Anglo American Plc - Segmental Report and Financial Risk Disclosures - Coursework Example

Anglo American: Critical Analyses of the Company’s Segmental Report and Financial Risk Disclosures Table of Contents Overview 3 Anglo American’s Segmental Report 3 Segmental Reporting of Petropavlovsk PLC 6 Significance of Segmental Reporting 7 Financial Risk Disclosure: Introduction and Significance 8 Financial Risk Disclosure: Anglo American Plc 9 References 13 Appendix A 15 Appendix (Ai) 15 Appendix (A ii) 16 Appendix (A iii) 17 Appendix (A iv) 18 Appendix (A v) 19 Appendix (A vi) 20 Appendix (A vii) 21 Appendix (A viii) 22 Appendix (A ix) 23 Appendix (A x) 23 Appendix (A xi) 24 Overview Anglo American Plc is one of the biggest mining companies in the world. The company deals in iron ore, metals, thermal coal, copper, diamonds and metallurgical coals. The company is devoted to practise operational distinction in a responsible manner (Anglo American, 2011). Segmental report refers to demonstration of distinct accounts for each division, branch or among other segments of the company (Investopedia, 2011). The main objective of the report is to analyse Anglo American Plc’s segmental report and to compare it with that of its peer namely, Petropavlovsk Plc. The report further aims to analyse Anglo American’s financial risk disclosure. The significance of segmental report and financial risk disclosure to the readers of the financial statements will also be analysed in detail. Anglo American’s Segmental Report The Anglo American Group’s segments have been lined up with the arrangement of the business units according to its core commodities. There is management team for every business unit that must report to the Chief Executive. The Kumba Iron Ore, Samancor business units as well as Iron Ore Brazil have been integrated as the iron ore and manganese segment according to the final product produced. It can be identified that the assets that have been recognised for divestment are treated as a separate business unit. The other segments of the company such as mining and industrial segment are demonstrated as a separate segment. The main task of the group’s executive committee is to assess the financial performance of the company. They are also responsible to examine the group’s segments with exceptional indication to operating profits ‘before special items’ as well as remeasurements. The revenues by the segments are generated as follows: platinum: platinum group metals; copper and nickel: base metals; iron ore and manganese: iron ore, manganese and alloys; thermal coal: thermal coal; other related mining and industrial: heavy building materials, zinc and steel products (Anglo American Plc, 2010). The segmental report is considered as effective, if it has disclosed adequately sales revenues, results, assets, capital additions, depreciations, equity method income, non cash expenses other than depreciation and basis of inter-segment pricing and liabilities. A segmental report is considered as good if it effectively discloses a segment’s revenues, results, operating profits and losses, assets and liabilities. It can be observed that Anglo American’s annual report has effectively presented segmental report. At the onset, the segment’s total revenues and operating profits need to be studied in detail. The figure below makes the study easier. It can be analysed that the total revenues obtained from the segments as on the year 2009 was US$24637 millions while the revenues earned by the company’s segments in the year 2010 was US$32929 millions. The operating profits as on the year 2009 had been US$4957 millions and that of the year 2010 had been US$9763 millions. There has been noteworthy development in the performance related to the company’s segments in a year (Anglo American Plc, 2010). (Refer to Appendix A i) The various non-cash items comprising in the operating profits are platinum, nickel, copper, iron ore and manganese, metallurgical coal, thermal coal, other mining and industrial, exploration and corporate activities as well as unallocated costs. The depreciation and amortisation amount in the year 2010 had been US$ 1919 million. (Refer to Appendix A ii) (Anglo American Plc, 2010). It is significant to analyse Anglo American Plc’s capital expenditure and net debt. The total capital expenditure of the segments of the company was US$5786 millions in the year 2010 and that in the year 2009 had been US$5232 millions. It can be analysed that there has been rise in the capital expenditure of the segments significantly in comparison to the previous year (i.e. 2009). The net debt of the company in the year 2009 has been US$11280 million. However, there has been reduction in the company’s net debt in the year 2010 and was registered at US$7384 millions. The figure in Appendix (A iii) represents the capital expenditure and net debt for the segments of Anglo American Plc (Anglo American Plc, 2010). The assets and liabilities of the segments of Anglo American Plc need to be studied. It has been presented with the