AAF044-6 Accounting and Finance Assignment Sample 2023
Introduction
Glencore Plc (Glencore) seems to be a multi-billion-dollar natural-resources conglomerate. It is essential for the manufacture and sale of a variety of mineral commodities (NO, 2020). The company’s activities include metallic and mineral refining, processing, preservation, and distribution, as well as energy and agricultural goods. Glencore manufactures and markets zinc, silver, lead, aluminum, nickel, iron ore, petroleum products, coal, chromite, and lithium. Glencore owns and controls coal mines spanning Colombia, &, South Africa Australia, among other places (Gatti, 2019). In addition, the corporation has petroleum and gas-producing properties in Chad, Cameroon, and Equatorial Guinea. It primarily services the automobile, power generating, oil and steel sectors, as well as the processing industries. The major mission of the Business is to hold interests in almost all of the Group’s greatest assets generated from industrial properties, and perhaps to raise funds in the financial sector, the revenues of which are provided to or deposited in plenty of other Company organizations. Glencore plc, along with other Groups businesses, has unequivocally and irreversibly confirmed the Company’s internal and external bondholder liabilities. There will be no modifications to the aforesaid business model in the following year, although even the composition of something like the Company’s financial performance may vary due to Group reorganizations.
The company’s economic status indicates that perhaps the loss available to common shareholders has increased from a deficit of $404 million in 2019 to something like a negative of $1,903 million years 2020, and Earnings per share has decreased from minus $0.03 per pound to significant $0.14 per percentage. The company’s robust code combines performance reflects the first year of two extremes from a year of quickly moving macroeconomic environment. [Referred to Appendix 1]
Net financing expenses seem to have been $1,453 million in 2020, a 15% drop from $1,713 million from the previous reporting quarter, owing principally to lower average base rates (mostly US$ Libor) (Grosjean, 2020). The interest cost for 2020 was $1,573 million, a 19% decrease from 2019, while retained earnings were $120 million, down from $227 million during the same period year (Killaly, 2020).
The reported H1 2020 performances have been severely influenced by slow economic growth and a difficult early pandemic situation, against which numerous redundancy notices were incurred throughout the business (MILLER, 2018). H2 2020 generated operating revenue of $697 million because businesses starts to recover from previous severe Covid-related lockdowns and uncertainties, and commodities prices recovered. The averaged LME copper premium in H2 was 24% bigger than it does in H1, while H2 metal production from domestic sources was 15% stronger than the one in H1. [Referred to Appendix 2]
Capital Investment Decisions Techniques
Capital investment choices are described as the process of determining whether or not to invest in capital assets (Khan, 2017). Capital assets make up a modest fraction of a company’s overall assets, and they’re often long-term expenditures such as factory devices, buildings, and software improvements (Pivorienė, 2017). Companies may more efficiently assess and prioritize which projects, programs, and other alternative investments should be most monetarily useful in the long run by implementing planned and coordinated financial planning into existing financial operations (Kadim et al.2020). Because these assets frequently only generate quantifiable returns, in the long run, it is critical that practicing professionals are required to understand the four principal methods of working capital and just how they could be used to determine the right course of action because once firms are going to plan their own next substantial capital investment.
Figure 1: Implementation of the company’s logo
(Source: https://www.globaltimes.cn/)
Some of the capital investment decisions techniques used by organizations like Glencore are as follows:
Internal Rate of Return- The internal rate of return computation has been used to examine if a certain investment is viable by calculating the revenue that should have been earned during the period of infrastructure investment. It is computed using a unique formula that can only be calculated either observation or experimentation or by utilizing specific technology. Since this internal rate of return helps investors improve the financial performance of future investments, the optimum internal rate of return for something like a program should have been greater than the cost of money required to finish the initiative, provided the initiative is profitable. Professionals who want to take better advantage of their infrastructure investments must use the internal rate of return whenever possible, especially when analyzing an investment in angel investors, investment management, or other operational processes that necessitate a stable income asset that results in a significant payout, such as a purchase.
