ACC202 Financial Accounting of Rio Tinto Group Assessment 2 Answer

Introduction

Business organizations work to achieve the predetermined goal for the shareholders by conducting better final performance. Various uncertain factors exist in the market that can affect the business at huge scale. Hence management of the company has to implement the business strategies and business policy to face such uncertainty. This report provides the financial analysis of the Rio Tinto Group (RIO.AX) and it includes the general background of the company, analysis of the revenue, property, capital assets and provision, contingent liability (García-Gómez, & Pérez-Cebada, 2020).

Part 1 General information about the company

Rio Tinto Group is engaged in finding, mining, and processing mineral resource all across the world. It belongs to the industry of other industrial and metals & mining in the sector of the basic material. It has a full-time employee of 46000. It offers aluminum, silver, molybdenum, copper, diamond, gold, titanium dioxide, borates, salt, iron ore, and uranium. This company is also involved in alumina production, primary aluminum smelting, rutile, and zircon mining.  It was founded in 1873 and is headquartered in London, The United Kingdom. 

Source: - (Rio Tinto Group 2020)

The share price of the company has been increasing from the past 5years. It has grown the business of the company twice and provided a higher return to the company. The company has paid the divided each year as it has earned higher profitability in all the years (Rio Tinto Group 2020)

Source: - (Rio Tinto Group 2020)

In the first quarter of 2016, the company's share price has been reduced by 12% which due to market changes and poor supply of the service. Then from the third quarter of 2016, the company has increased the performance and hare prices have been increased. In the last 8 months company's share prices have been reduced due to the pandemic situation that has been raised due to COVID-19. The global economy has slow down and affected the business of all sectors adversely (Challoumis,2019).

Source: - (Rio Tinto Group 2020)

The dividend has been distributed by the company each year and it has been raised by 2 times from 2015 to 2020. The company has paid divided $ 1.45 to $ 2.16 which show the higher return to the investor or shareholder of the company (Rio Tinto Group 2020)

Part 2 – Revenue

Rio Tinto company belongs to the other industrial and metals & mining industry in the sector of the basic material. Its main source of revenue is aluminum, silver, molybdenum, copper, diamond, gold, titanium dioxide, borates, salt, iron ore, and uranium. The revenue of the company has been increased continuously.  Revenue has grown from 33.8 million to 43.16 million in 2019 which shows better financial performance and demonstrates the financial strategies of the company. 

(Rio Tinto Group 2020)

Source:- (Rio Tinto Group 2020)

In 2020 the revenue of the company has been reduced as the price of the Iron ore has been reduced by the government and global primary aluminum has also reduced its sales due to decreases in the sales prices. It has been done because semi-fabricated aluminum has increased the export from china. In 2016 the company's sales have been higher due to a higher share of the market and increasing volatility in the price of iron ore. In 2019 it can be observed that there is a sharp increase in segment revenue because there was raise in global prices, environmental policy in china while the sale of iron ore has been dropped as supply has been increased (Ширяєва, Cоляник, & Коваль,2020).

Source: - (Rio Tinto Group 2020)

Simon Thompson is the chairmen of the company and stated that the company aims to achieve the industry safety, sustainability performance, capital discipline, and operational performance to invest throughout the cycle, and also providing a higher return to its shareholders. The revenue of the company is higher by 7% in 2019 due to the higher price of iron ore (Robinson, 2020).

As per the market demand expectation management of the company has been expecting the 20% growth in the revenue as the price of the iron ore will be increasing as per the new government policy and it will lead to an increase in the sales of the company. The following are the expected sale of the company in the next two years:- 

Source: - (Rio Tinto Group 2020)

Part 3 – Property, plant, and equipment

The capital asset of the company is an essential part of the business as it helps to generate revenue for the company. It is used to produce the product or service that supply to the consumers. Hence f there is any change in the capital asset of the company then it will lead to an impact on the business performance.

Property plan and equipment sales by the company for $ 49 million in 2019 and $ 586 million in 2018 which has become the major reason for higher cash inflow for the organization. The PPE has been increased from the last year by 15% now plant and machinery has been purchased by the company to increase the production level. The total increase in the PPE was $ 301 million which shows a higher amount of investment in the capital assets. The company has planned for future production capability so that revenue can be increase by supplying more products (Shad, Lai,Fatt,Klemeš, & Bokhari, 2019)

Impairment for the PPE has been charged for $ 10 million as an indication has been identifying as per IFRS 9 which says that if the carrying amount of the assets and market value of the assets has not been the same then the difference will be charged impairment of the non-current assets. Such carrying amount has to be determined by considering the cash inflow and converting them in present value with the required rate of return. Therefore it can be seen that the company has impaired the capital assets during the current financial year 2019.

Source:- (Rio Tinto Group 2020)

Part 4 – Provisions, contingent assets, and liabilities and leases

As per IAS 7 provision made by the company, when there is a surety of legal liability, and the company has to pay in the future. It is debited from the profit earned by the company in the financial year. While contingent liability is recognized by the company there is no guarantee to pay the liability in the future but there is the probability that the company can pay the liability and it may be possible that it will be obligated for the company to pay the damages. A contingent liability does not disclose in the balance sheet of the company rather it has to disclose in the notes to the account of the annual report. Contingent assets mean those assets for which the company is claiming for it legal right but it is still under the litigation and provide the probabilities to have such assets in the future. A contingent liability differs from the provision because the provision is made when there is the guarantee that the company has to pay the legal liability in the future while contingent liability is made when there is a probability that the company may or may not require to pay the future liability (Lopes, & Reis  2019).

From the analysis of the annual report of the Rio Tinto company, it can be observed that the total provision discloses by the company in 2019 is $ 11.10 million while it was $ 10 million in 2018. It has made the provision for the DTA and DTL, loss, and tax expenses of the company (Rio Tinto Group 2020)In the discloser of the notes to account, $ 100 million has been considering as contingent for the payment in the future based on the legal liability pending against the company. Following are the contingent liability of the company in the last two years:-

SOURCE:- (Rio Tinto Group 2020)

From the above, it can be seen that the company is having a higher amount of contingent liability. It may or may not require to pay in the future by Rio Tinto. The company has already disclosed it in the annual report so that the economic decision of the user may not affect it.

The company does not have any major contingent assets it has various insurance claims from the reinsurer which n be considered as contingent assets of the company (Rio Tinto Group 2020)

The leased asset of the company includes the land and building which is used for the office administration and plant & equipment (Vessel). The right to use the assets has been depreciated by the straight-line method. As per IFRS 16 Lease, the total amount of right to use assets is $ 1065 million which has been used for the business (Matei, 2019).

Conclusion

After considering the above report it can be observed and conclude that Rio Tinto has performed well in the past 5 financial years as it has maintained the NP ratio higher while the market was uncertain and government rules have also affected the industry adversely. The company is expecting a higher growth rate in the net profit in the next 5 years. It has used the free cash flow to invest in the capital assets so that production capacity can be increase. It also indicates that the company will supply a higher quantity of the product in the market in the next financial years. It also has contingent liability and provision in the financial position statement but does not indicate that company has generated the poor profit for the shareholder. Provisions are part of the business.