Aurizon Company Annual Report Analysis

Overview of Aurizon Company

Annual reports are the main source of information for all the stakeholders and it helps to deliver the required financial data to analyze the company performance throughout the year. Now-a-days annual reports not only provide the information related to the company financial health but also provides information related to corporate governance and other non financial matter that are vital information for the investors. International Accounting Board (IAB) has issued International financial reporting standards and conceptual framework that is required to be followed while making the annual report. In this report there will be discussion of information published in the annual report of Aurizon Company. Part A of this report will focus on the operating segments, share capital and profitability while part B will focus on the investor –investee relationship and measurement of goodwill.

Aurizon Holding Limited is the famous public limited company in Australia that deals in rail freight. It is formerly owned by the government of Queensland and all its assets are part of QR National Limited. Aurizon Company transports more than 250 million tones of commodities each year and its network connects major miners, primary producers and industries and aims to serve the international and domestic markets. Company aims to provide best in class transport service with integrated freight and logistics solution. Company owns the wide rail and road network that helps to connect all parts of Australia (About US, 2017). As mentioned at the company website company also owns and operates largest coal network in Australia that links more than 50 mines in Australia and one of the major ports in Queensland. Aurizon Company comprises of four main products lines such as transport network, coal, iron ore and freight. Apart from these products lines, company also provide wide range of specialist services such as rail design, engineering, construction, management and maintenance. The main vision of the company is to be world leading rail transport organization that partners with major customers for the growth of country (Annual Report, 2016). On looking at its vision company set its mission as to create the value sustainability for its customer, shareholders, communities, employees and other stakeholders that company operates within (About US, 2017).

AASB 8: segment reporting is one of most important accounting standards that require companies to disclose the information on their operating segments. Operating segment as describe in the Australian GAAP is component of an entity that earns its revenue through its business activities (revenue and expenses also includes transactions that are carried out as a part of other operating segment of the company) (AASB 8, 2017). Operating segment of any organization is regularly reviewed by the chief executive officer of the main organization in order to allocate the resources in the operating segment and to evaluate its performance. In order to be operating segment it is essential to disclose the discrete financial information to the management of the main entity (AASB 8, 2017).

AASB 8 Segment Reporting

As per the annual report Aurizon company identifies and reports operating segments on the functional basis that shows how financials are reported internally and also shows how business functions (Annual Report, 2016). The CEO and managing director of the company review the performance of the operating segments and also allocate the resources among the operating segments successfully. As described in the annual report following are major operating segments of the company. All these are the reportable segments:

• Network: It is the major operating segment of the Aurizon Company and company has provision to access its operation and management in the Central Queensland Coal Network and it also has provision of overhaul and upholding rail network.
• Commercial and Marketing: This operating segment established the channel between the customer base and Aurizon main business units.
• Operations: This business unit aims to deliver the coal, iron ore and other services to the customers. This segment unit includes yard operations, fleet maintenance and other important functions (Annual Report, 2016).
• Other Segments: This segment includes other business units such as corporate finance, tax management etc.

Share capital refers to the capital raise through issue of common share stock in the public. Public limited company issues the common equity shares that are subscribed by the public at the predefined market price or at initial public offer. In this way public become the authorized owner of the company (Dagwell, 2007).

Above table reflects the changes made in the share capital of the Aurizon Company in the year 2015-16. All the change in the equity capital of the company was due to major changes in year 2016 such buy back of ordinary shares $301.00 million, share based payments of $28 million and dividend provided in year of amount 529.00 million.

Reserve account refers to the account that company maintains or set aside to fulfill the future requirements such as purchase of fixed assets, payment of major liability etc.

Amount of retained earnings as shown by the company was $1,082 million for year 2016. Retained earning reflects the amount of profit left behind after meeting all the expenses related to the year and also any payment of dividend to the shareholders (Henderson, 2015).  

As reported by the Aurizon Company in its annual report the amount of profit and loss before income tax was $193 million in year 2016 and $ 835 million in year 2015. Income tax expense for the year 2016 was $121 million and in year 2015 it was $231 million.

Above table reflects why there was change in the taxable amount as reported by the company and as calculated if PBIT was directly multiplied by the tax rate of Australia Government (Annual Report, 2016).  

Income tax expenses as reported by the company were different from the amount of tax paid by the company to the Australian Government because of presence of deferred tax assets and liabilities that needs to be taken care of.

Investor-investee relationship is the relation existing between two associates. Investee can be stated as a business entity in which investment has been done by investor. The different types of investor-investee relationship can be stated as follows:

• Investor-Associate Relationship: This type of relationship is said to exist between investor-investee in which a company has only minority stake in its parent company. The relationship is said to occur when a company sells a small proportion of its business unit to another in return for associate investor. The accounting requirements for this type of relationship are possessing share ownership of 20%-50% between investor-investee. Also, the level of ownership is calculated by incorporating the use of equity finance method.
• Joint Venture: The relationship of joint venture is developed when there are two or more investors possess complete control of the investee. The level of ownership in this type of investor-investee relationship is also determined through the use of equity financing method.
• Parent-Subsidiary relationship: In this type of relationship, a subsidiary is completely acquired by its parent company as its majority shareholder. Thus, in a relationship of parent-subsidiary investor acquires over 50% shares of the investee company. The parent company is required to prepare and disclose consolidate financial statements that integrate the financial results of all its subsidiaries in a single economic entity.
• Limited Ownership: In this type of relationship of investor-investee, investor acquires only a limited control over the investee company. The level of ownership of investor is assessed through the use of financial asset accounting method (Watkins, 2009).