Net Present Value- Net present value (NPV) has been used to analyze the predicted returns for a proposed investment proposal in the very same way that the required rate of return is used. The difference here between the current amount of currency pouring through into the project or the estimated price of dollars being wasted is represented by the net present value. A positive net present value indicates that the attractiveness of a project or transaction will surpass the estimated expenditures of the endeavor and should therefore be pursued, whereas a deleterious net present value indicates that the initiative should not be undertaken. Furthermore, unlike other budgetary control approaches such as the highest return and accounting rate of return metrics, NPV takes into consideration is the fact of money, thus economic benefits including inflation are not neglected in the computation. To do this, the discounted cash flow formula determines a discount calculation based upon the expenses of borrowing the transaction or computes the estimated investment returns for equivalent investment opportunities. [Referred to Appendix 3]
Profitability Index- The profitability index seems to be a budgetary control method used to determine the link between both the cost of something like a particular investment and indeed the benefits that may be generated if somehow the endeavor was productive. The profitability index utilizes a ratio based mostly on anticipated cash flows divided by the initial expenditure. Because this ratio rises above 1.0, the initial investment is becoming more and more appealing to businesses. When this percentage does not reach 1.0, the development should be postponed since the economic value of the project is much less than the upfront investment.
The disadvantage of utilizing the income statement to make strategic investment decisions was that it doesn’t account for the construction project; hence, huge projects with very large monetary flow figures frequently claim lower efficiency indices due to their smaller operating margins. The return on assets has the advantage of accounting for something like the time price of the shares in its computation. It also determines the precise return on capital for a potential investment, making it possible to grasp the expense ratio of initiatives.
Accounting Rate of Return- The net profit margin ratio appears to reflect the value of an investment or an institution’s proposed infrastructure investment. Finance experts must divide the actual premium by the upfront investment to calculate the profitability of an investment. The payback method is a helpful indicator for rapidly determining a company’s financial performance and it is extensively used for measuring the chances of success of multi-project expenditures. The profitability index is critical for offering a clear picture of something like a project’s potential success, satisfying a company’s demand to know the predicted financial return. This approach also considers revenues following taxes and expenses, providing them valuable for evaluating a company’s success.
Payback Period- The payback time appears to have been a unique budgetary control strategy. The accounting rate of return, in particular, appears to have been a financial analysis approach that defines the time necessary to recoup every penny spent. The total cost return on investment is a special category that defines the time necessary for a company’s performance to equalize with the share value compensated by investors. The total cost repayment duration also was widely used to determine how risky an individual investor could be. Consideration of an investment’s money back guarantee decreases the risks associated with large-scale efforts.
Rates of return are becoming an essential component of financial analysis and should be taken into account when estimating the worth of planned infrastructure improvements. The average rate of return is especially beneficial for businesses that focused on investing in securities, owing to the fact that smaller expenditures often do not entail too complicated calculations. Amounts paid at a subsequent time still include an opportunities cost associated with the years invested, but again the accounting rate of return ignores this for the sake of simplicity.
Figure 2: Implementation of Capital Investment Decision Techniques
(Source: https://www.economicsdiscussion.net/)
Budgeting and Planning
Budgeting is critical in ensuring that existing resources are used effectively to fulfill overall organizational goals (Igonina et al.2019). Budgeting always seems to be beneficial since it allows the organization to track income and costs as well as the cash flows of the company. Budgeting, but on the other hand, does little more than limit expenditures and may hinder a small business by preventing it from reacting to changing economic situations (Arnold and Artz, 2019). A budgeting process allows the firm to alter expenditure, enhance marketing to improve sales, respond to an unanticipated fall in revenue, and generally run the business using hard numbers to stay on course.
Figure 3: Implementation of Budget Planning
(Source: https://wealthfare.in//)
Benefits
- Focuses on Pricing- Market factors, such as rivals’ prices, are not the first elements the organization must consider when determining fees, taxes, and prices. While setting pricing, the corporation must first determine its manufacture or overhead expenses. A budget allows a corporation to predict utilities, health care, branding, rent, labor, debt payment, and other expenditures in order to determine the real cost of production of producing goods or providing services (Bhimani et al.2018). Once the corporation understands this, it may set pricing to generate the income it desires. If this price has gone up for such a firm to compete on price, the budgeting may be used to find an environment in which the company can cut expenditures.
- Aids in the Acquisition of Credit and Capital- Few angel investors, banks, suppliers, and perhaps other lenders would offer money or loans to a firm because it has accounting transactions demonstrating that it is a continuing concern. Except if the firm has properties that may be used as security, one need to provide financial documents that demonstrate the organization’s stability. A budget will demonstrate to potential partners what their participation would affect revenues and profits whether the firm is established or developing.
