Iluka Resources Overview
This report is prepared on the application of various accounting theories on the business activities and operations of Iluka Resources. For this purpose, various accounting theories on the current annual report of the organisation have been applied. Under this specific framework, this segment represents the organisational profile along with its associated products and services. After this, the section provides a brief description of the increasing share price of the organisation.
Iluka Resources, which is listed on the Australian Stock Exchange (ASX), is a significant participant in the international minerals sand industry. The organisation is involved in project development, exploration, marketing and operations of mineral sand products. The primary assets and operations of the organisation are situated mainly in Australia; however, its operations are present in US and Sierra Leone as well (Iluka.com 2018).
Iluka Resources is the biggest provider of titanium-dioxide derived rutile, zircon and synthetic rutile internationally. In addition, it is involved in mining heavy mineral sands and it segregates the concentrate into individual mineral components like ilmenite, zircon and rutile. Furthermore, it owns the royalty over the revenues of iron ore sales from the tenements of the mining area of BHP Billiton (Iluka.com 2018).
It has been observed that the share price of Iluka Resources has risen to $11.43 on 3rd May 2018 after it has released its annual results on February 27. Even though it has declared net loss of $172 million for the period until December 2017, its earnings have increased due to 140% increase in EBITDA on the last corresponding year to $361 million (Motley Fool Australia 2018). Despite the report of net loss in the past year, its loss has been minimised by $52 million on the past corresponding year having above 40% increase in revenue to just above $1 billion. The recent appraisal of the US President, Donald Trump, regarding calling Australia “global rare earth crises’ has boosted the organisations such as Iluka Resources to create global demand for scarce minerals like zircon.
Such statement would encourage Iluka Resources and it would minimise the monopoly of China on minerals. It is estimated that Iluka would make significant moves in the past year. There has been significant increase in the share price of the organisation over the past year, as it has increased from $8.31 on 3rd May 2017. The shareholders are provided loyalty through fully franked final dividend of 25 cents per share along with the declaration of a new dividend reinvestment plan.
Increase in Share Price of Iluka Resources
In order to reduce the monopoly of China, Iluka has placed its concentration on improving its market position in all the operating nations. The organisation is expected to increase its market share further by the end of 2018, which stands at $2.3 billion in 2017; however, the increase in net debt has compelled the organisation to close down its US operations (Iluka.com 2018). Adequate focus is placed on sustainability aspects as well, which comprise of health, governance, safety, community and environmental outcomes.
As observed from the above figure, there is considerable rise in revenue; however, there is decline in property, plant and equipment because of the acquisition of Sierra Rutile Limited on 1st December 2016 at a price of $389 million. This is because a part of the asset is sold for raising funds for this acquisition.
There are several accounting theories having different aspects by taking into account the nature of the business activities. For instance, legitimacy theory is developed based on the social expectations of the stakeholders (Allee et al. 2015). The researchers have added that risk aversion issue needs to be avoided due to the result of the agency theory. Hence, the elements of risk and return need to be observed from the annual report. The annual report of Iluka Resources discloses the agency problem, which has occurred due to the acquisition of Sierra Rutile Limited.
This report would make the application of agency theory on different accounting items of the organisation that take into account income statement, balance sheet statement and cash flow statement (Azam 2017). In addition, the focus would be placed on remuneration structure and intangible assets of the organisation as well. Since Iluka Resources is involved investing in various capital projects, it has started to assess its remuneration policies. Thus, special consideration would be given to intangible assets and remuneration structure.
The conceptual framework of accounting has been explained from different perspectives and opinions. As remarked by Baker and Burlaud (2015), the basic level focus needs to be depicted on appropriate measurement of techniques, biases and recognition criteria in the framework.
However, it has been argued that this framework needs to be focus on the performance-related aspects of the business organisations. After the merger of most of the views and claims of the conceptual framework, four aspects are deemed to be significant in dissecting the organisational framework and they constitute of reliability, understandability, comparability and relevance (Barker 2015). These aspects would be taken into consideration for analysing the various accounting items of Iluka Resources, which are explained as follows:
Evaluation of Reliability Aspect
Reliability aspect could be associated with the value of information. In case, the information provided in the annual report could not be trusted, the shareholders and investors could not undertake their investment decisions (Birt, Muthusamy and Bir 2017). From the annual report of Iluka Resources, it has been identified that PwC audited the financial statements of the organisation in 2017, which is one of the big four global auditing firms. Thus, the financial information provided in the annual report could be deemed as reliable. In case of Iluka, the significance of this aspect is immense due to considerable changes in various accounts over the year. The impact would be substantial on the investors and shareholders and the organisation might experience the same, if it provides misleading and unreliable information.
