ACCT11059 ACCOUNTING, LEARNING AND ONLINE COMMUNICATION

Stuart HentschkeAssignment 1 – Steps 2-6

Step 2Personal Moodle Profile: Stuart HentschkePersonal Blog Link: From Staff to Student

Step 3Find you Firm’s Annual Report and SpreadsheetI posted the following on my blog – “Introducing Incitec Pivot” March 23rd

I received Martin’s email, opened the spreadsheet, scrolled down to see that I had been allocated Incitec Pivot. YES! A company that I had heard of, this is what I wanted. I thought having some previous knowledge regarding the company would give me head start to my research. Having worked in the Agricultural sector I was aware that Incitec Pivot were a manufacturer and distributor of fertiliser. I had used a variety of their products for growing broad acre cereals crops such as wheat and barley. These include a product known to farmers as “DAP” which contains 17.7% Nitrogen and 20% Phosphorus. Checkout the fact sheet here. Well, what else do I know about this company? Sadly, the answer is not much.

First stop was the company’s website to do some further research. What countries do they operate in? How many employees do they have? These were the initial questions going through my head and of course I hope that the annual reports are easy to find! My first impressions of the website were: clean, clear, modern and simple, see here https://www.incitecpivot.com.au/. I had this view because of the images that they had used, the tile like layout and the uncluttered links/tabs to other pages. At the bottom of the homepage one of my questions was immediately answers. Their workforce across the globe has 4,500 people, a few more than I was expecting. The Investor Centre tab revealed the ASX code for Incitec Pivot which is “IPL” and their current share price of A$3.20 (21/3/2019). The Annual reports were easy to find to find in the Company Reports section and they went all the way back to 2003. During this brief investigation I learnt that Incitec Pivot is involved with two business areas: one being Incitec Pivot Fertilisers and the other Dyno Nobel. I’m interested to know more? Will they complement each other? Will I be able to answer this question with information from the Annual report?

Read You Firm’s Annual Report: Identify Clearly What Your Firm DoesIncitec Pivot is a global company involved with the manufacturing and the production of various explosives, fertilisers and industrial chemicals. The company is broken down to two separate categories:

- Incitec Pivot Fertilisers Australia’s largest supplier and manufacturer of fertilisers by volume, approximately 2 million tonnes per year for the Australian grain, cotton, pasture, dairy, sugar and

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horticulture industries. The history of the company dates back to 1915 in Toowoomba, Queensland when they traded as Australian Co-operative Fertilizers. In 2003, Pivot Limited and Incitec Fertilisers merged to create Incitec Pivot Fertilisers. The company is also known to have Australia’s oldest soil testing service. The results allow farmers to make more informed decisions about the type and quantity of fertiliser to apply maximizing their output.

- Dyno Nobel: A global leader in the commercial explosives industry with 32 manufacturing facilities spaning across three continents. The company is involved in assembly of industrial explosives, such as detonators and dynamite. They also provide services including highly trained blasters to the mining, quarrying, seismic and construction industries. Dyno Nobels history can be traced right back to 1831 when Englishman William Bickford invented the safety fuse for explosives. In 1865, Alfred Nobel (the father of the Nobel prize) invented detonators and dynamite which led to the establishment of Dyno Nobel.

Difficulty understandingAs I investigate Incitec Pivot, I’m unsure on the correct terminology to use to describe the other companies. Are they sub companies? Each have their own website see https://www.incitecpivotfertilisers.com.au/ and https://www.dynonobel.com/. Will their financial information be recorded separately or combined?

After attending class on the 27/3/2019, Martin explained that all the major listed companies are groups of companies. We will be focusing on the consolidated financials (ie. the totals of all the various groups combined). Therefore, there was nothing unusual about IPL.

Incitec Pivot Annual Report LinksAnnual Report 2018Annual Report 2017Annual Report 2016

Key Concepts and QuestionsAs I read through the company’s annual report, I noticed the Chairman, Paul Brasher state that, “Zero Harm remains the Company’s number one priority for its people, customers and stakeholders every day and everywhere.” I understand Zero Harm to be a strategy IPL have implemented, which involves minimising harm in the following areas of Health, Safety, Environment and the Community (this sentence defining my understanding of Zero Harm was added after the PASS session on 28/3/2019, when I realised that I hadn’t described my understanding of the key concept). It is broken down to a variety of measures. One of these measures involves recording the Total Recordable Injury Frequency Rate (TRIFR). IPL have a target of <1 TRIFR calculated as the number of recordable injuries per 200,000 hours worked and it includes all contractors. The Zero Harm strategy has associated performance conditions and in the event of a fatality or major incident the Board may forfeit all of their short term incentives. I feel that the Zero Harm policy is a respectable idea in any business and I’m pleased

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to see that it also includes contractors. I agree that by setting targets (while aiming for none) and working towards lower rates of injury is a good outcome for everyone. The benefits not only flow through to employees and employees’ family’s but also the wider community. I can relate the concept of workplace injuries back to my personal experiences of working in agriculture. It’s often considered one of the more dangerous industries due to working for extended periods of time, using machines, chemicals, manual handling and so on. While I never suffered any major workplace injuries I was aware of many farmers who had. Some include machinery accidents, limbs caught in machinery and back injuries. I’m aware of the need to address this issue seriously and I feel that Incitec Pivot have it at the forefront of their business (as Paul Brasher stated in his Chairmans report). While the company achieved its goal of <1 TRIFR for the 2018 financial year, is their result of 0.96 (only just under the threshold) a good result? I do wonder how IPL’s injury frequency rate compares to other businesses in similar industries around the world?

