ASSIGNMENT TASKS
CORPORATE REGULATION (5 Marks)
(i) Do your own research and critically discuss whether the financial accounting and reporting should be regulated, or manager should be allowed to disclose financial accounting information voluntarily.
ACCOUNTING STANDARD SETTING (5 Marks)
(ii) Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB?
OWNERS EQUITY (10 Marks)
Select 4 public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name. In this section, go to your firms’ annual reports and save to your computer your firms’ latest annual reports consecutively for last four years. Do not use your firms’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firms’ financial statements carefully and include information from these footnotes in your answer.
You need to do the following tasks:
(iii) From your firms’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past four years articulating the reasons for the change.
(iv) Provide a comparative analysis of the debt and equity position of the four firms that
you have selected.
Solution
Executive Summary
The report shows how the free-market approach is better as compared to the regulatory approach, however, with the drawbacks of the efficient free market approach; it is better to use the regulatory approach until these are covered. The second section of the report shows the role of the AASB in the standard-setting process of global accounting, regulatory bodies and making efforts to converge with IFRS. The last section shows the detailed analysis of the equity sections of the four selected companies: Woolworths, Wesfarmers, CSL and Rio Tinto. Furthermore, the debt and equity positions of the four companies for the last four years are compared to analyze the optimal position of capital.
Introduction
The report shows how corporate regulation of accounting information, its drawbacks, and the opposing theory of free market research is presented. In the next section, the role of the AASB in the standard-setting process and convergence with IFRS is explained. The last section looks at the four company’s shareholder equity and their comparable equity and debt positions. These companies are listed on the Australian Stock Exchange including the Woolworth Limited, Wesfarmers limited, CSL Limited and Rio Tinto Group.
Corporate Regulation
Accounting information has received significance over the period and is now considered as vital for the entire trade and business economies. The global economy is now relying on market based financial systems which depend on the well-times releasing of qualitative and quantitative accounting knowledge. While it is not easy to evaluate the reliability of the information, as, by the varying needs of the users, the potential options for the guarantee of the correctness of the accounting data to users justify careful consideration. There have been two approaches; the free-market and the regulatory approach. The preference of one over the other is not easily determinable.
Under the free market approach, the thought is that the accounting data is a regular economic asset and there the requirement of such asset along with its supply of various companies is supposedly an exchange process which can result in the efficacy dissemination. It shows that the regulation system of the accounting data is unnecessary. On the other hand, the regulatory approach considers that regulation is a needed device for fixing of the potential market failures and that it is an instrument through which social choices are made, and the guarantee of a level playing field is provided.
Summarizing, it can be said that the ruling of the accounting information as detailed as it is currently applied can be considered unnecessary if the downsides of the free market can be triumph over. A well-organized allocation of the accounting information can be attained. It is to be noted that the direct and indirect costs for the implementation, as well as the operation of the accounting regulation system, should be considered as well. However, until these drawbacks cannot be reduced or erased, the regulatory system cannot be discredited (Sorrentino et al., 2015).
Accounting Standard Setting
Every country has its own set of accounting standards which it implements and follows and considers appropriate for its accounting regulation. However, for the aim of bringing comparability and standardization, the regulatory bodies put their efforts to make their regulations acceptable to most of the counties. Organizations like IASB work hard to accomplish this goal. Regarding this perspective, the Australian standard setting regulatory body AASB takes its part in the development of the process of the standard setting through the identification of the technical issues and taking inputs from Australian organizations and conveying it forward. The documents issued by the IPSASB and IASB are used by the AASB and it makes formal submissions commenting on these documents for providing its contribution to the standard-setting process. This leads to the setting up of high-quality standards of accounting, which are acceptable all over the world.
The vision of the AASB is to build the reputation of being the leading standard setter and to be identified as the center of excellence in the delivery of contribution to high-quality standards for financial reporting. The Australian Accounting Standard Board develops and maintains the financial reporting standard in high quality in all the sectors of the Australian economy and through its leadership and guidance aids in the global standard-setting process as well (Australian Accounting Standards Board, 2018).