help of the figure below. The figure makes it apparent that total net assets in the year 2009 have been US$56308 million. While, in the year 2010, it has been US$66656 million which implies that there has been rise in the assets of the company significantly. The segmented liabilities of the company in the year 2009 have been US$28239 million while in the year 2010 it has been US$28685 million. This implies that the segmented liabilities of the company have increased slightly (Anglo American Plc, 2010). (Refer Appendix A iv) The segmental report of Petropavlovsk Plc with that of Anglo American Plc will be compared in the subsequent section to identify the status of Anglo American Plc with respect to one of its peers. Segmental Reporting of Petropavlovsk PLC Petropavlovsk Plc is a Russian gold producer, thereby possessing strong range of assets. It has been found that the company is involved in gold mining at the Pokrovskiy, Pioneer and Malomir deposits. The company has three chief segments which demonstrate the way the group’s businesses are administered and reported. The segments are ‘Precious metals segment’, ‘IRC segment’ and the ‘Other segment’. The precious metal segment of Petropavlovsk Plc includes gold operation at numerous stages, starting from field exploration to the preparation of mines and gold manufacturing. The other segment i.e. IRC includes IRC Limited as well as its subsidiaries, the Other segment includes the in-house geological exploration knowledge which is done by company’s exploration firms such as Regis and Dalgeologiya, construction as well as engineering expertise which is done by Kapstroi and procurement of the raw materials that is done by Irgiredmet (Market Research, 2011). It can be analysed that in comparison to the Anglo American Plc, Petropavlovsk Plc also makes adequate disclosure of the segment information. Although the financial statement of the company takes into consideration all the information while disclosing the segment information, it does not make comparison of the results with that of the year 2009 in a single financial statement. From the above figure, the revenues of the segments, the operating profits, the assets and liabilities of the segment can easily be identified. The total revenues of the segments in the year 2010 have been US$612016000. The operating profits for the year 2010 have been US$22971000. The segments assets have been US$ 2429460000 and the segments liabilities have been US$ 163567000 (Petropavlovsk, 2010). (Refer to Appendix A v) Significance of Segmental Reporting The main objective of the financial statement’s segmental report is to assist the investors to gain insights into the results as well as the financial position of the company. Therefore, it becomes significant for the reporting entity to include all the activities in which it is involved. When the companies enter into new business operations and into new geographic area, the financial statement tends to become incomprehensive. The consolidated financial statement becomes inadequate since the industries and different geographical locations have ranges of profit potentials, growth opportunities and numerous types of risks. In order to reduce the uncertainty for the users, along with consolidated accounting information, it is also significant for the company to provide the users with the segmental information. Information regarding the segments is considered as one of the most significant aspects of the annual reports. It has been identified that the market efficiency tends to improve significantly by adequately revealing the segmental information. The reason behind this is that it permits the users of the financial information to employ the existing resources in an efficient way to minimise the uncertainty. It has been evident from research that forecasts done by making use of the segment information tend to be accurate in comparison to the forecasts that are made with the help of the aggregated information of financial statements. Segmental information serves as one of the significant means through which it becomes easier for the companies to compare the performance of the companies segments with that of the other entities. It also leads to efficient control of investors on management of the company. By the help of the segmented data, it becomes easier to compare the financial performance of numerous segments and performance of the management by segment (Thoen & Lefebvre, 2001). Financial Risk Disclosure: Introduction and Significance It is significant for the companies to disclose the financial risks and the methods of managing each type of risk that arises from the financial instruments. The main reason behind this is that the investors want to examine a company’s future cash flows as well as financial condition. They want the company to disclose regarding the uncertainties within the particular industry and firm. Good risk disclosure helps the investors to assess the quality and the volatility of the company earnings as well as cash flows. The investors must