HA2032 Corporate and Financial Accounting | Information Voluntarily

Introduction

Disclosures are crucial in the corporate world so that users can make proper decisions based on the same. Further, the materiality aspect of disclosure must be duly fulfilled so that future course of actions can be decided by the users, thereby serving as a positive indicator. However, it is noted that in the current scenario, such disclosures have become incapable of addressing the requirements of users in a proper way. This means that there are few who are appropriately satisfied with the disclosure strategies and there are people who cannot attain any benefits from such disclosure strategies (Vaitilingam, 2014). Therefore, it must be observed that there is an urgent requirement of a financial reporting system that can permit the management in disclosing specific details associated with the company’s financials to the users. Nevertheless, if the organization discloses the details on its own wish, then it can encounter complications as time passes by.

1. Corporate rules and regulations

It must be noted that companies must always focus on such information that may be useless to the users of financial statements and if these are highlighted to them, the company may also encounter mass destruction in the form of loss of reputation or goodwill. All the companies belonging to a same industry must often function under a common corporate umbrella when it comes to disclosures. This means that the management is bound to prohibit disclosures of any immaterial fact that may spoil the company’s goodwill on a whole. Furthermore, it is the auditor’s responsibility to assist and make specific disclosures that are required to be disclosed by companies. This includes prevention of immaterial disclosures that have already been facilitated by the company. Nevertheless, each company must also be supervised through an accounting system that is more structured in nature so that the management can attain the freedom of information disclosure on a voluntary basis.

Furthermore, the utilization of such financial regulation can also assist users in facilitating a comparative analysis of their companies with others performing in the same segment. Besides, such control regulation must be implemented so that enhanced disclosure sources of information can be obtained. In addition, it must be taken into account by the management that the data being disclosed is entirely dependent on the requirement and not voluntarily. Nonetheless, there must be proper transparency in the financials of the company because it caters to the financial reporting goals in an effective way. Thus, it can be stated that the financial or corporate reporting process is very idealistic and every company must possess a restriction on the details that are required to be disclosed by them. The general transparency ideology in relation to the system of financial reporting signifies that crucial details must be disclosed to the users but not every detail must be willingly reported to them. Overall, it must be noted that exaggerated level of information can play a key role in destroying the motto or goals of corporate reporting and therefore, may result in an insensible affair that must be undertaken or carried out by the companies (Davies & Crawford, 2012). Hence, disclosure of material information is mandatory and information that is not material or relevant in nature must be disregarded by the corporates specially when disclosure of such information can result in loss of reputation or goodwill in the entire industry.

2.Setting of accounting standard

The IFRS can be explained as a global term that can assist companies in gathering information and depicting them under the prescribed rules of IASB. Further, the IFRS concept consists of wider strategic implementation that has been accounted by the AASB and the FRC, thereby making it mandatory for the companies to report under Corporations Act 2001to implement such method so that the financials can be easily prepared. The implementation of such method also assists the companies to ensure if the financials have been prepared under AASB guidance. Moreover, the AASB is also said to pursue a neutral policy in association with the transactions that states every event must be recorded in the financials whether in non-profit or profit segments of the company. Further, the AASB has assisted in implementing various accounting standards in the AASB so that the strategic guidance policy of financial reporting can be addressed (Deegan, 2011). Besides, it is crucial for determining the fact that every company in the industry has been utilizing the IFRS system that is issued by the IASB owing to the ongoing nature of the principle needed by financial accounting. Nevertheless, it has been observed that the global market can be effectively affected by the IFRS implementation in the organization’s accounting segment because every Australian company will possess have a decreased capital reflected in their financials.

It has also been noted that the adoption of IFRS is not mandatory for every member who have been utilizing the IASB due to massive variations in the procedure that is necessary to be made in the financial segment of businesses. Moreover, facilitating several variations in the industries’ financial segment cannot be regarded very simple due to a widespread reach of such applications (Deegan, 2011). Therefore, it is not being made crucial for every country to implement the IFRS system in their framework. However, it must be noted that the IFRS adoption in the organization’s accounting segment can play a key role in motivating the country’s overall economy and will also offer various efficacies to the companies (Parrino, Kidwell & Bates, 2012). Furthermore, various countries that have been adhering to the GAAP principle must also try and adopt the system of IFRS within their framework so that they can facilitate in the maintenance of uniformity and therefore, ensuring that convergence cannot become an issue in the nearby future. Therefore, it cannot be regarded as crucial on the part of every organization to implement the system of IFRS (international financial reporting standards) and instead, they must always endeavour to adopt the same so that they can pave a path wherein uniformity can be easily maintained and users can also distinguish the varied forms in a thorough way.

Owner’s Equity

3.Item of equity

Retained earnings, contributed equity and reserves are the significant items that constitute the basic equity funds.

Retained earnings are that part of the earnings that are kept aside by the company or rather retained by the company so as to being capable of handling any future contingencies and obligations. These are a portion of earnings retained by the company in order to improve the efficiency of the operations of the company and so as to being capable of overcoming any future contingencies (Petty et. al, 2012). Such earnings are significant for every organization for it acts as a safety reserve that assists the company in ploughing back its profits.

