Business Performance and Value - Rio Tinto Company - Case Study Example

Rio Tinto Company Reporting Business Performance and Value: What if Money was Meaningless Report Addressed to: Rio Tinto Company CFO Report Prepared By: (Name) Date: Word Count: 2105 words Executive Summary Based on a request by the organizational CFO, this research report compiled a response on three key raised issues namely; the nature in which IASB framework promotes monetary based reporting, additional non-financial information that would have been supplied with the organizational financial reports as well as issues to include in the organizational future reports. On one hand, a review of the IASB conceptual framework and especially the objectives OB1-OB20, the research pointed three areas namely the regulations focus on overall organizational financial profits, focus on financial returns on investment and use of accruals as organizational performance benchmarks. A response to the second query includes recommendations for more information on the non-financial gains of raw materials, amortization and employment costs reduction as well as increased royalties costs and the issue of tax deferment. Finally the research report recommends on the need for the organization to include data on CSR, supplier and consumer relationships as well as employee development in its annual reports. 1.0 Introduction Financial reporting is one of the legal requirements for organisations in the market as an approach and a measure to ensure and facilitate increased transparency and accountability. The management operates and works under the law of agency. Therefore, as a form of fulfilling their obligation to the community, shareholders and other stakeholders’ organizations use the financial monetary reporting metrics. However due to the IASB requirements on much of the reports to be in financial and monetary terms as the CFO pointed out there emerges a reporting gap. This report is a research response evaluating ways in which the international accounting regulations focus on monetary issues, scenarios in which the organization can report on other achievements besides monetary vales as well as offering a recommendation for improvements in the reporting approach to organizational performances. 2.0 IASB Conceptual Framework Monetary Inclination 2.1 Focus on Financial Monetary Profits One of the strategic approaches through which the IASB forces organisations to focus on their monetary issues is its insistence on the need for investors and other financial interest parties on the financial gains on an organization. Therefore, through this approach, organizational management are required to list their financial gains as well as forecasted gains as a measure to attract increased number of investor. Moreover, in order to ascertain and affirm the respective organisations credibility’s the conceptual framework developed by the IASB requires that such organisations demonstrate their financial and monetary gains through which the respective financial institutions can base their loaning and financial advancement decisions to the organisations (“IASB”, 2010, p.9). This can be evidenced in the Rio Tinto company financial analysis 2013. Under the profit and loss account indicates that the venture gained $ 197.3 million against the earlier loss in 2012 of 163.8 million (“Rio Tinto”, 2013, p.111). The emphasis placed on the financial gains of the organization indicates the increased focus on maximizing on this positive development to increase the organizational gain. In fact, a relationship on this can be evidenced by the changed share price that was $55.15 in 2012 prior to this publication and the current risen value $59.26 as of 1st October 2014. This financial representation does not represent the actual organizational scenario. For instance, in the year 2012, although the organization incurred overall operational losses, it increased its market base through increased employee training programs. 2.2 Returns on Investment One of the conceptual frameworks focus on organizational reporting is the emphasis on their financial returns on investment under the IASB conceptual framework OB3. In this case, the institution classifies institutional returns on investment as the amount on money that organisations gains form an investment. Therefore, this has forced organisations to report their investment gains in terms of financial gains. This representation of project gains fails to comprehensively cover the organizational real value and returns obtained (“IASB”, 2010, pp.9-10). For instance, the report fails to establish the non financial gains the organization and the Namibian society acquired from its corporate social responsibility program through its subsidiary Rossing Uranium Limited in Namibia. Therefore, the IASB forces organisations to report project gains and returns on investment through monetary terms as evidenced in the organizational financial annual reports 201 leaving out on critical non-financial gains components. 2.3 Accruals Under the conceptual framework OB 20 the IASB focuses and places much emphasis on organisations reporting their financial gains. Therefore, through this approach, the institution creates the need for organisations to gauge their past performances and gains against the previous performances, as a measure to show changing cash flows (“IASB”, 2010, p.13). Therefore, much emphasis is placed on cash flows both in the present and expected into the future. Through this approach, organisations increase their focus on cash flows rather than other non financial gains such as increased reputation and image development that the current reporting system does not include. 3.0 Alternative Non-Financial Gains Based on the above analysis on existing IASB financial regulations as enumerated by the conceptual framework on Rio Tinto annual reporting, it is apparent that the system is currently insufficient. Therefore, in response to the research requirement, this research report section lists some of the current five cases of non financial cases that Rio Tinto could benefit by including in its financial analysis. In this case, the section evaluates the respective gains in the financial reports and their non-financial implications not captures in the reports. 3.1 Raw Materials Acquisition A major development and achievement for Rio Tinto is the reduction in the cost of acquired raw materials. This development is despite the increased overall organizational revenues in 2013. In this case, the cost f acquiring the production raw materials that are mainly minerals has reduced from $10,124 million in 2012 to$ 8,8o1 in 2013 (“Rio Tinto”, 2013, p.137). This sudden and drastic decline in the costs of raw materials can be attributed to tow key organizational strategies. One among them as already discussed in this research report is application of IT. As such, the cost of ordering and expediting on the organizational placed orders has significantly reduced due to increased operational efficiencies at minimal costs. On the other hand, increase supplier development and appraisal by the organization has increased the relationships with such suppliers a key element in reducing overall procurement and acquisition costs. Therefore, this analysis establishes that if these issues were to be included in the organizational annual report in relation to the raw materials costs they would showcase on the indirect financial gains it accrues as a result of investing in non-financial generating issues such as corporate social responsibility. 