It regularly consults and provides liaison to the broad range of the Australian constituents. The responses are all documents as exposure drafts. It attends and hosts the Asian Oceania and National Standard Setters Group meetings and also takes part in the Trans-Tasman Auditing and Accounting Standards Group. Furthermore, the member countries of IASB do not need to comply with IFRS as it is not compulsory for them to implement these. The member countries can have their standards and converge it with IFRS. The convergence of these different accounting regulations with IFRS is not possible and feasible hence it takes place in phases.
Owner’s Equity
Financial Statement Analysis
For the analysis of the owner’s equity of four public companies listed on the Australian Stock Exchange, the four companies that have been selected are.
- Woolworths Group Limited
- Wesfarmers Limited
- Rio Tinto
- CSL Limited
The four companies selected showcases of different industries. While CSL Limited is a global biotechnology company which makes products for treatment as well as prevention of serious human medical conditions, Rio Tinto is an Anglo Australian group which is one of the largest metal and mining companies of the world. On the other hand, Woolworths and Wesfarmers belong to the retail industry of the Australian economy. The report will examine the equity portion of the financial statement for each of the companies, individuals, for its last four years. Because of the reason for the change in fiscal years for companies, while some have already published their 2018 Annual Report, others have only reported interim financial statements. It has caused a difference in the financial years of companies. For Rio Tinto, financial reports from 2014 to 2017 are considered, while for another three 2015 to 2018 are considered for financial analysis of its equity.
CSL Limited
CSL Limited Owner’s Equity is shown to have three components in its financial statement. The three components reported on the statement of the financial statement are.
- Contributed Equity
- Reserves
- Retained Earnings
Table 1: CSL Equity
| CSL | ||||
| Equity | 2015 | 2016 | 2017 | 2018 |
| Contributed Equity | -3560.4 | -4213 | -4534.3 | -4634.5 |
| Reserves | 306.5 | 187.9 | 294.2 | 224.2 |
| Retained Earnings | 6000.8 | 6592.3 | 7403.9 | 8490.2 |
| Total Equity | 2746.9 | 2567.2 | 3163.8 | 4079.9 |
| Debt | 2015 | 2016 | 2017 | 2018 |
| Total Current Liabilities | 936.1 | 1374.4 | 1618 | 1914 |
| Total Non-Current Liabilities | 2718 | 3621.1 | 4340.8 | 4779.9 |
| Total Liabilities | 3654.1 | 4995.5 | 5958.8 | 6693.9 |
Contributed Equity
The contributed equity is composed of the ordinary share that is issued and is fully paid, share buybacks reserve. During the investigated four years, the ordinary shares issued and fully paid remained zero (CSL, 2018, p.115). The changes were seen in the share buyback reserves. The company CSL has gradually increased its share buyback reserves in the last four years. Because of the share buybacks and the higher prices undertook as compared to the original subscription prices, the ordinary share balance of contributed equity has been reduced to zero and the share buyback reserve is reflecting on the excess value of the shares that are bought above the original amount of the subscribed capital (CSL, 2015, p.106).
Reserves
Reserves include the components of Share-based payment expense, net exchange losses or gains on translation of the foreign subsidiaries (net of the hedge), deferred tax on share-based payments regarding the share-based payments reserve and the feign currency translation reserves. The share-based payment reserve recognizes the value of the performance rights, options and GSP rights issued to the employees. The other component takes into account the translation effect of the profits or losses of the subsidiaries operating in non-US dollar currency, and of the exchange differences on borrowings considered as hedges of the net investments in the foreign companies. The share-based Payment expense of reserves has increased in 2018 substantially. On the other hand, the net exchange resulted in a substantial loss in 2015, lower loss in 2016, gain in 2017 and then lost again in 2018 (CSL, 2016, p.115).
Retained Earnings
Retained earnings show the portion of the earnings which remains after the distribution of the dividends among the shareholders of the company. The retained earnings of CSL include the net profit component, dividends, actuarial loss or gain on benefit plans, and deferred tax on these plans. The company has been distributing dividends increasingly in the last four years with the increase in its net profit. Even with higher dividends distributed, it has also remained with higher retained earnings each year (CSL, 2017, p.111).
