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FNSFPL503 Corporate Accounting

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FNSFPL503 Corporate Accounting

FNSFPL503 Corporate Accounting

Executive Summary

As corporate accounting is an essential factor in every business and the treatments in corporate accounting might be quite complex in various companies, this report has been prepared in order to compare and contrast the corporate accounting performed in two major ASX listed firms, BC Iron Ltd and Boral Ltd. In order to do so, the annual reports of the individual firms have been obtained followed by a detailed analysis of the financial statements presented in them. The report contains the analysis of the major financial statements of BC Iron Ltd and Boral Ltd and their notes to financial statements. As a result of this report, it can be determined that various changes can also be noticed in the cash flows from different operations and activities, the total equity as well as the other comprehensive income of the companies. It has also helped in understanding the various accounting treatments related to taxation.

(A) A brief introduction of the companies chosen and an overview of what has been discussed in this assignment

It is necessary for all companies to perform corporate accounting. In this report, a discussion is going to be conducted over BC Iron Ltd and Boral Ltd, the two most important ASX listed companies working in Australia. The BC Iron Ltd, which is also called the BCI Mineral Ltd, is a resource-based company in Australia involved in the development of industrial minerals supported with iron ore earnings (Bciminerals.com.au, 2018). The company has several projects such as the Iron Valley and the Buckland project. Boral Ltd, on the other hand, is another Australian company selling construction and materials for buildings with more approximately 15994 employees and 700 operational sites (Boral.com, 2018). In this report, the corporate accounting, which has been performed in these two companies have been evaluated along with conducting an analysis of the tax accounting treatments of the two companies. It will evaluate the cash flow statements, the other comprehensive income statement and the financial statements of BC Iron Ltd and Boral Ltd along with interpreting the constituents in them.

(B) Owners equity

(i) From your companies’ financial statements, list each item of equity and write your understanding of each item

The statement of financial position of a company consists of its ownership interest breakdown and this is called equity (Geske, Subrahmanyam & Zhou, 2014). In the table provided below, the equity capital of BC Iron Ltd and Boral Ltd and the items listed under it have been discussed -

Equity items

BC Iron Limited

Boral Limited

 

2017 (in ‘000)

2016 (in ‘000)

2017 (in millions)

2016 (in millions)

Contributed equity / Issued capital

 $ 266,735.00

 $  242,467.00

 $  4,265.10

 $ 2,246.20

Reserves

 $  5,426.00

 $      4,883.00

 $ 19.30

 $ 162.00

Accumulated losses

 $ (165,005.00)

 $  170,675.00

Nil

 Nil  

Retained earnings

Nil

 Nil  

 $  1,156.10

 $  1,098.10

Total equity

 $    107,156.00

 $    76,675.00

 $  5,440.50

 $  3,506.30

 

It can be seen from the above table that BC Iron Ltd and Boral Ltd has four different items listed in their equity capital. The contributed equity or the issued capital in the equity section of a company refers to the amount of equity held in a company from the number of shares, which the company had issued to public (Baker & Xuan, 2016). On the other hand, reserves refer to the amount that has been kept aside by insurance companies for future claims, which have not yet been reported but have been settled or filed to the insurance company (Sheets, 2018). According to Bunea et al. (2016), the accumulated losses of a company represent the negative retained profit balance while the retained earnings refer to the positive retained profit balance in a company, both of them arising from net income.

It can be noticed from the table above that all the items listed under the equity of BC Iron Ltd and Boral Ltd have changed in the past two financial periods 2016 and 2017. The contributed equity in the companies has increased by $24268000 and $2018.90 million in BC Iron Ltd and Boral Ltd respectively (Bciminerals.com.au & Boral.com, 2018). This increase has been due to the further issue of equity shares to public and purchase of the shares by potential investors. On the contrary, the reserves have reduced by $142.70 million in Boral Ltd while increased in BC Iron Ltd by $543000 between 2016 and 2017 (Bciminerals.com.au & Boral.com, 2018). This might have been due to the reduction or increase in the claims of the companies during the one-year span. At the same time, the accumulated losses and retained earnings of both BC Iron Ltd and Boral Ltd show a decrease (Bciminerals.com.au & Boral.com, 2018). This might have been due to the decrease in their profits or increase in the amounts distributed to shareholders.

(ii) Provide a comparative analysis of the debt and equity position of the two firms that have been selected.