- Flexible towards Changing Conditions- A budget allows a firm to track its performances during the year, especially when making required changes to cut expenses or boost spending to capitalize on growth prospects. If an advertisement is beneficial, a budget should inform the corporation if funds are available to enhance promotion in order to improve sales. If earnings are slower, a strategy reveals areas where another firm may decrease discretionary spending to become more effective or just to get through bad periods.
Limitations
While accounting serves numerous tasks and provides many benefits for the organization, it does have several restrictions that must be carefully considered:
- Budgeting, planning, and projecting aren’t really perfect realities; instead depend on estimates or judgment, which may or may not be completely true. A budget is, at most, a prediction; no one knows exactly what will occur in the end.
- The success and usefulness of budgeting are determined by the participation and engagement of all managers and supervisors. People’s efforts should be directed in line with the specification. Senior management should also keep to the budget and work together. Budgeting had frequently succeeded since upper staff has just given due attention to its implementation.
- Creating a budgeting strategy takes time. Also, too much is sometimes expected of a budget, yet when demands are not met, the budget is criticized. Responsible personnel must understand the concept, purpose, and foundations of budgeting in order for a budgeting program to be effective.
- Excessive focus on planning would contribute to reduced management and staff attempting to manipulate the system through providing incorrect projections of future income and expenditure, as well as neglecting to capitalize on environmental factors since doing so would result in a divergence from either the plan.
Recommendations
1. Set realistic budget expectations- If there are no plans to make modifications in the firm, do not boost the budget amounts. Justify each cost in terms of its protracted profitability and adaptability. As a result, develop goals and programs to encourage new initiatives. Obtain estimates for any prospective costs that may be incurred over the next term.
2. Categorize all the expenses-Costs that seem to be related should be grouped together. Collecting them all in one location makes it easy to see trends and irregularities, allowing for better planning. For example, group altogether all or most of the business costs, such as occupancy charges, operational expenses, office energy, stationery expenditures, and so on.
3. Have backups- It is impossible to over-prepare. Planning for eventualities in the budgeting is important since not all of it usually goes as planned. So, if the price of inventory items suddenly jumps by 20%, have just a plan in place to accommodate for the additional costs.
Corporate Governance Concept
The FRC’s UK Corporate Governance Code is the principal administration standard throughout the UK, and it applies to all firms having a Preferred listing with equity securities also on London Stock Exchange, whether they will be formed throughout the UK or abroad (Aspan, 2017). Other businesses have chosen to use it as well. [Referred to Appendix 4]
Figure 4: Implementation of UK Corporate Governance Code
(Source: https://kfknowledgebank.kaplan.co.uk/)
The most recent version of something like the Code became issued in October 2018, and that it covers fiscal years beginning from now through January 1, 2019 (Council, 2017). Its FRC’s previous work on company culture on performance, the president’s Green Paper on good governance, and a Competitiveness, Energy, and Industrial Strategy (BEIS) Committee submitted its report on its own governance practices investigation all influenced the changes. The Code is also now considerably shorter and places a greater emphasis on the connections between corporations, shareholders, and stakeholders (Mujih, 2021). The following are the major modifications to the Software:
- Workforce and stakeholders- A new provision allows for increased board involvement with the employees in order to better understand its perspectives. The new Code encourages companies to explain how they addressed stakeholders’ interests while carrying out their obligation under Section 172 of the Provisions Of section that promote this same company’s performance.
- Culture- Boards are tasked with developing an environment that connects corporate values to objectives and assessing how to retain value over time.
- Succession and diversity- The new Code underlines the need for more board refreshment and succession planning is needed to guarantee ensuring boards always had the correct balance of qualifications and abilities, present constructive difficulties, and encourage diversity. Companies should explore whether the chairman should serve for more than 9 years. The revised Code emphasizes the nominating committee’s responsibility in transition planning and developing a diversified board. It emphasizes the significance of independent board review for all businesses. Details of an independent board evaluator’s communication with both the company and executive management should be included in the nominations paper to provide an analysis.
- Remuneration- To resolve public concern about CEO pay, the revised Code stresses that compensation committees should consider worker remuneration and associated policies when determining director pay. Formulaic achievement pay computations should be discarded, and compensation committees shall exercise discretion where the resultant conclusion is not warranted.
The Code’s “comply or explain” premise has stayed constant, though, with the publishing of the updated Code, there seems to be a fresh need for corporations to properly explain their implementation of the Code’s concepts, and for customers or proxy managers to carefully analyze the justifications.
