Corporate Regulation And Owners’ Equity In Mining And Materials Industry: An Analysis Of Australian Public Limited Companies

Introduction:

Corporate regulations are the established rules and provisions that corporations have to comply with in order to continue business operations in the long run. Contraventions of mandatory corporate regulations by entities shall be dealt with as per the provision of the act that governs the corporate regulations in a country. In Australia, Corporations Act 2001 is the act that contains all necessary rules and regulations for corporations of different types to follow. As per Part 2.M of Corporations Act 2001 a reporting entity is obligated under the act to follow the corporate reporting requirements as mentioned in the act to avoid penalties including cancellation of certificate of incorporation. In brief the necessity of corporate regulations or lack of it shall be discussed in the document. Also a closer look at the financial statements of four entities from mining and materials industry shall be taken to understand the different items reported under owners’ equity in these companies and changes to the balances in those items.

There are number of benefits of regulating financial accounting and reporting with very few drawbacks. A closer look at the benefits will enable us to take a correct decision regarding the impotence these regulations to observe whether such regulations are required or management should be allowed to disclose information voluntarily (Mathuva, 2015).

The benefits of regulations in accounting and financial reporting are as following:

Disclosure of true and fair picture: Financial reports will disclose a true and fair picture of an organization if it is correctly regulated.

Comparability: Comparability of financial reports improves significantly as the reporting regulations will compel organization to follow a standard reporting format while preparing and presenting financial reports (Morris, 2017).

Accounts and financial reports will not be manipulated: Accountants and managers do not have the opportunity to manipulate accounts as per their choice due to strict corporate regulations.

Reporting in the public interests: Financial reports are prepared in public interests. Reporting and accounting regulations upheld the concept of public interest.   

Taking into consideration the number of benefits that accrue due to financial reporting regulations it would be wrong to suggest that such regulations should not be there and management should be allowed to report voluntarily. In case management and accountants are allowed to disclose information voluntarily then the quality of accounting and financial reporting both will deteriorate and decline sharply. Hence, accounting and financial reporting should be regulated instead of allowing managers the freedom to disclose information voluntarily (Nobes, 2014).

Corporate Regulations:

International Accounting Standards Board (IASB) have a standard procedure to issue global accounting standards (IFRSs). National accounting standards boards from different countries actively participate in the process of global accounting standards. The IASB urges all its members to be part of the global accounting setting standards process with the objective of developing globally acceptable accounting standards in all across the globe. Australian Accounting Standards Board (AASB) is a member of the IASB and actively participate in the overall process of setting IFRSs (O’Hare, 2016).    

Role in research program:

At the beginning IASB conducts research on different aspects of accounting and financial reporting. AASB provides excerpt support by conducting research on demotic accounting and financial reporting issues to help IASB in understanding the accounting and financial reporting environment in Australia.

Development of the proposal for publication:

At the time of development of the proposal for publication AASB provides technical support to the IASB to help it develop better proposals (Lebedeva et. al. 2016).

Deliberations and finalization:

After development of the proposal for publication IASB asks its members to send comment on the proposal. Deliberation on comments and issues arising after publication of proposal are conducted and AASB participates by providing its valuable suggestions and recommendations.

Implementation and post implementation services: After the implementation of a new standard AASB along with other members of IASB verify reviews and provide support services to properly implement the standard (Simnett and Huggins, 2015).

International Financial Reporting Standards (IFRSs) set by the IASB are not compulsory for the member of IASB because of the inherent limitations of accounting standards. The economic, work and overall environment of different countries are different thus, it is not possible to have single standard applicable under different circumstances. Thus, single sets of IFRSs cannot be applicable under differing circumstances hence, these have not made mandatory for the members of IASB (Zhang and Andrew, 2014).

Owners’ equity for an entity is represented in the amount of share capital and accumulated free reserves of an organization. Using practical examples of entities operating Australia, a brief discussion on the different items of owners’ equity is explained here.

Four chosen entities are all from mining and materials industry of Australia and are listed in Australia Securities Exchange (ASX). These entities are BHP Billiton Limited, CSR Limited, Boral Limited and BCI Minerals Limited. Here are the items and little description about them for the readers (Schaltegger, Burritt and Petersen, 2017).

Accounting Standards Setting Process Globally:

Issued share capital: Shares issued to the public at face value and fully paid up are shown in issued share capital.

Treasury shares: Amount of shares purchased from the market and kept in the treasury stock is shown in the treasury shares account.

Reserves: Entities operate in a complex business environment require to make reserves to keep funds aside for the future in case any contingencies arise. Maintaining specific reserves for meeting specific future obligations are accumulated show under reserves (Lakis and Masiulevi?ius, 2017).

Retained earnings: An entity operates with the objective of earning profit from business. Profits earned and accumulated over the period are referred as retained earnings. The entire amount of retained earnings is free and can be used for any purpose by an organization.       

Accumulated losses: The amount loss earned over the years and transferred is disclosed as accumulated losses. This amount is deducted while calculating net equity of shareholders or owners of an entity (Escobar and Demeritt, 2017).    