From the comparison and analysis of the debt and equity position of a firm, its overall financial stability and financing methods can be evaluated. The debt and equity positions of BC Iron Ltd and Boral Ltd have been compared below -

Details

BC Iron Limited

Boral Limited

 

2017 (in ‘000)

2016 (in ‘000)

2017 (in millions)

2016 (in millions)

Total debt

 $ 17,332.00

 $ 33,076.00

 $ 3,873.10

 $ 2,294.20

Total equity

 $ 107,156.00

 $ 76,676.00

 $ 5,440.50

 $ 3,506.30

(Source: Bciminerals.com.au & Boral.com, 2018)

It can be inferred from the above comparative analysis that the total debts of BC Iron Ltd have decreased while that of Boral Ltd have increased during the last two years. However, the equity positions of both these companies show an improvement in terms of equity. It can also be noticed from BC Iron Ltd and Boral Ltd’s financial position statement that they rely more on equity financing than debt financing. Hence, it can be evaluated that the debt and equity position of both BC Iron Ltd and Boral Ltd are quite stable.

(C) Cash flows statement

(iii) From the financial statement of your chosen companies, list each item reported in the cash flows statement

The financial statement in a firm, which records the outgoings and the subsequent incomings of cash in it, is called its cash flows statement (Nurnberg, 2015). The following points show the items listed in cash flows statements of BC Iron Ltd and Boral Ltd along with their respective understandings, changes and the possible reasons for changes -

·         Net cash used in operating activities - Changes taking place in the net cash balance of a firm because of day-to-day operational activities is called net cash used in operating activities (Miao, Teoh & Zhu, 2016). The items listed in BCI Iron’s net cash used in operating activities include management fees receipt, payment to employees and suppliers and customer receipts (Bciminerals.com.au, 2018). However, Boral Ltd has recorded payment to employees and suppliers, dividend and interest receipt, tax and borrowings paid and acquisition, restricting or integration expenses under this cash flow category (Boral.com, 2018). Increases and decreases can be noticed in these items in BC Iron Ltd and Boral Ltd respectively, the amounts of which have been stated in the next part (Bciminerals.com.au & Boral.com, 2018). These changes might have taken place due to the enhancement or delays in debtor and creditor payments and tax payments.

·         Net cash used in investing activities - Changes taking place in the net cash balance of a firm because of investing activities such as buying and selling assets is called net cash used in operating activities (Lewellen & Lewellen, 2016). The items listed in BCI Iron’s net cash used in investing activities are payments for exploration projects, plant, equipments, property and development (Bciminerals.com.au, 2018). However, this category in Boral Ltd has several items such as intangibles, plant, equipments, and property, cash from acquisition, repayment of loan, and others (Boral.com, 2018). Both the companies BC Iron Ltd and Boral Ltd show decreases in these items over the last two years (Bciminerals.com.au & Boral.com, 2018). This decrease might have been due to the increasing investments of the companies instead of receipts from assets.

·         Net cash used in financing activities - Changes taking place in the net cash balance of a firm because of financing activities such as taking and repaying loans, issuing equity shares and others is called net cash used in operating activities (Baik et al., 2016). The items listed in BCI Iron’s net cash used in financing activities include royalty rebate and borrowings repayment and issue of equity shares (Bciminerals.com.au, 2018). Boral Ltd also has the same items with addition of capital raising and share buyback costs (Boral.com, 2018). Both BC Iron Ltd and Boral Ltd show an improvement in these items, which might have been due to the considerable increase in the issue of shares by the companies as well as proceeds from borrowings (Bciminerals.com.au & Boral.com, 2018).

(v) Also provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis.

The comparative analysis of BC Iron Ltd and Boral Ltd’s cash flow statement and the three broad categories show that the net cash used in operating activities of the firm have increased by $44634000 and -$5 millions respectively (Bciminerals.com.au & Boral.com, 2018). On the other hand, the net cash used in investing activities of BC Iron Ltd show a decrease by $15571000 from 2015 to 2017 while that of Boral Ltd indicate decrease by $3675 million (Bciminerals.com.au & Boral.com, 2018). However, the net cash used in financing activities of both BC Iron Ltd and Boral Ltd have improved over the last two years, with an amount of $95013000 and $3358.60 million respectively (Bciminerals.com.au & Boral.com, 2018).

(D) Other comprehensive income statement

(vi) What items have been reported in the other comprehensive income statement for each company?

