The Data for Adani Mining from Morningstar Websites - Case Study Example

Operating Lease Also known as the off-balance sheet financing, the asset is leased whilst the liability that is linked to lease isn’t accounted for in the books of accounts of the company, which leads to partial system of accounting for the reasons of shareholder as well as venture information. Operating lease is significant in purchase of asset, the lease accounting doesn’t fall within the existing debt as well as it isn’t paid no attention within the existing payment for the lease assumed. The plan of leasing asset for companies is appropriate since it cuts on cost as well as significant benefits in terms of accounting. The threat of become obsolete linked with owner asset is written off by way of lease arrangement (Belverd Needles, 2010). We will therefore examine the Adani Mining since; this is a mining company in which case, many of the company companies do lease their asset instead of purchasing them. We will therefore analysis the difference between lease accounting on employing leases as off-balance sheet items as well as within the statement of financial positions. According to the statement of financial positions of BHP Adani mining, it can be observed that the company recorded a lease value of $4497.9 Million for plant, machinery as well as equipment. The Summary of the company Adani Mining is a worldwide natural resource corporation. The business is in the dealing of mining of ore, steel oil, and gasses. The business as a subsidiary investment in Iron Ore (Jimblebar) Pty Ltd with a share investment worth 85 % .The subsidiary business invests in iron ore mining,the percentage of ordinary shares held in principal subsidiaries is disclosed in Note 26 to the note to financial statement ‘Subsidiaries’. Collection of Data The study centers on using the data for Adani Mining from Morningstar websites. The comprehensive financial statement for the company was retrieved from Adani Mining website which aids us in analyzing the company annual performance. The off-balance sheet items were classifieds into notes to the accounts such as the contingent as well as the commitment for the company. The research therefore will employ the finance lease as well as the operating lease data existing for the company in commitment. The financial assessment of Adani Mining point out that the company depicts a hunch in their gross profits margin by 1.98% due to decline in sales. The growth in cost of goods sold was as well 2.7% which lead to decline in the margin. Adani Mining assumed a superior short debt which articulates greater demand for controlling the short term cash commitment while the company availed the more of long term in order grow the debt by 2.4%. The data depicted in the yearly report implied that the company had assumed numerous leases under the finance lease and also under the operating lease for plant and equipment used in mining. The total of the lease for the year 2014 amounted to $ 4250 million which grew to $5150 million in the year ending 2015 due to extra lease asset. The finance lease was $174.5 million as well as the operating lease was $4494 million. Case Study The companies interest rates for leased assets is constant at 18% for mining asset while it is assumed that the capital lease will be relevant for 15 years with straight line method of depreciating the assets. The remaining useful life is appreciated to be 30 years (Burton, 2003). The Journal Entry In accounting for depreciation of the leased asset, the rate employed is 6% for 15 years as depicted below.   Title Dr. Cr. Reverse Entry Cash $ 4,494.00   Operating Lease   $ 4,494.00 On 1/1/2014     Capital Asset $ 4,494.00   Long-term Liability   $ 4,494.00  On 31/12/2014     Interest Expense $ 765.00   Interest Payable   $ 765.00 On 31/12/2014     Depreciation Expense $ 269.40   Accumulated Depreciation   $ 269.40 Main Figures and Accounts of the Financial Statements The journal entries above depict the performance of operating lease within the accounting statement. The impact is depicted below. Before 2014 After 2014 Increase Amount (In Million) USD Amount (In Million) USD Sales 65,968 65,968 Operating Expenses 25,129 25,399 270 Operating Income Before Interest & Taxes 40,839 40,569 Interest Expense 758 1,523 765 Income Taxes -6,797 -6,797 Income from Continuing Operation 11,075 11,075 Discontinued Operations 0 0 Net Income 10,876 9,841 1,035 Current Assets 19,786 19,786 Fixed Assets 118,323 122,821 4,498 Total Assets 138,109 142,607 Current Liabilities 20,372 20,372 Long-Term Liabilities 47,073 51,571 4498 Stockholder Equity 70,664 70,664 Total Liabilities & Equity 138,109 142,607 Ratio Analysis for Adani Mining The ratio analysis for Adani Mining depicts the similarity in numerous ratios when the operating lease is performed in the statement of financial position.   