Rio Tinto
Table 2: Rio Tinto Equity
| Rio Tinto Group | ||||
| Capital and reserves | 2014 | 2015 | 2016 | 2017 |
| Share capital | ||||
| – Rio Tinto Plc | 230 | 224 | 224 | 220 |
| – Rio Tinto Limited | 4535 | 3950 | 3915 | 4140 |
| Share premium account | 4288 | 4300 | 4304 | 4306 |
| Other reserves | 11122 | 9139 | 9216 | 12284 |
| Retained earnings | 26110 | 19736 | 21631 | 23761 |
| Equity attributable to owners of Rio Tinto | 46285 | 37349 | 39290 | 44711 |
| Attributable to non-controlling interests | 8309 | 6779 | 6440 | 6404 |
| Total Equity | 54594 | 44128 | 45730 | 51115 |
Rio Tinto’s Equity portion of the financial statement shows the components of share capital (for Rio Tinto PLC and Rio Tinto Limited), Share premium account (for Rio Tinto PLC and Rio Tinto Limited), other reserves account (for Rio Tinto PLC and Rio Tinto Limited) and retained earnings account. The equity of the Rio Tinto declined in 2015 substantially because of the decline in the other reserves accounts and the retained earnings account. Afterward, in 2016 and 2017 the retained earnings and other reserves account improved consequently improving the total equity as well.
Share Capital
The share capital includes the issued and fully paid share capital, the shares held by the public and the share held in treasury and by the public. All these components of share capital declined in 2015 for Rio Tinto PLC and Rio Tinto Limited.
Other Reserves and Retained Earnings
It includes the components of Capital redemption reserve, the Available for sale revaluation reserves, hedging reserves, other reserves, foreign currency reserves. It declined significantly in 2015 due to the decline in the foreign currency translation reserve. The retained earnings account includes the total comprehensive loss or profit of the year, the share buyback scheme, the dividends paid, employee share options, and own shares purchase or reissued. Retained earnings declined in 2015 due to the share buyback scheme and losses incurred by the parent and subsidiaries in 2015, and because of the higher dividend paid (Rio Tinto, 2015).
Wesfarmers Limited
Table 3: Wesfarmers Equity
| Wesfarmers | ||||
| Equity | 2015 | 2016 | 2017 | 2018 |
| Issued Capital | 21844 | 21937 | 22268 | 22277 |
| Reserved Shares | -31 | -28 | -26 | -43 |
| Retained Earnings | 2742 | 874 | 1509 | 176 |
| Reserves | 226 | 166 | 190 | 344 |
| Total Equity | 24781 | 22949 | 23941 | 22754 |
The equity section of the balance sheet of the Wesfarmers Group shows the following components.
- Issued Capital:
- Reserved Shares
- Retained Earnings
- Reserves
The Contributed Equity reserve account of Wesfarmers includes the accounts of Restructure tax reserve, retained earnings, foreign currency reserve, financial assets reserve, hedge reserve, and share-based reserve. The equity of the company has declined in 2016 due to the decline in reserves and retained earnings of the company. It improved in 2017 by witnessing improvement in the retained earnings and reserves and issued capital. In 2018, the retained earnings declined significantly due to the substantial distribution of dividends (Wesfarmers, 2018, p.50).
Woolworths Limited
Table 4: Woolworths Equity
| Woolworths Limited | ||||
| Equity | 2015 | 2016 | 2017 | 2018 |
| Contributed Equity | 5064.9 | 5347 | 5615 | 6055 |
| Reserves | -155.9 | -94.8 | 357 | 353 |
| Retained Earnings | 95.1 | 93.9 | 3554 | 4073 |
| Total Equity | 5004.1 | 5346.1 | 9526 | 10481 |
The financial statement of the financial position of Woolworths Group shows the equity section regarding contributed equity, as well as reserves and retained earnings. The contributed equity of the company includes share capital, shares held in trust. The reserves include hedging reserve, foreign currency reserve, the asset revaluation reserve, remuneration reserve, equity instrument reserve. The equity of the firm has improved substantially in the last four years because of the increment in the retained earnings and contributed equity (Woolworths Group, 2018).