Changes in equity:

The annual reports of 2014, 2015, 2016 and 2017 of all the above mentioned companies have been evaluated for the purpose of documenting changes in different items of equity as reported by these entities in the financial statements.

Changes in items of equity of BCI Minerals are enumerated below:

AUD Millions	2014-06	2015-06	2016-06	2017-06
Contributed equity	131.00	242.00	242.00	267.00
Reserves	14.00	8.00	5.00	5.00
Accumulated losses	90.00	(91.00)	(171.00)	(165.00)
Total Equity	235.00	159.00	76.00	107.00

 Contributed equity which is nothing but issued share capital of BCI is $267 million in 2017 has increase since 2014. In 2014 the company has a balance of $131 million I contributed equity. Over the years the company has issued additional shares to the public to increase its contributed equity to $267 million in 2017. Reserves has reduced to $5 million in 2017 as specific utilization of these reserves were made during last three years (Cao, Chychyla and Stewart, 2015). The continuous deterioration in performance of BCI Minerals have increased its accumulated losses to $165 million in 2017 from $90 million of 2014.

Boral Limited changes in owners’ equity:

AUD millions	2014-06	2015-06	2016-06	2017-06
Issued capital	2,478.00	2,362.00	2,246.00	4,265.00
Reserves	162.00	19.30	19.00	162.00
Retained earnings	1,098.10	1,156.10	1,098.00	1,156.00
Total equity	3,738.10	3,537.40	3,363.00	5,583.00

In 2016 the issued capital of Boral was $2,246 million. During 2017 the company issued additional shares to the public for arranging funds required for expansion of business resulted in increase of issued capital to $4,265 million.

Increase in reserves is due to creation of additional reserve in 2017 to $162 million. In 2017 retained earnings of the company has increased to $1,156 million from $1,098 million as the company earned a profit and transferred the same after providing for all expenditures, taxes and creation of reserves (Suryanto, 2016).  

$ Millions	2014	2015	2016	2017
Share capital BHP Billiton Limited	1,186.00	1,186.00	1,186.00	1,186.00
Share capital BHP Billiton PLC	1,069.00	1,057.00	1,057.00	1,057.00
Treasury shares	(587.00)	(76.00)	(33.00)	(3.00)
Reserves	2,927.00	2,557.00	2,538.00	2,400.00
Retained earnings	74,548.00	60,044.00	49,542.00	52,618.00
Total equity	79,143.00	64,768.00	54,290.00	57,258.00

Owners’ Equity:

Share capital of the company has not changed in any of the last four years because the company didn’t issue any shares in the public in last three years. Treasury shares have decreased each year as these have been disposed of over the years.  Fluctuation in reserves is due to the utilization and creation of reserves. The company’s ability to generate profit has increased its retained in 2017 (Weygandt, Kimmel and Kieso, 2015). 

CSR Limited: Changes in items of equity:

$’ millions	2014	2015	2016	2017
Issued capital	1,042.20	1,042.20	1,041.10	1,036.80
Reserves	19.90	17.10	20.40	(73.40)
Retained earnings	39.90	86.40	123.20	191.60
Total equity	1,102.00	1,145.70	1,184.70	1,155.00

Issued share capital of the company has reduced in 2016 and 2017 from 2014 and 2015. The reason is that the company has purchased a bit of its issued shares from the market. Reserves have turned into negatives in 2017 due to excessive contingencies arising compared to the specific reserves created in the books of accounts. Retained earnings have increased by the amount of profit transferred to retained earnings after providing for all expenditures, reserves and divined.    

Debt and equity position of the companies:

Debt and equity position is very crucial for an organization. This is because the long term solvency of an organization depends on the debt and equity position of an organization. It is recommended to have majority of the funds invested in an entity as owners’ funds and not borrowed funds. This helps a organization to stay solvent for long period of time. An entity with high proportion of debt to the equity will struggle to find finance for the long term projects as the banks and financial institutions would be worried about the solvency position of the organization.

Comparative analysis of debt and equity position of the four firms will not be complete without calculating capital gearing ratio or debt to equity ratio of these firms. Capital gearing ratio measures proportion of debt fund to owners’ equity. The higher the ratio, the better it is for an entity. However, very high capital gearing ratio also be an indication of a firm’s inability to use arrange borrowed funds and utilize the same for business operations.              

AUD millions	2017
	Boral	BCI	BHP	CSR
Owners’ equity	5,440.40	107.00	57,258.00	1,155.00
Long term debt fund	2,168.00	–	29,233.00	30.50
Capital gearing ratio (Owners’ equity / Fixed interest bearing fund)	2.51		1.96	37.87

Boral and BHP both have stable debt and equity position with 2.51 and 1.96 capital gearing ratios suggesting significant amount of owners’ equity compared to debt funds. But the 37.87 capital gearing ratio of CSR is certainly indicative of its inability of not using debt funds for business activities. BCI Minerals have also not been able to use debt funds in business operations. 

References:

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Lakis, V. and Masiulevi?ius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS OF FINANCIAL STATEMENTS. Journal of Management, 2(31). [Online] Available from: https://www.ceeol.com/search/article-detail?id=583160 [Accessed 29 September 2018]

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