The financial statement of a company in which the gains and losses that it has earned during a period from non-operational sources is called its other comprehensive income statement (Detzen, 2016). It can be evaluated from the other comprehensive income statement of BC Iron Ltd and Boral Ltd that there are not much items recorded in this financial statements of the two companies. The items that are present in BC Iron Ltd’s other comprehensive income statement can be derived from the extract below -

(vii) Why have these items not been reported in Income Statement/Profit and Loss Statements?

The other comprehensive income statement of any company comprises of items, which are not be recorded in its income statement, as such items neither have any impact on net income or retained earnings of any company (Graham & Lin, 2018). As a result, these items have not been reported to BC Iron Ltd and Boral Ltd’s income statements as well.

The above shows that both companies, in their other comprehensive income statements, have only the items that can be reclassified into profit or loss. However, no items that cannot be reclassified have been mentioned. Even if these items had been reported in BC Iron Ltd and Boral Ltd’s income statements, there would be a decrease in shareholders’ part of profit, since the income statement of a company decides profit attributable to shareholders based on net income but these items will not be having any effect on the net profit of both the companies.

(ix) Should other comprehensive income be included in evaluating the performance of managers of the company?

Since managers or any high-level executive, do not have any command on the items that are mentioned under the other comprehensive income statement, this statement should not be considered for evaluating performance of managers (Gazzola & Amelio, 2014). As a result, BC Iron Ltd and Boral Ltd’s managerial performance must also not be considered as per this statement.

(E) Accounting for corporate income tax

(x) What are the tax expenses shown in the latest financial statements of the two companies that you have selected?

The tax expense of any income, which is also known as its tax charge, refers to the income earned by it before taxes multiplied with the suitable or applicable rate of tax (Lee et al., 2017). A detailed analysis of the profit and loss statements of the companies BC Iron Limited shows that it had no tax expense during the year 2017 (Bciminerals.com.au, 2018). However, during the year 2016, the company had paid $43862000 as income tax expense (Bciminerals.com.au, 2018). On the other hand, Boral Limited had a tax expense of $35.6 million during 2016, which has changed to $51.4 million at the end of the accounting period 2017 (Boral.com, 2018).  

(xi) Calculate the effective tax rate for both companies that you have selected. Which one of the companies has the higher effective tax rate?

According to Fairfield & Jorratt De Luis (2016), the average rate as per which the earned income or the pre-tax income of a company are taxed is known as its effective tax rate. The following part consists of the calculation of BC Iron Ltd and Boral Ltd’s effective tax rates during the last financial period 2017 -

Particulars

BC Iron Limited

Boral Limited

Income tax expense (i)

0

51.4 millions   

Profit before tax (ii)

7064000

301 millions

Effective tax rate (i / ii)

0

0.17

 

Since BC Iron Ltd did not have any tax expense during 2017, it is obvious that Boral Ltd has a higher effective tax rate.

(xii) Comment on deferred tax assets/liabilities that are reported in the balance sheet articulating the possible reasons why they have been recorded.

According to Yasseen, Jansen & Small (2016), one of the most important components to be included in the balance sheets of a company are deferred tax assets and deferred tax liabilities. However, BC Iron Ltd’s balance sheet indicates that the company neither has deferred tax asset nor has deferred tax liabilities (Bciminerals.com.au, 2018). Boral Ltd also does not have any deferred tax liabilities. However, the financial position statement of the company shows that it has deferred tax assets, which amounted to $237.4 million during 2016 and has reduced to $128.4 million during 2017 (Boral.com, 2018). The reason for which Boral Ltd has recorded the deferred tax assets of the company is that deferred tax assets act as the prepaid expense of the company and will be reducing its income taxes payable during the future financial periods.

(xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies?

Through the comparison of the BC Iron Ltd and Boral Ltd’s financial position statements, one can be determining that that the company BC Iron Ltd neither has deferred tax asset nor has deferred tax liabilities (Bciminerals.com.au, 2018). As a result, there is no scope of any increase or decrease in its deferred tax liabilities and assets. The same case is in case of the deferred tax liabilities of Boral Ltd. The company does not have any deferred tax liabilities, and therefore no changes. However, it can be seen that the deferred tax assets of the company have had a decrease of $109.0 million between the two years 2016 and 2017 (Boral.com, 2018).

(xiv) Please calculate the cash tax amount for both companies.

The book tax amount of



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