not only be aware of the types of risk that the company faces but also it is significant for a company to disclose adequately how its materialisation can have an impact on the operation of the company, its cash flows, its financial circumstances as well as its results of operations. The evaluation of the impacts of risks needs to be escorted with care to the readers and there must be proper explanation of the assumptions used and the influence of changes of assumptions on the overall activity of the company. It has often been noted that the management may not be ready to disclose the risks since they feel that it might endanger their competitive position. However, by disclosing the risks the companies can prove their transparencies towards the investors (Chartered Accountants of Canada, 2011). Financial Risk Disclosure: Anglo American Plc Anglo American Plc is also exposed to numerous financial instrument related risks. The board is responsible for monitoring the risk management methods, the counterparty limits, the treasury procedures, the scheming and the reporting structures. The risk management processes for the subsidiaries of the company are aligned with the policy of the company. The numerous types of risks that the company faces are credit risk, liquidity risk and market risk. The chief financial assets of the company are cash, trade and other receivables and investments. The numerous financial assets that give rise to the credit risk are cash and cash equivalents, trade and other receivables, financial assets investments, other financial assets and other guarantees and loan facilities. The figure below in the Appendix (A vi) helps to understand the degree of financial risk by making comparison between the figures of two years i.e. 2009 and 2010 (Anglo American Plc, 2010). Anglo American Plc successfully limits its exposure to credit risks in liquid funds along with derivative financial instruments by paying attention to the policy of agreeable lowest counterparty credit ratings which are allocated by international credit-rating agencies such as Standard & Poor’s, Moody and Fitch. It also tends to limit its exposures by daily counterparty arrangement limits and exposure diversifications (Anglo American Plc, 2010). With the varied characteristics of the Group’s operations along with insurance cover, the company does not have vital concentration of credit risk in relation to trade receivables, with disclosures spread over a wide range of customers. Anglo American Plc makes allowance for the impairment of trade receivables when the company recognises any event where loss has occurred. It is made based on preceding experience of decrease in the recoverability of the cash flows. In order to meet the liquidity risk, the company ensures that it has enough loan facilities so that the short-term requirements of the business can be easily met by the organisation. This is done considering the cash flows from operations and it’s holding of cash and cash equivalents and also considers the groups distribution restrictions that prevails. Some of the projects are also financed with the help of ‘limited recourse’ project finance if the company finds it suitable to do so. The balance sheet treatment of the expected undiscounted cash flows of the company’s financial liabilities can be demonstrated in the figure in (Appendix A vii) (Anglo American Plc, 2010). Market risk refers to the risk where the fair values of the financial instruments tend to vary because of the alteration in the market prices. Anglo American Plc is exposed to three types of market risks such as interest rate risk, commodity price risk and foreign exchange risk. Since the company has operations in most of the countries of the globe, it is exposed to varied currencies generally because of non-US Dollar operating expenses and also from non-US Dollar revenues. The company’s policies do not permit to hedge such exposures because it is diversified by its nature and therefore hedging may not be an appropriate measure to limit the risk from such exposures. The company also faces the risk in relation to non-US Dollar expenses along with non-US Dollar related borrowings. The company believes in the policy that such risks can be hedged by assessing the specific context of the exposure. The figure below in Appendix (viii) demonstrates the exposure to the currency risks of the company’s assets and liabilities (Anglo American Plc, 2010). Interest rate risk takes place because of the variation in the interest rates that affect the short-term investments as well as financing activities. The company is exposed to the interest rate risk because of the alteration in the interest rates in the US and South Africa. The company follows the policy to borrow the money at floating rate of interest for a longer period of time which provides the management a natural hedge against the commodity price movements. The company also makes use of interest rates swap contracts in order to administer its exposure to interest rate movements. Anglo American