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Theoratical Concepts of Accounting 

Introduction to Rio Tinto Group

Rio Tinto is a multinational metal and mining corporation that was founded in the year 1873. It is the second-largest mining corporation and is behind BHP Billiton. The company produces iron ore, diamonds, uranium, and gold. A multinational consortium purchased a complex of mine in Rio Tinto, Spain. Since 1873, the company has followed a business model of mergers and acquisitions and has placed itself in the world leaders for the production of commodities like iron core, aluminum, copper, diamonds, and uranium. Rio Tinto also has its operations in refining too particularly iron ore and bauxite (Rio Tinto, 2019). There are six continents in which the company operates, yet the main concentration of the company is in Australia. The revenue of the company stands at US$43.165 billion while there is a loss of US$6.972 billion in the year 2019. In the report, conceptual framework relevance concerning the company's financial reporting will be studied and the information will be mentioned where the company has followed the conceptual framework.

Conceptual Framework

The conceptual framework provides a framework that is used for setting standards of accounting and serves as a basis for resolving the disputes in accounting. The conceptual framework is a project that started in the year 1973 for developing a sound basis of theory and development of accounting standards. 8 conceptual framework statements were released by the FASB (Kober, Lee & Ng, 2020). The conceptual framework refers to a system of objectives and ideas that help in the creation of the set rules and standards. The reasons for creating a conceptual framework are as follows:

  • It provides a framework for setting the standards of accounting.
  • It provides a basis for resolving accounting disputes.
  • Principles that are then not required to be repeated in the standards of accounting.

In the report, the conceptual framework from paragraphs 2.1 to 2.5 concerning the Rio Tinto group will be classified accordingly.

Paragraph 2.1 of Conceptual Framework

According to the conceptual framework Paragraph 2.1, the financial information that is useful for the existing and potential investors, lenders, and creditors for deciding on the entity should be mentioned in the financial report (AASB, 2004).

Rip Tinto group publishes that information in its financial report. From the perspective of investors, it has published financial highlight at the beginning of the financial report that includes EBITDA that stands at $21.2 billion while the earnings are at 10.4 billion. Free cash flows of the company are at $9.2 billion while return on capital stands at 24% and net debt is at $3.7 billion. The company has also shared information that is valuable to its customers (Rio Tinto, 2019). It includes strategies, operational excellence, and sustainability, and also the allocation of the capital.

The strategy of the company is mentioned in its strategic report. The company aims at creating superior values for the shareholders by meeting their needs and maximizing the cash. The company continued its investment in the year 2019 in high return projects. It invested $1.5 million in Kennecott mine of copper in Utah, U.S. This mine will be operating till 2032. Also, the company announced an investment of around $749 million in Greater Tom price operations in Western Australia for sustaining the capacity of its iron ore. The company has invested $463 million in the Zulti South project. It has also made an investment of $302 million in Arizona for improvements. The company has invested overall a sum of $5.5 billion for the growth of its business (Rio Tint, 2019). Also, the company's report contains information about the safety and changes in climate that have been addressed through partnering. The company signed a Memorandum with China Baowu Steel group for opting for the methods that reduce carbon emissions and improves the performance concerning the environment. The company for providing the information to the investors has also shown 5 years of returns of shareholders. This impacts the decision making of investors.

Creditors are affected by the cash flows of the company as they get their returns through that. The company has mentioned the free cash flow in its balance sheet that stands at the US $ 9158 after all the payments (Rio Tinto, 2019). This depicts the situation that the company is operating well in the industry and lenders' decision making will be impacted by these figures. The figures related to the earnings are also mentioned and the investments made by the company. This information will help the creditors as they will be able to know whether the project will bring returns or not. Thus, the information is as per the conceptual framework.

Paragraph 2.2 of the Conceptual Framework

According to this paragraph, reports of the company should include the economic resources and effects of transactions or changes in events and conditions that will lead to change in the resources and claims. Some reports include explanatory material about the expectations of the management and strategies or any other type of forward-looking information (AASB, 2004).

An annual report of Rio Tinto, the company has mentioned its forward-looking information with regards to various key performance indicators. The company has a forward plan concerning its people's safety and changes. It will continuously implement the risk management program and the maturity model of safety. Also, it will strengthen the leadership of safety and the programs of coaching. The company is also planning to implement the major hazards standards that include the water and tailing and process safety.

The company also has a forward-looking plan for its return on capital employed where it will focus on increasing the returns from the assets over the medium, short and long term. The company also has plans for maintaining its rigorous approach and invest in the projects that will bring returns over and above the cost of capital. The focus will be on converting the earnings into cash. The next forward-looking plan of the company is concerning its free cash flows. The company is aiming to generate free cash flow and is expecting a capital expenditure of around $6.5 billion in the year 2021 and 2022. For greenhouse emission gases, the company plans to reach 0 emissions by the year 2050 and to reduce 30% by the year 2030. Also, the expenditure on this will be around $1 billion which the company is planning to make (Rio Tinto, 2019). According to the statement of CFO the company has plans to manage its assets and improve its performance. These are certain forward-looking strategic and economic conditions that the company has predicted.

