paid by South 32 Limited has been $ 127 Mn and $ 52 Mn for the year 2017 and 2016 respectively. For the year 2015, there was a refund of $ 1 Mn. All of this as well as change in the balance of deferred tax asset sand the liabilities has been shown in the table above.

1. The cash tax rate for BHP was found to be 25%, 31.5% and 54.3% for 2017, 2016 and 2015 respectively. On the other hand, for South 32 Limited the same has been 7.8%, 3.4% and 0.3% respectively for 2017, 2016 and 2015. Here, as well, BHP Billiton has a higher cash tax rate(Das, 2017).

• The huge difference in the cash tax rate is due to the difference in the size of operation and the benefit of deferred tax, which was available to South 32 because of losses in the year 2016 and 2015. The book tax rate is 30% for all the years for both the companies as the same is as per the income tax laws and is levied straightaway. On the other hand, the cash tax rate is something, which depends on the computation of tax post adjustments of deferred tax assets and liabilities and other tax adjustments.

References

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