Share Capital and Retained Earnings

The concept of ‘control’ in financial terms refers to the authority acquired by a company over its associate in terms of ownership. On the other hand, the concept of ‘significant influence’ refers to the power acquired by the investor over the investee company to involve in its decision-making processes (Watkins, 2009).

As analyzed from the annual report of Aurizon, the company is part of a consolidate group. The numbers of individual companies that comprise the group are as follows Aurizon Holdings Ltd, Aurizon Finance Pty Ltd, Aurizon Property Holding Pty ltd, Aurizon Terminal Pty Ltd and many other entities. Consolidated financial statement is prepared for a group when it has number of subsidiaries in order to integrate the financial information of all its business units in a single economic entity. The parent company holds the responsibility of preparing and disclosing the consolidated financial statement in the annual report of the group (Aurizon: Annual Report, 2016). The process involved in preparation of consolidated financial statements is as follows:

• The financial statements of both the parent company and its subsidiaries are prepared with adopting a uniform method of accounting.
• The financial statements of parent group and its subsidiaries are prepared through the adoption of GAAP (Generally Accepted Accounting Principles).
• The parent group holds the responsibility of integrating the financial accounts of parent and subsidiaries in accordance with the market value of shares (Pham-Gia, 2009).

The equity method and consolidate method of accounting differs from each other in respect of preparation of a group’s balance sheets and income statements. Equity method of accounting is used to generate net income in accordance with the investment of an investor in investee. On the other hand, consolidated financial method of accounting is used to disclose the assets and liabilities of subsidiaries in the balance sheet of the parent group in proportion to their stake in the parent company. The preparation of consolidated financial statements incorporates the use of acquisition analysis in order to list the value of assets and liabilities of subsidiaries acquired by the parent group. The process of consolidation requires revaluation of some assets in order to provide information related to contingencies associated with the potential assets that may be required by the group in future context (Hove. 2006). The company also has significantly investment in associates such as Moorebank industrial, Property Trust, Aquila Resources Limited (Aurizon: Annual Report, 2016).

Joint arrangement can be stated as the relationship existing between two parties that have joint control over other business entity. Joint venture is said to exist between an investor-investee through holding definite amount of net assets in investee through acquiring shares in another associates. On the other hand, a joint operation refers to the integration of two business entities in order to carry out a specific task (Epstein and Jermakowicz, 2010). Aurizon is also a part of joint ventures that have contributed approximately about $1million to the financial results of the group. The joint ventures of the group are as follows, CHCQ, CRGL, KMQR, ARG Risk Management Limited, Integrated Logistics Company Pty Ltd (Aurizon: Annual Report, 2016).

The term ‘goodwill’ in the financial reports of a business entity refers to an intangible asset that is reported in the financial accounts when a company acquires another one and is different from physical assets such a buildings and machinery. The goodwill is depicted in the balance sheet of a business entity. It is calculated by identifying the fair market values of assets and liabilities and deducting it from the purchased price (Mard et al., 2002).

Conclusion

Thus, it can be summarized from the overall analysis carried out in the report that annual report of Aurizon has provided significant information related to its business segments, investor-investee relationship, capital structure, consolidated financial statements and goodwill.

References

AASB 8. 2017. [Online]. Available at: www.aasb.gov.au/admin/file/content102/c3/AASB8_02-07_ERDRjun10_07-09.pdf [Assessed on: 22 April, 2017].

About US. 2017. Aurizon. [Online]. Available at: https://www.aurizon.com.au/company/overview [Assessed on: 22 April, 2017].

Annual Report 2016. Horizon. [Online]. Available at: https://www.aurizon.com.au/investors/documents-and-webcasts/2017 [Assessed on: 22 April, 2017].

Dagwell, R. et al. 2007. Corporate Accounting in Australia. UNSW Press.

Epstein, J. and Jermakowicz, E. 2010. WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons.

Henderson,S. et al. 2015.  Issues in Financial Accounting. Pearson Higher Education AU.

Hove. M. R. 2006. Consolidated Financial Statements: An International Perspective. Juta and Company Ltd.

Mard, M. et al. 2002. Valuation for Financial Reporting: Intangible Assets, Goodwill, and Impairment Analysis. John Wiley & Sons.

Pham-Gia, K. 2009. Consolidated Financial Statements in IAS/IFRS and German GAAP – Major Differences Explained. GRIN Verlag.

Watkins, J. 2009. Financial Management. Elsevier.

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