Comparative Analysis of Debt & Equity Position
CSL
The CSL buyback program has been largely funded by the debt financing and has been in process for the last eight years. The company has completed its buyback of about 1.1 million shares accounting for $150 million purchased on the market. This buyback has provided the shareholders with improved investment return ratios, like the EPS and ROE ratios. The increase in net debt is offset by the decline in the equity (CSL, 2018, p.63). The group is aiming to have a capital structure which has a prudent level of debt financing. The focus is on reducing the cost of capital be not impacting on the credit margin on the debt funding.
Figure 1: CSL
The above chart shows that the equity portion of the company is lower than its debt portion showing its reliance on the debt financing.
Wesfarmers
The company has reduced its net financial debt from $741 million to $3580 million. The group board is responsible for the maintenance of its capital position and composition. The company credit ratings are A-stable by S&P in 2017 and A-negative in 2018. As per Moody’s it has A3 stable ranking in 2017 and 2018.
Figure 2: Wesfarmers
The Wesfarmers equity portion is way higher as compared to its debt portion showing its reliance on the equity financing.
Woolworths
Figure 3: Woolworths
The Woolworths equity portion is also lower as the CSL and its debt dependency is higher as compared to Wesfarmers.
Rio Tinto
Figure 4: Rio Tinto
The Rio Tinto equity portion has been higher for most of the year in the last four years. Only in 2015, its debt portion increased as compared to its equity portion. It is also because of the lower retained earnings are shown in 2015.
Comparison
Figure 5: Comparative Analysis
Comparatively, the debt-to-equity ratio for all four companies shows that Wesfarmers debt to equity ratio is the lowest one being less than 0.30. It shows its high reliance on the equity financing. The Woolworths, on the contrary, have a high debt position which has been gradually reduced in the last few years. Rio Tinto debt and equity position have remained near 1 showing its better optional financing position for capital management. CSL is also relatively better positioned as compared to Wesfarmers and Woolworths having less than 2 debts to equity ratio, even though its reliance is getting increased on debt.
Conclusion
The results of the analysis of the four companies show that CSL and Rio Tinto have a better financial capital management strategy shown from its optimal debt and equity position. The equity portion of each company shows its activities in this regard.
References
Australian Accounting Standards Board, 2018. Student Queries. [Online] Available at: https://www.aasb.gov.au/About-the-AASB/For-students.aspx [Accessed 28 September 2018].
CSL, 2015. CSL Annaul Report 2015. [Online] Available at: https://www.csl.com/investors/financial-results-and-information/debt-information [Accessed 28 September 2018].
CSL, 2016. CSL Annual Report 2016. [Online] Available at: https://www.csl.com/investors/financial-results-and-information/debt-information [Accessed 28 September 2018].
CSL, 2017. Annual Report 2017. [Online] Available at: https://www.csl.com/investors/financial-results-and-information/debt-information [Accessed 28 September 2018].
CSL, 2018. CSL Annual Report 2018. [Online] Available at: https://www.csl.com/investors/financial-results-and-information/debt-information [Accessed 28 September 2018].
Rio Tinto, 2015. Rio Tinto Annual Report 2015. [Online] Available at: https://www.riotinto.com/search-results-2108.aspx#search/debt [Accessed 28 September 2018].
Sorrentino, M., Cossu, F. & Smarra, M., 2015. The “Production” of Accounting Information Between Regulatory and Free Market Approach: An (Eternally) Open Issue. Journal of Modern Accounting and Auditing, 11(1), pp.1-9.
Wesfarmers, 2018. Wesfamrers Annual Report 2018. [Online] Available at: http://wesfarmers.com/investor-centre/debt-investors/debt-overview [Accessed 28 September 2018].
Woolworths Group, 2018. Woolworths Annual Report 2018. [Online] Available at: https://www.woolworthsgroup.com.au/index.php?action=search&query=debt [Accessed 28 September 2018].
