Purpose of the Report
The main purpose of this report is to analyze the reporting framework which is applied by businesses for the purpose of reporting of various transactions of a business. The assessment deals in details whether financial reporting should be regulated or not in order to provide appropriate disclosures to the users of financial statements. In addition to this, the report will also be containing a description about the standard setting process which is followed by IFRS and what is assistance is provided by AASB in the same. In the second part of the assessment, the report will be considering analysis of significant items which are included in financial statements of four companies. The companies which are considered for this assessment are Boral Ltd, BHP Billiton ltd, Rio Tinto Ltd and Amcor Ltd. All the companies which are considered for this assessment are involved in mining business and metal extractions. The assessment also considers debt equity position of such companies for which a comparative analysis is to be undertaken for a period of four years.
The use of financial reporting is an important part of managerial process in order to communicate with the users of the financial statement regarding the performance of the business. The users of financial statements are not only the investors but also the suppliers, employees, governments, banks and all stakeholders of the business. The purpose of financial reporting under regulations is to ensure that the transactions which are recorded in the annual reports of the business are in a systematic manner and consistency and transparency is maintained in the annual reports of the business. However, integration of practices which is followed all over the world is a difficult process and therefore accounting boards needs to come up with plans which the accounting standards issued universally applicable. The accounting regulations which are introduced by accounting boards are basically based on bringing about improvement and consistency in accounting policies which is followed by businesses. The following mentioned can be provided in order to explain the advantages of regulations of financial disclosures:
- Creditable Commitments: The adoption of appropriate regulations to deal with reporting disclosures brings about reliability in the information which are portrayed in the financial statements of the business. This would promote creditability of the information which is presented in the financial statement of the company.
- Comparability: The regulations will bring about comparability of the financial statements of the business. The management of the company will be able to compare the information provided in the financial statement of the business.
- Asymmetry of information: The information which is shown in the annual reports of the business should be complete and adequate so that the users of the financial statements are able to take appropriate decisions regarding the financial statement of the business. The regulation in reporting framework prevents misconducts and also ensures that the users of the financial statement get a clear idea of the business.
The managers of a business have the option to use voluntary disclosures for the purpose of disclosing information which are not easily available and the same information are provided to the users of the financial statements so that the same can complement with the information which is provided in the annual reports of the business.
The accounting standards are the basis or guidelines which are used by professional accountants to record transactions in books of accounts off the business. The accounting standard are formulated by accounting standard boards such as International Accounting Standard Board (IASB). In Australia, Australian Accounting Standard Board (AASB) is responsible for introducing and amending accounting standard. AASB has adopted the IFRS framework for the purpose of reporting of various items which are reported in the financial statements of the business. AASB also plays a crucial part in the accounting standard process which are formulated by IASB.
Advantages of Regulations of Financial Disclosures
The first step in formulating accounting strategy is to identify the issues which are faced by accounting professionals. Then the second step is to analyze the issues and come up with a strategy which can counter the issues. The board will also be consulting other accounting bodies and also the IASB in order to understand the problem and what alternative treatments are available for the business. The accounting bodies provide feedback regarding the points which are raised for formulating accounting standard. AASB then provides the research for public discussion so that the stakeholders can comment on the same. After confirmation is received for the research standards, the official standard is issued by the accounting board.
The international financial reporting standard are followed by most countries as a reporting framework for the purpose of recognizing and displaying the financial information to the general public. The IASB has fifteen-member countries who have the option to not to follow the standards which are issued under IFRS framework (Hambleton 2013). An example can be given of USA which does not follow the IFRS framework as the same is not suited for its markets. In addition to this, the cost of implementing the framework in business requires additional costs to be incurred by the business during the period. Thus, the cost of implementing the changes can affect the business.
The owner’s equity of a business reflects the capital holding which a business has for the purpose of meeting the financial needs of the business. These needs can be funding of a project which are related to operational activities of the business or even for day to day financing of the operations of the business. In order to analyze the owner’s equity, four companies are considered for the analysis process which are BHP Billiton, Rio Tinto ltd, Boral Ltd and Amcor ltd. For the purpose of conducting a comparative analysis of the owner’s equity of the business, the annual reports of the respective companies are considered for a period of four years (Robb and Robinson 2014). The analysis aims to identify the growth or decline in the equity values over the years for the businesses.
The annual report of all four companies show three common items which are included year after year in the annual reports of the business. The items which are included are issued share capital, reserves and retained earnings. The share capital of a business reflects the amount which is paid by the investors for the shares which are issued by such companies (Needles, Powers and Crosson 2013). The share capital is the main source of funds in many businesses and forms an important part of the capital structure of the company. The share capital also represents the holdings of equity shareholders who are the owners of the business in the company. Reserves and retained earnings are both part of profits which is earned by business during a year which is set out by the management of the company for meeting certain obligation of the business. Sometimes, such reserves and retained earnings of the business are used for the purpose of setting off losses or meeting certain emergencies of the business.