Paragraph 2.3 of Conceptual Framework

According to this framework characteristics of useful information of finance is applied in the financial information provided. The cost that is known as a pervasive constraint as per the reporting entities' ability for providing useful information is applied similarly. Yet applying the qualitative characteristics and the constraint of cost might be different from applying it to existing resources and for the changes in those resources and claims(AASB, 2004).

In Rio Tinto's annual report financial statements have been defined as per the cost structure or the cost that has been utilized for any particular function. For future investments, the company has provided investment value but the cost has not yet specifically divided. But for 2019, the costs are specifically mentioned and also the percentage according to the growth concerning it returns on capital employed, shareholder's returns, dividends that have been paid are described for the company in its financial statement (Rio Tinto, 2019). Thus, the company shows the costing according to the activities carried out.

Paragraph 2.4 of Conceptual Framework

According to this paragraph, the financial information should be relevant and represented faithfully. The usefulness of the financial information is enhanced when it is comparable, timely, verifiable, and understandable (AASB, 2004).

Rio Tinto's annual reports are comparable as the company in its statements has compared its information with itself for the return. Also, the reports of the company are prepared as per the IFRS standards. These are the standards that are followed by other companies all around the globe. This makes the report of Rio Tinto comparable (Rio Tinto, 2019). The performance of the company can be compared concerning the other companies in the same or the other industries.

The company prepares its report promptly. Every year the company publishes its report on the same date which follows the fiscal year. At the end of every year, the company makes the necessary calculations and rolls out the reports for the investors or any other party who are interested in the information of the company.

Verifiability can be checked by the internal audit and the reports or statements that are given by the directors. For Rio Tinto's everything is available in the financial report. The statement of directors are as per the results of the company and so are the statements of the CFO. This verifies the usefulness of the financial statements of the company.

The reports of Rio Tinto's are understandable. Every accounting policy and the information under that has been mentioned. With that the calculations and the amounts that have been driven are also shown in the reports. Accounting policies that have been used are mentioned in every treatment. The company prepares its report according to the IFRS standard. IFRS 16 has been used for Plant, Property, and Equipment. The various functions of the business have been clearly defined. After reading the reports person can understand the nature, the investment, future actions that will be taken by the company. Thus the report is according to the conceptual framework and shows comparison, timeliness, verifiability, and understandability.

Paragraph 2.5 of Conceptual Framework

It represents the fundamental qualitative characteristics of relevancy and faithful representation (AASB, 2004).

The relevant information is capable of changing the decisions that are made by the users. Various information regarding that is provided in the annual report of the company. It includes financial highlights as mentioned earlier i.e. EBITDA that stands at $21.2 billion while the earnings are at 10.4 billion. Free cash flows of the company are at $9.2 billion while return on capital stands at 24% and net debt is at $3.7 billion. This information can change the decision of the investor whether to invest in the company or not. If the company is not making enough profits, it won't be able to give a return. Thus, investors would not like to invest in the company. In the same manner if the company is generating profits, providing dividends, and returns then investors will be interested in investment. Thus, the information regarding revenue and net income is crucial. It helps the investors in deciding what further actions they would like to take.

Faithful representation can be checked through the audit report. The audit report of the company was prepared by Debbie Smith who is a partner at PwC. They have made a statement regarding the financial statements of the company that states that there are no contraventions with regards to the act and also no professional code of conduct has been contradicted (Rio Tinto, 2019). This shows the faithful representation of the company's annual report. Also, audit reports show that the statements of the company have been thoroughly analyzed and checked for their represented figures. Thus, the conceptual framework has been taken care of in the company's annual report.

Conclusion on Conceptual Framework Analysis of Rio Tinto Group

Rio Tinto's financial statements are prepared according to the conceptual frameworks paragraph 2.1 to 2.5. All the information that has been required in this paragraph is there in the company's annual report. The company shows the information that is relevant to the investor, also it shows the prospects of the company. It also measures the cost that is involved in the business activities and represents information that is relevant and faithful as mentioned in the conceptual framework paragraphs. Thus, while the formation of its statements company involves framework in the process.

References for Conceptual Framework Analysis of Rio Tinto Group

AASB, F. (2004). Framework for the preparation and presentation of financial statements. AASB (AASB). Retrieved from:https://aasb.gov.au/admin/file/content105/c9/Framework_07-04nd.pdf

Annual Report. (2019). Rio Tinto. Retrieved from: https://www.riotinto.com/en/invest/reports/annual-report

Kober, R., Lee, J., & Ng, J. (2020). Australian not‐for‐profit sector views on the conceptual framework, accounting standards and accounting information. Accounting & Finance. Retrieved from:https://onlinelibrary.wiley.com/doi/abs/10.1111/acfi.12605

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