Overview of Rio Tinto and Ausdrill Limited

The report is prepared for analysing the financial statements of two organisations operating in the same sector having similar kinds of operations. Therefore, the organisations selected for this paper include Rio Tinto and Ausdrill Limited, as they are associated with extracting and mining mineral resources. The paper takes into account the annual reports of the two organisations in order to evaluate several components of the financial statements along with conducting comparative assessment between them for evaluating better reporting of the different elements of the financial statements.

            The primary operations of Ausdrill Limited include extraction of minerals and mining other metals in Australia. The organisation has global presence in Africa and United Kingdom as well. The specialisation of the firm is in mining services, drill and blast exploration projects along with grade control[1]. Moreover, the organisation has experienced increase in revenue throughout the years due to which it has recruited additional employees for maintaining its business operations.

            Rio Tinto is considered as the leading organisation in the Australian mining sector and it is an Anglo-Australian firm having maximum operations in Australia. The organisation is popular for its mining operations and it is one of the largest producers of metals in Australia[2]. It is involved in producing iron ore, coal, copper, uranium and diamond. Moreover, the organisation is involved in refining business for products such as bauxite as well as other minerals.

            The report focuses on assessing the annual reports of the two-above mentioned organisations for three years starting from 2015 and ending with 2017. It covers comparative assessment of the components mentioned in the annual reports of the organisations. Some of the few important areas taken into consideration in their annual reports constitute of equity capital, cash flow statement, tax treatment as well as disclosures. Moreover, the report would shed light on the effective tax rate, cash tax rate and book tax rate of the two selected organisations.

Owners’ equity: Part (i):

            The owners’ equity depicts the issued capital and retained earnings, which are utilised for funding the business activities[3]. The annual reports of 2015, 2016 and 2017 are taken into account for both the organisations so that their owners’ equity could be evaluated accordingly. This is found mainly in the balance sheet statements of the two organisations, as per their annual reports. As per the annual reports of Ausdrill Limited, contributed equity, retained earnings and other reserves are the main items. The contributed equity is related to share capital obtained by an organisation through issuance of shares to the public. The contributed equity of the organisation has been $546,447,000 in 2017 and this item value has been same as that of the previous two years.

Evaluation of Equity Capital

            The retained earnings of the organisation denote a portion of the profits, which are set apart for reinvestment in business or fulfilling different future dues of the organisation[4]. Significant rise in retained earnings could be observed in the year 2017 compared to the previous year and retained earnings amounted to $121,444,000. In 2015, the amount of retained earnings has been $38,027,000. This trend reflects rise in retained earnings of the organisation. This is because of rise in profit level of the business and enhancement in its business structure[5]. The business reserves are represented in negative numbers due to accumulated losses from the past years.

            For Rio Tinto, the main equity items reflected in the balance sheet statement of the organisation include share capital, reserves, share premium and retained earnings. The share capital has been obtained from Rio Tinto Limited and Rio Tinto Plc over the years. The equity capital denotes the funds that a firm accumulates to fulfil the business obligations. The reserves are shown in positive numbers, which signify that the organisation has accumulated earnings that could be used by the management for any future business activities[6].

The share capital of the organisation has been $4,140 million and improvements could be seen from the previous year. This is because Rio Tinto has issued additional shares in the market for drawing adequate funds in order to finance its business operations. The retained earnings of the organisation have been $23,761 million and this increase is inevitable due to increase in profit generation capacity of the business. Moreover, it is apparent from the annual report that the profit reserves of the organisation are adequate for fulfilling future business obligations.

Part (ii):

            In accordance with the annual reports of Ausdrill Limited, the capital structure of the organisation is observed to place adequate dependence on equity capital rather than debt funding. The debt capital has declined from $395,019,000 in 2016 to $385,815,000 in 2017, which implies that the management has managed to repay a portion of its loan in the current year for minimising its overall debt burden.

For equity share capital, increase in equity capital of the organisation could be observed during the year evident from the balance sheet statement. The business borrowings are identified as $407,307,000, which is more than the estimate of 2016. The three-year analysis states that the management is minimising the debt burden of the business in a systematic manner and thus, focus is kept on applying additional equity capital of the business[7].

Capital Structure Analysis

            For Rio Tinto, the balance sheet statement of the organisation in 2017 states that the business borrowings have been $15,148 million and this amount is deemed to be lower than the estimate represented in the year 2016, which is observed to be $17,470 million. In 2015, the overall business borrowings of Rio Tinto have been $21,140 million, which is higher compared to debt capital shown in 2016. This clearly sheds light on the fact that the management of the organisation is attempting to minimise the debt capital over the years[8].

The equity capital of the organisation reflected in its annual reports is found to be $4,140 million in 2017 and the same has been $3,950 million in 2016. This indicates that the management of the organisation is attempting to raise the equity funding in its business capital structure. Moreover, the management is making efforts to maintain optimality in its capital structure by raising funds from debt as well[9].

