Discussion
The main purpose of this assessment is to analyze the financial statements of Rio Tinto limited which is engaged in mining business. The assessment will be discussing the business operations and activities which the management is engaged in day to day business. The assessment will also be analyzing the financial performance of the business and make comparison of the same with previous year’s performance (Nobes, 2014). The assessment will be checking for any changes in the accounting policies and practices of the business. The carrying value of property, plant and equipment will also be identified in the assessment.
Rio Tinto Limited is an Anglo-Australian company which has its operations in Australia and is engaged in the mining sector. The company is regarded as one of the largest metal and mining businesses in the country (Riotinto.com, 2018). The company in Australia operates from Melbourne as its headquarters. The company is listed in both Australian Stock Exchanges and also in London Stock Exchanges.
As per the annual reports of the company and a background of the business, it can be said that the core business in which the company is engaged in, is mining and metal business. Some of the products which are produced by the business are uranium, aluminum, iron ore, copper, coal and diamonds. The primary activities of the business are mining and extraction of minerals from the ground (Edwards, 2013). However, the business also engages in refining activities which includes for products like bauxite and iron ores.
Rio Tinto ltd belongs to mining and metal industry as the primary activities of the business is extraction of minerals from the soil. The company is considered to be one of the largest metal and mineral production businesses in Australia and therefore it is clear that the business conditions of the company are quite favorable (Kemp & Owen, 2013). The Australian mining industry had suffered a decline in the year 2016 but as per 2017 estimates the business is good and running and the market is again ready to grow and boom.
As the market conditions are favorable for growth and development of businesses, naturally there are more competitors in the market and the level of competition in the market is intense. The main competitors which can be identified are Vale, BHP Billiton ltd, Glencore. Vale is regarded to be the closest rival of Rio Tinto ltd in terms of production and revenue generating capabilities. The company is considered to be the largest producer of iron ore in the world and has an effective scale of operations. Similarly, BHP Billiton also has engaged in the mining business and has a strong financial backlog.
Core Business of Rio Tinto Ltd
As per the annual report of the company for the year 2017, the management of the company relies more on equity-based capital sources for financing the activities of the business. The annual reports of the business show that the company has retained earnings of US$ 23,761 million which can be used for financing the activities of the business. The management also utilizes significant amount of debt capital for the purpose of financing the activities of the business and the debt capital which is shown in the annual report of the company for the year 2017 is shown to be US$ 15,148 million. Therefore, it can be said that the company is majorly financed using internal sources of capital which comprise of equity capital, retained earnings and reserves.
The management of the company provides more relevance on the internal finance sources rather than external finance sources which is clear from the proportion of equity capital and retained earnings which is shown in the annual reports of the business. The use of more equity capital also suggest that the capital structure of the business is prepared considering the risks which are associated with excessive use of debt capital and therefore the company uses majorly the retained earning sources for financing the activities of the business.
The annual reports of the Rio Tinto ltd for the year 2017 is shown to be effectively prepared considering all relevant accounting standards and principles applicable to the business. The sales revenue which is earned by the business for the year 2017 has increased significantly in comparison to previous year’s analysis which is positive factor. The sales revenue of the business for the year 2017 is shown to be US$ 40,030 million and the same was US$ 33,781 million which is shown in 2016. The increase in operating profits of the business is a sign that the operational efficiency of the business is appropriate and the operating profit of the business is shown to be US$ 14,135 million which is much more than the estimate which is shown for 2016. Similarly, the net profit of the business has improved significantly as shown in the annual reports of the business. which shows that the business is doing extremely well considering the profitability aspect of the business.
The company has a positive cash from operations figure which is shown in the cash flow statement of the business and also has an increase in the cash and cash equivalent balances in comparison to 2016 performance details. This shows that the liquidity position of the business is also appropriate and also shows that the business has the ability to meet the current obligations of the business effectively. There has been an increase in the assets of the business and also retained earnings of the business has increased which shows that the company is growing and is in development phase. The earning per share of the business has also increased significantly since the overall profits of the business has also increased and this is a positive factor for the business. The business is meeting the needs and expectation of shareholders which is profit maximization of the shareholders and also keep the financial position of the business appropriate. Therefore, it can be said that the company is performing extremely well considering the annual reports of the business for the year 2017.