According to the above figure, it has been found that there is significant change in the overall liabilities of Iluka Resources, as the decline is by 20.74%, especially in interest-bearing liabilities. If the information presented has reliability issues, the market share and position of the organisation would drop significantly leading to various problems. In addition, it would violate the reliability aspect stated in the conceptual framework of accounting.
This aspect requires the accounting information disclosed in the annual report to be pertinent from various perspectives (Chaudhry et al. 2015). For instance, Iluka Resources has made investments in various capital projects in 2017 compared to 2016. Besides disclosing the investing activities in its cash flow statement, the method depreciation that it uses is mentioned in the financial notes to comply with AASB 116. Another pertinent factor for the organisation is goodwill, as it has aimed to minimise the monopoly of China in mineral extraction and this has considerable effects on the different accounting aspects of the organisation. Since the change in debt position of the organisation is evaluated, relevancy needs to be ensured regarding the change in the market value of the organisation.
From the above figure, it is evident that goodwill value is not adjusted or altered through impairment change in the poor performing areas of the organisation. Hence, issue could be found regarding the relevance of financial information represented in the annual report of Iluka Resources.
According to this aspect, it is necessary for an organisation to provide financial information in a format so that the users could understand them effectively (Cordery and Sinclair 2016). The financial information disclosed in the annual report of Iluka Resources depict all the financial as well as non-financial aspects in the form of notes to the financial statements and Directors’ report, which the users find clear and easy to understand.
Evaluation of Relevance Aspect
At the time of evaluating the comparability aspect, improvement is necessary in the annual report of Iluka Resources. Many Australian organisations disclose their positions for at least three financial years in their annual reports. In case of Iluka Resources, the financial information regarding the current year and previous year is disclosed and thus, comparability needs to be improved (Craig, Smieliauskas and Amernic 2017).
With the help of agency theory, association could be developed between the business executives (agents) and the shareholders (principal). At the time of swerving of organisational interests, the agency theory is evaluated for mitigating those issues (Gebhardt, Mora and Wagenhofer 2014). The directors’ remuneration is provided special importance in agency theory. The remaining part of the segment would apply the accounting concept in relation to Iluka Resources.
As per the annual report of Iluka Resources in 2017, it could be observed that there is significant increase in revenue; however, it has incurred net loss in the year due to increased expenses. Despite such net loss, the organisation has managed to provide greater dividends to its shareholders. In addition, both shareholders and business executives are aware of the upcoming capital projects to curb the monopoly power of China in mineral extraction (Huber 2017). Therefore, Iluka Resources is planning to expand its business operation, even though it has been forced to shut its US operations. Since the shareholders are provided with adequate return on their investment, they feel satisfied with the rising investing activities in the organisation. From the annual report of the organisation, the remuneration report has been extracted, which is depicted as follows:
As Iluka Resources has invested in various capital projects and more investments are expected to occur in the upcoming years, it is estimated that the short-term incentives of the directors might fall (Gordon et al. 2015). The directors are ready to compensate this amount, which signifies that they are aligned the business objectives with their personal benefits to seek maximum benefits for both the parties.
After critical evaluation of the annual report of Iluka Resources in 2017, it could be stated that the expectations are not met fully. The increase in revenue could be observed only; however, there is significant decline or more specifically, it has suffered net loss. In addition, the earnings per share of the organisation has been negative to (41 cents) in 2017, which was (53.6 cents) in 2016. On the other hand, greater dividend payout has been made in 2017 so that the wealth of the shareholders could be maximised. In addition, it is intending to invest in capital projects further for capturing greater portion of the market share (Yong, Lim and Tan 2016). From the perspective of agency theory, it increases the overall market exposure of the organisation and this might pave the path for new entrants in the market. As a result, Iluka Resources might lose a part of its market capitalisation, if the expenses are not minimised. However, the management of the organisation is highly confident that its competitive edge would be gained back in the upcoming year (Iluka.com 2018). In this case, such higher representation of higher dividend payout despite lower income is a signal that the financial statements provided in the annual report could not be relied fully.