Standard Setting Process Followed by IFRS and AASB
The annual report of BHP Billiton ltd for the year 2015 shows that equity share capital of the business is $ 1057 million which has remained the same throughout the four years period. In 2014, the share capital of the business is shown to be higher but the same then reduces which suggest that the management has buyback certain shares of the business (BHP. 2018). The retained earnings of the business from the year 2014 is shown to have decreased as per current year analysis. The reserves of the business for the year is shown to be $ 2400 million. The total equity of the business is shown to be reduced which suggest that the management is trying to maintain an appropriate capital structure (Isberg and Pitta 2013).
The annual report of Rio Tinto ltd for the year 2014 is shown to be $ 4535 million and the same is shown to have reduced in 2015 and the figure is shown to be $ 3950 million. The equity capital after 2015 is shown to have steadily increase and the same is shown to be $ 4140 million for the year 2017 (Riotinto.com. 2018). The increase in equity capital suggest that the business is requiring more capital to finance the activities of the business. The retained earnings of the business is also shown to have grown progressively over the four year period. The retained earnings of the business shows internal strength of the business.
The annual report of Boral Ltd shows that the equity capital of the business for the year 2017 is $ 4265.1 million which shows tremendous increase during the year from previous year figure. The management has issued new shares during the year which is the main reason the business is showing such high equity capital value. The retained earnings of the business for the year 2017 is shown to be $ 1156.1 million which has also increased tremendously from previous year analysis (Boral.com. 2018). This shows that the management has brought about significant improvement in the capital structure of the business. The increase in equity capital of the business might also be due to the fact that the management of the company is trying to meet the growth requirements of the business.
The annual report of Amcor ltd shows that the equity capital value of the business for the year 2015 is shown to be $ 1680.6 million which is lower than the balance which the company showed in 2014. In 2016 and 2017, the equity capital of the business has further reduced which gives an indication that the management of the company is bringing out changes in the capital structure of the business (Amcor.com. 2018). The reserves of the business is shown to be in negative which signifies that the business has significant amount of capital losses as shown in the financial statement of the business. The retained earnings of the business for the year 2017 is shown to be $ 286 million which has improved from previous year analysis. This shows that the management of the company is trying to recover from the losses which are shown in the reserves of the business and thereby is also trying to reduce the equity holdings of the business.
Analysis of Significant Items Included in Financial Statements of Four ASX-Listed Companies
The analysis which is shown above clearly shows that the business of Boral ltd for the year 2017 shows most favorable balances in comparison to all other companies. The capital structure and retained earnings of Boral Ltd is shown to be significantly increased during the year.
As per the financial statement of the BHP Billiton ltd for the year 2027 shows that the loans of the business have reduced slightly in comparison to previous year and the figure is shown to be $ 29233 million. The capital structure in case of BHP Billiton ltd is mainly dominated by debt capital of the business as per the annual report of the business (De Franco et al. 2013). The annual report of Rio Tinto ltd shows that the long-term borrowings of the business has reduced significantly in comparison to previous year. In this case as well the management of Rio Tinto ltd is shown to have more reliance on debt capital of the business (Coleman, Cotei and Farhat 2016). The loan of the business of Boral ltd has increased significantly during the year and it also shows that the management of Boral Ltd relies more on equity capital of the business (Mitani 2014). The loan of Amcor ltd is shown to be more than equity capital which shows that the business incorporates both equity and debt capital of the business.
Conclusion
The analysis of the financial statement of four companies reveals that the most changes which has taken place in the equity capital of the business is in the business of Boral ltd. The debt position analysis shows that BHP Billiton ltd utilizes most debt capital in comparison to other companies. The discussion in the assessment also shows the standard setting process which is followed by the AASB and IASB for formulating accounting standards.
References
Amcor.com. 2018. [online] Available at: https://www.amcor.com/investors/financial-information/annual-reports [Accessed 27 Sep. 2018].
BHP. 2018. BHP | 404. [online] Available at: https://www.bhp.com/404?item=%2finvestor-centre%2fannual-reporting-2017&user=extranet%5cAnonymous&site=website [Accessed 27 Sep. 2018].
Boral.com. (2018). Annual Reports | Boral. [online] Available at: https://www.boral.com/news/annual-reports [Accessed 27 Sep. 2018].
Coleman, S., Cotei, C. and Farhat, J., 2016. The debt-equity financing decisions of US startup firms. Journal of Economics and Finance, 40(1), pp.105-126.
De Franco, G., Vasvari, F.P., Vyas, D. and Wittenberg-Moerman, R., 2013. Debt analysts’ views of debt-equity conflicts of interest. The Accounting Review, 89(2), pp.571-604.
Hambleton, R.K., 2013. Setting performance standards on educational assessments and criteria for evaluating the process. In Setting performance standards (pp. 103-130). Routledge.
Isberg, S. and Pitta, D., 2013. Using financial analysis to assess brand equity. Journal of Product & Brand Management, 22(1), pp.65-78.
Mitani, H., 2014. Capital structure and competitive position in product market. International Review of Economics & Finance, 29, pp.358-371.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.
Riotinto.com. 2018. [online] Available at: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 27 Sep. 2018].
Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
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