2015 2014 Current Ratio={Current Asset / Current Liabilities} 1.0 1.0 Debt Ratio ={Total Liabilities / Total Assets} 0.5 0.5 Times Interest Earned ={Net Income + Tax + Interest) / Interest Expense} 6.4 3.0 Operating Ratio={(Operating Expenses / Net Sales} % 0.4 0.4 Operating Cash Flow={ Operating Income Before Interest & Taxes + Depreciation – Taxes} 33773.0 34043.0 From the above ratio analysis, it can be observed that with acquisition of operation lease, the current ratio is fixed. This is an implication that the business depicts a strong liquidity. The debt ratio is enhancing each year with acquisition of extra lease asset; the growth in debt ratio will lead to limitation of liability to acquire other source of capital form the company. With the times enters earned ratio, it can be observed that there is declining trend when there is acquisition of operating lease asset (Cheng-Few Lee, 2010). This is risky for the company since, higher times interest earned ratio would lead to high capability in repaying the interest commitment as well as debts. Operating ratio therefore increases depicting effect of entailing the operating lease expense. It can be depicted in the financial statement for Adani Mining that the operating cash flow is growing by 269.5 million each financial year. Installment plan The basis of installment was on the following approach Annuity Due Approach From the table below, it can be observed that the company accounted for the lease payment valuing $4494 with installment repayment of $399.5 for the next fifteen years on the basis of Annuity due approach. Under this approach, the payment shall be each period with interest rate of 0.15 and PV of 6. Ordinary Annuity The table below shows the payment of lease obligations over a period of 15 years using the Ordinary Annuity method. Here, the payments are made at the end of each year, where the interest rate is taken to be 15%; the installment value is at USD 300 million, while the PV factor is taken to be 5.00. Date Lease Payment Interest Expense Present Value Interest Expense Reduction in Liability Lease Liability 1/1/2014           4,494 1/1/2014 $ 300.00       $ 300.00 $ 4,194.00 12/31/2014 $ 300.00 $ 0.94 $ 283.02 $ 299.06 $ 300.00 $ 3,894.00 12/31/2015 $ 300.00 $ 0.89 $ 267.00 $ 299.11 $ 300.00 $ 3,594.00 12/31/2016 $ 300.00 $ 0.84 $ 251.89 $ 299.16 $ 300.00 $ 3,294.00 12/31/2017 $ 300.00 $ 0.79 $ 237.63 $ 299.21 $ 300.00 $ 2,994.00 12/31/2018 $ 300.00 $ 0.75 $ 224.18 $ 299.25 $ 300.00 $ 2,694.00 12/31/2019 $ 300.00 $ 0.70 $ 211.49 $ 299.30 $ 300.00 $ 2,394.00 12/31/2020 $ 300.00 $ 0.67 $ 199.52 $ 299.33 $ 300.00 $ 2,094.00 12/31/2021 $ 300.00 $ 0.63 $ 188.22 $ 299.37 $ 300.00 $ 1,794.00 12/31/2022 $ 300.00 $ 0.59 $ 177.57 $ 299.41 $ 300.00 $ 1,494.00 12/31/2023 $ 300.00 $ 0.56 $ 167.52 $ 299.44 $ 300.00 $ 1,194.00 12/31/2024 $ 300.00 $ 0.53 $ 158.04 $ 299.47 $ 300.00 $ 894.00 12/31/2025 $ 300.00 $ 0.50 $ 149.09 $ 299.50 $ 300.00 $ 594.00 12/31/2026 $ 300.00 $ 0.47 $ 140.65 $ 299.53 $ 300.00 $ 294.00 12/31/2027 $ 300.00 $ 0.44 $ 132.69 $ 299.56 $ 300.00 $ -   $ 4,500.00   $ 2,788.50 $ 2,140.00 $ 4,500.00 $ 35,910.00 Recommendations IFRS Lease vs. US GAAP Lease The basis of ensuring that the statement of financial position for Adani Mining company entails the operating lease assets is based on contingent liability as well as liabilities hasn’t actualize one existence of an actions (Hussey, 2010). The operating lease is a liability in which the installment for the debt is reimburse on a standard basis for a particular time in which then leased asset is in use by the company. Leased asset isn’t under the possession of Adani Mining and thus the depreciation must be accounted in the company books of accounts of the leased assets. The ordinary approach of annuity is advice as compared to the Annuity approach due to the lease value of interest commitment linked to ordinary annuity approach. The advantage of including operating lease is an off balance sheet item in the company’s statement of financial position with no deprecation cost hence rectifying the statement. The dent commitment as well is exaggerated for a long time. If the operating lease is included in the statement of financial position. Removing the operating lease perm it’s the Adani Mining to leverage more as well as depict more finance for the company.iot is therefore advice that the operating lease must be maintained in the company’s statement of financial positions (James Wahlen, 2012). Reference List Belverd Needles, ‎. P. (2010). International Financial Reporting Standards. London: mcgrw Hill. Burton, M. (2003). The Financial System and the Economy - Page 445. Sydney: Springer. Cheng-Few Lee, ‎. L. (2010). Handbook of Quantitative Finance and Risk Management. New York: John Wiley $ Son's. Hussey, R. (2010). Fundamentals of International Financial Accounting . London: Cingage learning. James Wahlen, ‎. J. (2012). Intermediate Accounting: Reporting and Analysis - Page 1-19. New York : Cingage Learning. Lanza, R. B. (2009). Cost Recovery: Turning Your Accounts Payable Department. London: Cingage learning. McEwen, R. A. (2009). Transparency in Financial Reporting:. New york: Cingage Learning. Nersesian, R. L. (2004). Corporate Financial Risk Management. New York: John Wiley & sons. R, S. J. (2013). Economics and Financial Management for Nurse. London: John Wiley anf Son's. Read More