Industry and Competitor
As per the annual reports of the business the management has reported of completion of Shaft 2 of Oyu Tolgoi’s underground mine. The new underground mine is expected to start operating from the first quarter of 2018. The management has also reported that the Autohaul project which is heavy haul train journey project as per the annual report of the business. The directors of the business have announced an annual dividend of 180 cents per share on February 2018.
The notes to account section of the annual report, the company has received a binding offer from liberty house to acquire the Group’s Aluminium Dunkerque which is northern France for an amount of US$ 500 million. The company has also initiated an online market buyback programme of US$1.0 billion of Rio Tinto Plc Shares. The company on 26th February has received a binding contract from Hydro for acquisition of aluminium assets of the business. For US$ 345 million.
The management as per the financial notes to account section has brought about changes in the lease accounting standards of the business. The standard effectively recognizes leases assets and rights. The lease agreements of the business show that recognition of rights on interest on leases (Barth, 2013). The management has also recognized IFRS 9 which is related to financial instruments and the same is endorsed by the business during the year.
The significant assets which are shown under the classification of property plant and equipment consist of Mining properties and leases which is shown to be US$ 11,488 million, Land and Buildings which is shown to be US$ 7,376, Plant and Equipment which is shown to be US$ 36,285, Capital which is in work-in-progress is shown to be US$ 6,944. The carrying amount of the assets which are included in the property plant and equipment classification are shown in the notes to account section of the annual report of the business.
As per the notes to account section of the annual report of the company, Property, plant and equipment are stated at cost as per the International Accounting Standard (IAS) 16. The same is also to be show after accumulated depreciation charges are deducted from the cost of the assets as shown in the financial statement of the business (Altamuro et al., 2014). In addition to this, the cost of property plant and equipment includes estimated close down and restoration expenses which are associated with the asset (Biondi & Lapsley, 2014).
Financial Structure of Rio Tinto Ltd
The intangible assets of the business comprise of Exploration and Evaluation for which the value is shown to be US$ 393, trademarks, patented and non-patented technologies which is shown to be of US$ 75 million, Contract based intangible assets which is shown to be US$ 2,188 million and other intangible assets which is shown to be US$ 463 million as per the notes to account section of the annual report of business for the year 2017. Intangible assets of the business helps a business to earn revenues or increase the same (Christensen & Nikolaev, 2013). Accounting for such intangible assets are an important aspect which the business should consider effectively (Yallwe & Buscemi, 2014). Intangible assets of the business are measured by classifying the same as intangible assets with definite life and intangible assets with indefinite life which helps the business for maintain proper records for the same (Bianchi, 2017). The intangible assets of the business are initially measured at cost and then it is amortised over the useful life of the asset.
As per the notes to account section of the annual reports of Rio Tinto ltd, the impairment of assets is done for property plants and equipment, intangible asset and other assets of the business. The impairment losses which is recorded are US$ 435 million, US$ 357 million and US$ 4 million respectively.
Conclusion
The above discussion shows the financial performance of Rio Tinto ltd for the year 2017 and the same shows that the company has been performing efficiently and has improved significantly over the years. The assets of the business which are both fixed assets and intangible assets of the business are discussed above along with their respective accounting policies which the management follows. Thus, in an overall estimate it can be said that the financial statement which is prepared by the management of Rio Tinto ltd is done following all relevant accounting principles and standards relating to different items which are shown in the annual report of the business.
Reference
Altamuro, J., Johnston, R., Pandit, S., & Zhang, H. (2014). Operating leases and credit assessments. Contemporary Accounting Research, 31(2), 551-580.
Barth, M. E. (2013). Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), 331-352.
Bianchi, P. (2017). The economic importance of intangible assets. Routledge.
Biondi, L., & Lapsley, I. (2014). Accounting, transparency and governance: the heritage assets problem. Qualitative Research in Accounting & Management, 11(2), 146-164.
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), 734-775.
Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting). Routledge.
Kemp, D., & Owen, J. R. (2013). Community relations and mining: Core to business but not “core business”. Resources Policy, 38(4), 523-531.
Nobes, C. (2014). International classification of financial reporting. Routledge.
Riotinto.com (2018). Retrieved 3 September 2018, from https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf
Yallwe, A. H., & Buscemi, A. (2014). An era of intangible assets. Journal of Applied Finance and Banking, 4(5), 17.
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