            Hence, the evaluation of debt and equity capital utilised by both of the organisations reveals that Ausdrill Limited is focusing more on raising funds through debt for financing its business activities. On the other hand, Rio Tinto has focused on raising more funds through debt rather than depending on equity capital, as the investors are unwilling to invest in business operations. Therefore, in terms of capital structure, Ausdrill Limited is placed in a favourable position in the Australian mining industry.

Cash flow statement: Part (iii):

            The cash flow statement signifies the cash position of an organisation and it denotes each activity that represents cash inflows and cash outflows. As per the cash flow statement of Ausdrill Limited, the operating cash flows primarily include receipts from the customers for conducting sales and cash payments to suppliers for purchase of raw materials as well as other products. Another important item is taken into consideration in the cash flow statement, which is the income tax payment made by the organisation in an accounting year[10]. The net cash flow has increased from $91,006,000 in 2016 to $94,613,000 in 2017. The amount collected from the customers and the payments made to the suppliers have risen based on the estimates of the year 2016, which state that the operational level of the organisation has risen considerably.

            The investing cash flows of the organisation state that the organisation has invested large amount of cash in order to purchase property, plant and equipment observed to be $147,418,000 in 2017. The financing cash flows take into account different repayments, which the organisation has undertaken over the year like borrowing repayment, hire purchase repayment and dividend payment to the shareholders of the organisation[11]. As per the cash flow statement, the cash and cash equivalents have been $166,710,000 in 2017 compared to $181,157,000 in 2016. Thus, the cash balance of the organisation has declined slightly in contrast to the outcomes of the past year.

Particulars	2015	2016	2017
Net cash flows from operating activities	$  1,17,936.00	$  91,006.00	$    94,613.00
Net cash flows used in investing activities	$         -738.00	$ -60,853.00	$ 1,01,127.00
Net cash flows used in financing activities	$ -1,04,693.00	$  47,772.00	$      6,965.00

Cash Flow Statement Evaluation

According to the cash flow statement of Rio Tinto in 2017, the operating cash flows are observed as $16,670 million, which is more than the amount of the year 2016. This implies increase in overall business operations of the organisation. The items reflected in the operating cash flows primarily constitute of dividends from the units of equity account as well as tax expenses incurred by the organisation in the year[1]. The cash generated from operations is observed to be greater compared to the estimates of 2015 and 2016 and it is found to be $13,884 million.

            The investing cash flows for the year 2017 constitute of purchase of property, plant and equipment, purchase and sale of financial assets. In addition, it has been observed that the organisation has different subsidiaries held in the year. The investing cash flows are found to be negative in comparison to the cash inflows. The financing cash flows depict increased outflows of cash because of loan repayments, share buyback and dividend incurred by the organisation in the year. As a result, this has lead to increase in overall cash balance of the organisation in contrast to the analysis of the past year. The net cash is found as $10,547 million in 2017, which has been $9,354 million in 2016. Hence, cash balance has increased considerably over the years after critical comparative evaluation of the cash flow statements of Rio Tinto over the years.

Particulars	2015	2016	2017
Net cash flows from operating activities	$       9,383	$     8,465	$     13,884
Net cash flows used in investing activities	$     -4,600	$     2,104	$       2,373
Net cash flows used in financing activities	$     -7,670	$     7,491	$       9,141

As per the cash flow statements of the two organisations depicted in their annual reports, appropriate formats are used for disclosing the various items listed in the same. These items mainly include operating cash flows, investing cash flows and financing cash flows. The operating cash flows of Ausdrill Limited have deemed to increase from $91,006,000 in 2016 to $94,613,000 in 2017 denoting considerable increase in this item. In 2015, the operating cash flows of the organisation have been $117,936,000. Due to such favourable operating cash flows, it implies that there has been significant improvement in the business operations[1].

The operating cash flows signify the operating efficacy of the organisation, which is deemed to be favourable for the business. The operating cash flows of Rio Tinto for 2017 is deemed to be $13,884 million, while the operating cash flows in the year 2016 have been $8,465 million and in 2015, such flows have been $9,383,000. From the annual report of Rio Tinto in 2017, the operating cash flows have been more compared to Ausdrill Limited. This might be because of the increased operational scale of the organisation[2].

            The investing cash flows of Ausdrill Limited have been negative in 2017, which are identified as $101,127,000. This is mainly because of the payments made in order to buy various classes of assets[3]. The cash flows for Rio Tinto in the year 2017 have found to be negative, which is because of the rising payments associated with purchases undertaken from the end of the business organisation. The investing cash flows of Rio Tinto are observed to be favourable compared to Ausdrill Limited.

The financing cash flows of the organisation constitute of loan repayments, agreements related to hire purchase and loan proceeds undertaken by the organisation in the year. These cash flows are shown to be negative as $6,965 million for the period and improvement could be observed compared to the evaluation of the past year. For Rio Tinto, the financing cash flows is observed to be more, which states that the organisation has made significant cash payments during the period.