Evaluation of Understandability Aspect
In addition, maximum investments are made in property, plant and equipment for capital projects and such investments have affected the solvency and liquidity position of the organisation. The overall debt burden has increased, while the cash base of the organisation has fallen. As a result, it signifies poor liquidity position and hence, it needs to consider twice before making any further investment in capital projects, since such investment might restrict its growth or even liquidation.
For dealing with the above-identified issues, Iluka Resources could consider the following points:
- Expenses are to be minimised so that net income could be realised in the ongoing financial year.
- Iluka Resources needs to include financial information of at least three years in its annual report for improving its comparability aspect.
- The organisation needs to focus on its faithful representation aspect, since issues are inherent in the rising share price.
- It needs to abstain from making further investments in capital projects to ensure regular payment of dividends to the shareholders and dividend-related information needs to be mentioned in a separate section in the annual report of the organisation.
Conclusion
The above discussion clearly inherits that Iluka Resources did not have a strong financial year due to the net loss suffered and increased debt burden in 2017. However, it has managed to ensure increased dividend payouts to its shareholders for maximising their wealth. The issues related to liquidity, solvency, comparability and investment in capital projects for which suitable recommendations have been provided to Iluka Resources to increase its financial position and transparency in reporting.
References
Allee, K., Campbell, J., Curtis, A., Hales, J., Jorgensen, B., Krische, S., Rees, L., Sunder, J. and Wang, C., 2015. Response to the IASB Invitation to Comment: Conceptual Framework for Financial Reporting (ED/2015/3).
Azam, M.R., 2017. Challenges to the Users of Financial Reports Constructed Using Multiple Measurement Bases: A Review of the IASB’s Conceptual Framework for Financial Reporting. International Journal of Accounting and Financial Reporting, 7(2), pp.172-177.
Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to conceptual framework in financial standards setting. The CPA Journal, 85(8), p.54.
Barker, R. and Penman, S., 2016. Moving the conceptual framework forward: Accounting for uncertainty. Unpublished paper, Oxford University and Columbia University.
Barker, R., 2015. Conservatism, prudence and the IASB’s conceptual framework. Accounting and Business Research, 45(4), pp.514-538.
Birt, J.L., Muthusamy, K. and Bir, P., 2017. XBRL and the qualitative characteristics of useful financial information. Accounting Research Journal, 30(01), pp.107-126.
Chaudhry, A., Coetsee, D., Bakker, E., Varughese, S., McIlwaine, S., Fuller, C., Rands, E., de Vos, N., Longmore, S. and Balasubramanian, T.V., 2015. Conceptual Framework. 2015 Interpretation and Application of International Financial Reporting Standards, pp.29-37.
Cordery, C.J. and Sinclair, R., 2016. Decision-Usefulness and Stewardship As Conceptual Framework Objectives: Continuing Challenges.
Craig, R., Smieliauskas, W. and Amernic, J., 2017. Estimation Uncertainty and the IASB’s Proposed Conceptual Framework. Australian Accounting Review, 27(1), pp.112-114.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of IFRS. Abacus, 50(1), pp.107-116.
Gordon, E.A., Bischof, J., Daske, H., Munter, P., Saka, C., Smith, K.J. and Venter, E.R., 2015. The IASB’s discussion paper on the Conceptual framework for financial reporting: a commentary and research review. Journal of International Financial Management & Accounting, 26(1), pp.72-110.
Huber, W.D., 2017. Irreconcilable differences? The FASB’s conceptual framework and the public interest. International Journal of Critical Accounting, 9(5-6), pp.514-523.
Iluka.com., 2018. [online] Available at: https://www.iluka.com/docs/default-source/company-presentations/mineral-sands-conference-by-matt-blackwell [Accessed 3 May 2018].
Iluka.com., 2018. Annual Reports. [online] Available at: https://iluka.com/investors-media/asx-disclosures/annual-reports [Accessed 3 May 2018].
Iluka.com., 2018. Company Overview. [online] Available at: https://www.iluka.com/company-overview [Accessed 3 May 2018].
Motley Fool Australia., 2018. Why the Iluka Resources Limited share price is heading higher. [online] Available at: https://www.fool.com.au/2018/03/01/why-the-iluka-resources-limited-share-price-is-heading-higher/ [Accessed 3 May 2018].
Yong, K.O., Lim, C.Y. and Tan, P., 2016. Theory and practice of the proposed conceptual framework: Evidence from the field. Advances in Accounting, 35, pp.62-74.
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