Plc may also take into consideration the fixed rate debt for strategic hedging in the mean time if the Group Management Committee approves it. Taking into account the company’s financial assets, it is the policy of the Group to invest the funds at floating rate of interest. It is also the policy of the company to maintain cash reserves in short- term investments so that it is capable of upholding sound liquidity and thus provide its investors with sound returns. The company’s financial assets exposure to the interest rate risks has been demonstrated in the figure in Appendix (A ix) (Anglo American Plc, 2010). The floating rate financial assets comprise of cash and bank term deposits. On the other hand, the fixed rate financial assets take into account financial assets investments and cash. The company’s financial liabilities are exposed to interest rate risk as depicted in the figure below in Appendix (A x) (Anglo American Plc, 2010). The interest on floating rate financial liabilities is dependent upon the inter-bank rates. The fixed rate borrowings are taken with interest at weighted average interest rate of nearly 9% for three year of average period (Anglo American Plc, 2010). It has been observed that the company’s earnings are also exposed to movements in the prices of the commodities that it tends to manufacture. The policy of the company is not to hedge the price risk. Hedging at certain point of time may be undertaken by the company for some strategic reasons. The company makes use of forward as well as deferred contracts in order to minimise the impacts of the price risks. The figure below in Appendix (A xi) helps to demonstrate the company’s financial assets and liabilities exposures to commodity price risks (Anglo American Plc, 2010). It has also been observed that the company makes use of derivative instruments in order to administer market risk exposures. The derivative financial tools are not utilised for the purpose of speculations, but it may not designate some of the derivatives as hedges because of accounting reasons. The derivatives that tend not to be hedged are called as non-hedges. There are certain limits in making use of the derivative instruments and the positions of such instruments are controlled and reported to the higher level management. There are certain occasions when the company divides its forward foreign currency as well as commodity price contracts hedging transactions as cash flow hedges. Most of the company’s interest rate swaps have been called as fair value hedges. It has also been identified that the company may not choose a few of the derivatives as hedges. For the purpose of managing the short as well as long term capital structure, the company undertakes numerous initiatives such as adjusting the amount of ordinary dividends paid to the shareholders, arranging for debts so that it can acquire funds and selling of non-core assets in order to minimise the debts (Anglo American Plc, 2010). References Anglo American, 2011. What We Do? At a Glance. [Online] Available at: http://www.angloamerican.com/about/whatwedo [Accessed January 02, 2012]. Anglo American Plc, 2010. Annual Report 2010. Segment Reporting. [Online] Available at: http://ar10.angloamerican.com/_assets/pdf/AA_AR2010_FinStmts.pdf [Accessed January 02, 2011]. Chartered Accountants of Canada, 2011. Building a Better MD & A Risk Disclosure. Research And Guidance. [Online] Available at: http://www.cica.ca/research-and-guidance/mda-and-business-reporting/item12822.pdf [Accessed January 03, 2012]. Investopedia, 2011. Business Segment Reporting. Accounting. [Online] Available at: http://www.investopedia.com/terms/b/business-segment-reporting.asp#axzz1iHQNQfGv [Accessed January 02, 2012]. Market Research, 2011. Petropavlovsk PLC (POG) - Financial and Strategic SWOT Analysis Review. Report Information. [Online] Available at: http://www.marketresearch.com/GlobalData-v3648/Petropavlovsk-PLC-POG-Financial-Strategic-6737096/ [Accessed January 02, 2011]. Petropavlovsk, 2010. Financial Statements. Value Creations. [Online] Available at: http://www.petropavlovsk.net/images/stories/Reports2011/2010_financial_statements.pdf [Accessed January 02, 2011]. Thoen, V. & Lefebvre, C., 2001. A Critical Analysis of Segmental Reporting Based On an International Perspective: A Ground for a Better Regulation. Abstract. [Online] Available at: https://lirias.kuleuven.be/bitstream/123456789/224105/1/OR_0152.pdf [Accessed January 02, 2011]. Appendix A Appendix (Ai) Source: (Anglo American Plc, 2010). Appendix (A ii) Source: (Anglo American Plc, 2010). Appendix (A iii) Source: (Anglo American Plc, 2010). Appendix (A iv) Source: (Anglo American Plc, 2010). Appendix (A v) Source: (Petropavlovsk, 2010). Appendix (A vi) Source: (Anglo American Plc, 2010). Appendix (A vii) Source: (Anglo American Plc, 2010). Appendix (A viii) Source: (Anglo American Plc, 2010). Appendix (A ix) Source: (Anglo American Plc, 2010). Appendix (A x) Source: (Anglo American Plc, 2010). Appendix (A xi) Source: (Anglo American Plc, 2010). Read More