Part (v):

            As per the above evaluation, the operating cash flows of the two organisations have shown increase over the years, which implies that the operating efficacy is deemed to be appropriate for Ausdrill Limited. However, the figure is more suitable for Rio Tinto, since it is greater in contrast to the other organisation operating in the industry. The investing cash flows are found to be same for both the organisation, as they have conducted significant investments in property, plant and equipment along with loan repayments for meeting the business obligations. Finally, it could be said that Rio Tinto has generated more cash flows than Ausdrill Limited throughout the years.

Other comprehensive income statement: Part (vi):

            This statement represents items that are not included in the income statement of a business organisation[4]. As per this statement of Ausdrill Limited, the main items comprise of exchange gains on transactions associated with cross-border operations amounting to $882,000, income earned from joint ventures, gains made on financial asset revaluation and revaluation gain on PPE. For Rio Tinto, the significant items are actuarial gains along with tax adjustments on benefit plans of post-retirement. The other items include cash flow hedge, gain and loss on revaluation, which include sale of variable securities[5].

Part (vii):

            The above-stated items are not added in the income statements of the two organisations, since their nature is extraordinary and they are not used for conducting daily business operations[6]. Instead, they are utilised for disclosing all business activities during the period and as they could not be included in the income statement, they are shown as items in the other comprehensive income statement[7].

Part (viii):

            According to this statement of Ausdrill Limited, the main sources include exchange gains on translation of cross-border operations, which is reflected as $882,000. The organisation has suffered losses on asset revaluation, which are reflected in the annual report of the organisation in the period. The annual report of Rio Tinto reflects actuarial gains, adjustment of deferred tax benefits of post-retirement and tax adjustments, which are reflected in the annual report of the organisation during the period[8]. The comprehensive income statement developed reflects cash flow hedge gains as well as revaluation gains of available securities of sales.

            The evaluation denotes that the extraordinary items are greater for Rio Tinto compared to those of Ausdrill Limited, according to the annual reports. In the two cases, if these items are considered in the income statement, the net income of the organisation would either increase or minimise the income of the organisation. For Ausdrill Limited, the net income would decrease if the comprehensive items are reflected in the income statement. On the other hand, the profit of Rio Tinto would rise, if the profits are considered in the income statement of the organisation.

Part (ix):

            The performance of the organisation need not be dependent on comprehensive items that are reflected distinctively in the annual reports of the organisations, since the nature of these items is extraordinary and they might not be recurring in nature. The items reflected in the other comprehensive income statement are primarily of extraordinary nature. Hence, the items need not be included while undertaking business decisions.

Accounting for corporate income tax: Part (x):

            The income tax expense for Ausdrill Limited in 2017 is represented as $13,885,000 and this amount has risen from $4,581,000 in 2016. In case of Rio Tinto, the income tax expense of the organisation has been $3,965 million in 2017 and $1,567 million in 2016.

Part (xi):

            The effective tax rate denotes the average rate of tax, in which the business profits are taxed and the computation of effective tax rate is depicted in the above figure. It is apparent from the above figure that Rio Tinto has higher tax rate compared to Ausdrill Limited.

Part (xii):

            Deferred tax assets as well as deferred tax liabilities are important components of the financial statements of the organisation, which are recorded at the end of the period and the same has effect on income tax reflected in the income statement[9]. The cause due to which deferred tax assets and liabilities are recognised is the temporary variation and permanent variation between tax profit and accounting profit[10]. Another cause could the tax liabilities or tax assets brought forward from the past year.

Part (xiii):

            Ausdrill Limited has deferred tax assets of $36,372,000 in 2017 and they have fallen compared to the previous year. On the other hand, deferred tax liabilities of the organisation have been $22,077,000 in 2017 and this amount has been minimised compared to the analysis of the past year. The deferred tax assets of Rio Tinto have followed similar trend like that of Ausdrill Limited; however, increase in deferred tax liabilities could be observed over the year.

Part (xiv): Part (xv):

            As per the above table, the cash tax rate of Rio Tinto is deemed to be higher compared to Ausdrill Limited.

Part (xvi):

            The primary difference between cash tax rate and book tax rate is the estimation of cash tax rate based on the existing year[11]. On the contrary, book tax rate is projected based on both current and future year. In order to calculate the cash tax rate, consideration is made for deferred tax assets and deferred tax liabilities and burden of interest, which could lead to tax savings and they are added. For calculating book tax rate, no such consideration is made for cash tax rate[12].

Conclusion:

            It is prominent from the above discussion that both Rio Tinto and Ausdrill Limited have made adequate disclosures regarding the various financial aspects. It has been found that Rio Tinto has focused on equity capital, while Ausdrill Limited has concentrated on raising more funds through debt. In terms of cash flow statement, the position is deemed to be favourable for Rio Tinto as well. Finally, it has been found that Rio Tinto has incurred more cash tax compared to Ausdrill Limited because of more revenue generated over the years.

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