Comply or Explain
In the United Kingdom, corporate leadership is characterized by the “comply or explain” attitude. That has been in place because since Code’s inception and serves as the basis for its adaptability. It has widespread support from both enterprises and stockholders, and this has been extensively praised and replicated on a global scale.
The Code isn’t really a collection of hard regulations. It is made up of principles (both major and subsidiary) or restrictions (Du, 2019). Corporations are obligated by the Listing Rules to implement the Main Guidelines and explain to stakeholders how they’ve done so. The fundamentals have been at the heart of the Code, so how they have been implemented should always be the key concern for a company as it decides how to act in accordance with the Code.
It is acknowledged that in some cases, an alternative to obeying a provision may be permissible if democratic accountability can be attained through other ways. One need is that while the causes for it have been stated clearly and effectively to stakeholders, who would choose to address the situation with the firm and whose vote results may be impacted as a consequence. In explaining the reason, the firm should strive to demonstrate how its current practices are compatible with the concept to which the specific provision refers, contributes to good corporate governance, and encourage the achievement of business objectives.
In responding to answers, stakeholders should take into account the unique circumstances of each firm, particularly the magnitude and characteristics of the organization, as well as the complexity of both the issues and hazards it confronts.
Conclusion
In this given piece of paper, I have chosen Glencore Company which belongs to the minerals and metals sector. Through research, I was able to find the annual reports of the company. I have focused mainly on the financial tools as well as techniques used by the organizations. With the help of this project, I came to know different capital investment techniques used by organizations, such as the internal rate of return, profitability index, Net present value (NPV), payback period, and accounting rate of return. I also acknowledged the benefits as well as limitations of budget planning. Lastly, I was able to determine the Corporate Governance Concept. Thus, by the end of the project, I managed to gain appropriate knowledge regarding several financial tools as well as techniques used in the analysis of accounting and finance management of an organization.
Reference List
Journal
Arnold, M. and Artz, M., 2019. The use of a single budget or separate budgets for planning and performance evaluation. Accounting, organizations and society, 73, pp.50-67.
Aspan, H., 2017. Good Corporate Governance Principles in the Management of Limited Liability Company. International Journal of Law Reconstruction, 1(1), p.87.
Bhimani, A., Sivabalan, P. and Soonawalla, K., 2018. A study of the linkages between rolling budget forms, uncertainty and strategy. The British Accounting Review, 50(3), pp.306-323.
Council, F.R., 2017. Proposed revisions to the UK corporate governance code. London: FRC.
Du, S., 2019. Evaluate the importance of the board of directors to the corporate governance of large listed UK firms. Academic Journal of Business & Management, 3(10), pp.44-46.
Gatti, S., 2019. Glencore/Xstrata: playing Aida’s triumphal march on the top of the Everest.
Grosjean, J., 2020. Can reputation risk related to Glencore’s activities in the DRC be an impediment to making an investment or indeed to sell one’s shareholding stake in Glencore?: Can this reputation risk undermine Glencore’s share price and if so to what extent? (Doctoral dissertation, Haute école de gestion de Genève).
Igonina, L.L., Vikharev, V.V., Shurygin, S.V. and Yaroshenko, D.V., 2019. Budget potential of the region: attributive features and methods of assessment.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm’s value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870.
Khan, M.Z.U., 2017. Impact of availability bias and loss aversion bias on investment decision making, moderating role of risk perception. Management & Administration (IMPACT: JMDGMA), 1(1), pp.17-28.
Killaly, J.J., 2020. The Glencore Case: Transfer pricing and the world of possibilities. Tax and Transfer Policy Institute, working paper, 8.
MILLER, S., 2018. 1st Phase Heritage Impact Assessment for the client, GLENCORE ALLOYS SOUTH AFRICA–RIETVLEI SILICA MINE (PROJECT NUMBER: GLE-RIE-17-06-02) on. Cell, 82(939), p.6536.
Mujih, E., 2021. Do not simply tick the box: the effectiveness of the Corporate Governance Code 2018 in the absence of an implementation mechanism. Company Lawyer, 42(2), pp.43-50.
NO, P.O., 2020. Glencore International AG and CI Prodeco SA (Doctoral dissertation, INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES).
Pivorienė, A., 2017. REAL OPTIONS AND DISCOUNTED CASH FLOW ANALYSIS TO ASSESS STRATEGIC INVESTMENT PROJECTS. Economics & Business, 30.
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