Reserves are of various types such as foreign currencies, translation reserves, remuneration reserves, hedging reserves, asset revaluation reserves and general reserves. General reserves are created so as to safeguard the organization from contingencies and allow the organization to carry out its operations more diligently and easiness. Asset revaluation reserve is created by an organization so as to tackling with depreciation and such other fluctuation in prices of assets (Porter & Norton, 2014). With the help of hedging reserves, gains or losses suffered on a derivative instrument can be settled easily. To compute the amount need to be paid as remuneration that is not evaluated appropriately, remuneration reserves are created.

Contributed equity is the combination of shares that are held in trust by the organization as well as the share capital of the organization. It reflects the value of share capital held by the organization itself. Inflation in the contributed equity is generally seen when the new shares are offered or issued. The investors who purchase the shares of the company becomes the shareholders of the same and as a result of which also treated and termed as owners of the company (Ross et. al, 2014). The reason behind issuing shares is to generate cash flows in the company by means of collecting cash from the people who are willing to purchase the shares of the company. The company also complies with its policy of issuing bonus shares to its existing shareholders. Equity funds are comprised of mainly 3 items mentioned below-

• Reserves
• Retained earnings
• Contributed equity

BHP Billiton

As per the annual report, it has been observed that the total business of the organization has fallen in the previous year and one of the major reasons is for the declining popularity. The noteworthy reason that can be cited in this scenario is that of the exercise of the share awards of the employees by the organization. The reserves reduced to a considerable extent and the transfer was made for the share award of the employee (BHP Billiton, 2017).

Rio Tinto

As per the annual report it is observed that the company has huge retained earnings and even it comprised of accumulated and comprehensive financial statement. As the company reaped enormous profit hence the accumulation of retained earnings were huge. Higher retained earnings were owing to higher level of profit. Moreover, high accumulated, as well as comprehensive income was noted in the organizations financial statements as the conduct of the business were strong and the management discharged the obligations with ease and flexibility (Rio Tinto, 2017).

Rusal Mining

From the annual report of Rusal Mining it is noted that the share premium remained intact while the other reserves declined marginally. The consolidated share capital, as well as share premium projects only the share capital and share premium of the company (Rusal Mining, 2017).  Further, the share capital and other paid in capital that is done before the acquisition has been considered in the reserves. As seen 2017 witnessed the highest change and increased considerably as compared to the other three years owing to more funds towards the retained earnings. As the profit were good therefore, the figures for the past three years settled to a considerable extent. Further, the common stock remained constant in all the four years.

Gold Fields

The equity and the share capital increased in nature while share capital increased in nature. The retained earnings of the company reduced in nature projecting that there is a reduction in the funds of the company (Gold Fields, 2017). The level of profit fluctuated and in tune to that the retained earnings witnessed a change. Overall, it can be commented that the stockholder equity for 2017 is better as compared to 2015 and 2016. The common stock witnessed a downward graph while the retained earnings declined because the company incurred net loss.  As compared to 2015 and 2016, the performance of company was better in 2017.

4. Comparative analysis of the debt and equity position

The analysis of debt and equity has been done with the aid of debt equity ratio. As per the computation, it is witnessed that the debt equity of Gold fields is high and at the end of 2017 it is more than 1 indicating a major reliance on debt and low on equity. There has been a continuous increment in the debt equity ratio since 2014. However, there has been a marginal decline in the year 2017 where it dropped and became 1.06.           

 Similar instance has been noted in the case of BHP Billiton where the ratio increased with the due passage of every year and currently stands at more than 1 indicating a higher level of debt. The debt equity remained close to 1 in all the past four years. The current debt to equity is 1.04 a drop from the previous year level.

Rio on the other hand has a huge presence of debt but going by the level of exposure and business such level of debt and ratio is feasible and can be easily maintained by the company. Rio level of debt has changed in all the four years. The current debt equity stands at 1.14 meaning a higher proportion of debt.

Rusal on the other hand witnessed similar instance where the debt level was high but declined in the later years. For Rusal, the debt equity ratio has declined meaning the company has repaid the debts. The debt equity ratio in 2017 stands at 71% which is apt for a mining company.

Conclusion

Going by the analysis from the annual report of the four mining companies it can be commented that the management of the company should have a strong stand on the disclosure needs that will benefit the company in the long run. The study on the big four mining companies indicates that the debt to equity depends and varies from one industry to another. For some companies the ratio of more than 1 is risky as more amount will go towards the payment of interest while in the case of mining industry where the level of exposure is more and hence, the debt level can be stretched further.

References

BHP Billiton. (2017) BHP Billiton annual report and accounts 2017. Available from: https://www.bhp.com/investor-centre/annual-reporting-2017 [Accessed  24 September 2018]

Davies, T. and Crawford, I. (2012)  Financial accounting. Harlow, England: Pearson.

Deegan, C. M. (2011)  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.

Goldfields. (2017) Goldfields Annual Report and accounts 2017 [online]. Available from: https://www.goldfields.com/pdf/investors/integrated-annual-reports/2017/iar-2017.pdf  [Accessed 24 September 2018]

Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,

Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.

Porter, G. and  Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning

Rio Tinto. (2017)  Rio Tinto Annual Report and accounts 2017 [online]. Available from: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 24 September 2018]

Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)

Rusal. (2017) Rusal Annual report and accounts 2017 [Online]. Available at: https://rusal.ru/upload/iblock/327/LTN20180427141%20ar.pdf [Accessed 17 September 2018]

Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.