3.2 Employment Costs One of the issues that ought to have been included is the gains acquired by the organization upon its spending on employment. As the organizational financial analysis establish, the costs were high in 2012 at $8671 million against the 2013 costs of $7568. This analysis establishes a major decline in the operational employment costs. However, as already established by this report, the organization developed a profit overall margin against the 2012 loss. Therefore, as this statistics illustrate, there is a relationship between the reduced costs of employment and the overall profit gains. In this case, one of the reasons as to why the costs have reduced is through increased automation of the organizational services. In this regard, Rio Tinto organization as a market leader in the minerals industry has developed an increased IT infrastructure that has enabled the venture automates its basic services. As such, the basic employment costs have been reduced as well as enhancing increased process efficiency. In order to increase its influence and clarity in reporting, the organization should consider focusing on reporting on the nature of its reducing employment costs, the rate of increased IT application and the subsequent internal and operational efficiency gains achieved. Unfortunately, the existing reporting regulations do not allow for this non-financial reporting. 3.3 Royalties Royalties are described as the legal payments offered by individuals or organisations to the legal owners of patents and copyrights for the products use. In the current business practices, it is hard for organizations to acquire individual patent rights to a majority of the resources. As such, most organisations result to loyalties as opportunities to increase their performances and productivity through other organizations owned resources. An evaluation f the Rio Tinto financial statements indicate a growing cost of loyalties. In this case, the value increased from the 2012 $ 2374 million to $2883 million in 2013. The increasing loyalties spending costs increase is an indication that the organization has in the financial year 2012-2013 secured loyalties on patents and copyrights with an increased number of market investors. Therefore, the organization should consider including a list of these patents and copyrights owners that the venture is partnering with. Through such establishments the organization will increase the nature and quality of information in the market. This is because, the existing rules consider on the need to reduce on operational costs. Therefore, it would justify on why the increasing of the royalties costs is a positive market development. 3.4 Deffered Taxes One of the strategic legal obligations of any business venture is tax payment to the existing structures and governments. However, organisations often defer this tax payment. In this regard, such systems allow for the covering of appropriate ventures requiring an increased amount of working capital. Unfortunately, the existing financial systems only allow the organization to present the amount of deferred taxes in the previous years. Instead of just focusing on the amounts deferred, the organizational annual reports should indicate justifiable reasons as to why such deferment was made. In this case, specific projects and uses in which such funds will be allocated to. Such will seek to justify both the financial and non-financial gains of the expected uses. Through this opportunity, the organization will highlight on the existing projects not captured in the financial reports. 3.5 Assets Amortization One of the areas that the organization has performed extemporarily is in reducing assets amortization. This means the value of assets depreciation that has to be written off in the balance sheet as well as subtracted in the profit and loss account. The value has significantly reduced from $ 310 million in 2012 to $ 255 in 2013 (“Rio Tinto”, 2013, p.137). As such, this indicates on the organizational efficiency in capital assets management. Reducing amortization values indicate increasing assets lifespan and operational efficiency. This could be attributed to the organizational efficient procurement system as well as an internal function for the repair, servicing and maintenance of its capital equipments across its premises. This is a vital management efficiency evidence data that could be supplied in tandem to the asset amortization gains. 4.0 Conclusion In summary, this research report establishes that although the existing financial regulations have their share of merits in ensuring transparency and financial accountability in organisations as well as providing a uniform framework for the external stakeholders analysis, it has its limitations. In this regard, the pressure on organisations to report their performances in terms of monetary values denies them a viable opportunity to communicate and relay their non financial performances to the society. In the current business context, organizational goals, objectives and operational models are changing. In this case, the need to incorporate the society as well as environmental concerns leads to the need and urgency for organisations to adopt alternative reporting structures. In this regard, this research report recommends the adoption of a balanced score card as an alternative reporting structure. In this case, it should consider aspects such as corporate social responsibility programs, supplies relationships and employee development. On one hand, the Rio Tinto Company serves in the highly volatile mining industry. As such, the organizational operations and production process has direct implications on the environment and the eventual depletion of minerals as non renewable natural resources. Therefore, in its reporting, the organization should not only indicate on the profits gained from the activities but also on the social programs through which it seeks to compensate the society as well as conserve the environment. On the other hand, the development of relationships with both the organizational supplies and consumers is an imperative business aspect in the wake of increased sustainability. Therefore, the organization should consider highlighting its efforts in building these relationships as well as the eventual non financial gains of these developed relationships. Moreover, despite using employees to acquire profits reported in its annual performance indications the organization should report on its employee programs and their non financial implications on the employees such as elevation of social status and increased motivation among others. Incorporating these reporting issues with the monetary elements of gains and losses, the organizational reports will be more beneficial and enriching into the future. References International Accounting Standards Board (IASB), 2010, Conceptual Framework for Financial Reporting, IFRS Foundation, London. Rio Tinto Company, 2013, 2013 Financial Statements, [Online] Available at [Accessed October 1, 2014]. Read More