IPL also appears to be heavily committed to sustainability. They have their own Sustainability Report in their Annual Report and also a Sustainability Scorecard. I would define sustainability as working today without negatively impacting the environment for future generations. Incitec Pivot are part of the Dow Jones Sustainability Index (DJSI), which is the leading index in sustainable investing. Using this index Incitec Pivot can compare itself to other companies in the chemical sector across the globe. The total index score for IPL in 2018 was 65 (It appears the higher the score the better) compared to the chemical sector average of 44. I’m pleased to see that Incitec Pivot are heavily involved in sustainability and it shows their customers, employees and the community they are aware of their impact on the environment. Due to the nature of the company (explosives and fertilisers) they have the potential to contaminate ground water, the ocean, soil and pollute the air. The company admits that they are a large emitter of greenhouse gas but ensures that they focus on new technology to minimise their impact on the environment. I didn’t expect to see this report in the Annual Report in the format that it was. I thought that they would approach the sustainability aspect of their business more from a marketing point of view. I thought maybe a separate page in the Annual Report with easy to read highlights about the company’s progress to sustainability would have been more likely. I found the Sustainability Report rather hard to read and I had some difficulty in understanding the report. I think this was because it was broken down to performance and priorities in many separate categories. I had to read the Sustainability Report a few times to have a basic understanding of the content. I can relate sustainability back to a previous experience I had, the first time I visited Newcastle. This was a case where sustainability wasn’t the main focus. I couldn’t believe that the water in the port was so dirty from loading coal into ships. It was literally brown and while I’m no expert in this area I felt that it should be managed in a more sustainable manner. As investors turn towards sustainable investing there would be a huge incentive to appear so called “green”. I would like to know how the index scores are calculated? Also, how do we tell if this is a genuine push for sustainability or a push to win over investors?

Another interesting discovery from reading the annual report was that Incitec Pivot had been involved in an on-market buy-back. I understand an on market buy back to be the process where a company uses its own funds to reduce the number of shares in the marketplace. I

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believe that they would normally do this when they believe that the shares are undervalued, therefore creating value for existing shareholders. In this case it states that the purpose of the on-market buy-back is to be used for the Incitec Pivot Employee Incentive Plan. I felt that this may not be in the best interests of the company’s existing shareholders. If the incentives were used correctly (ie. to retain the best staff and when correctly identified targets were met) maybe it would be an appropriate strategy. In November 2017, IPL announced that up to $300m was available to buy back shares over a twelve month period. $210m was used for this purpose and they have extended the plan for another twelve months to use the remaining $90m. The extra money used for purchasing the shares in the open market might led to a temporary increase in the share price. I can imagine that if I was a shareholder and I heard the company was going to spend $300m in an on-market buy-back I would think that the shares are likely to rise in price. I would need to put the $300 million into context of the company though. Does this system have the potential to be abused? For example, who determines the targets that need to be met in order to receive bonuses?

Firms financial statements – difficulty understandingI found the “other comprehensive income” to be the most confusing part of IPL’s financial statements. I thought why wouldn’t this just be included in income statement under a separate heading like the “financial and other income” was? Why does it need to be so special? Later on in chapter 3 of the study guide, I read that other comprehensive income “… includes items such as ‘Fair-value movement and reclassification of interest-rate swaps’ (that is, gains or losses on various financial instruments).” This income has occurred outside the usual operations of the businesses, an example might be the increase in money from revaluing a block of land that the company own. This other comprehensive income is never entered into the revenue or expense accounts and therefore won’t end up in the profit or loss figure either. This is the reason it’s so special and needs to be separated. Risks, challenges and strategyIPL set out a long list of principle risks each with a description and potential consequences in their Annual report. It also states the treatment strategies employed by IPL to mitigate against those risks. Here is an example taken from the 2018 Annual Report page 27 to show what I mean. I found this to be very informative approach to looking at all the company risks, and it was very clear to see the potential consequences and treatment strategies in place.

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Using the Annual Report and by searching news articles online, I could identify four major challenges IPL have faced during the last twelve months. I have listed these below with some of the strategies that are in place to deal with these challenges.

- One of their long-term gas supply contracts expired. The firm has overcome this in the short term by securing another contract for 2019. Their strategy is to make this a key management focus and to secure a new economically viable long-term gas supply. If this can’t be achieved the company will cease manufacturing operations at the Gibson Island facility.

- Manufacturing performance was impacted by turnarounds at Phosphate Hill – which have since been completed. They describe turnarounds as a period where scheduled maintenance takes place. They didn’t appear to be any strategy to deal with the negative effects of the scheduled maintenance. I thought a plan to increase production once maintenance was completed might have been appropriate strategy.

- The company suffered a large first-half impairment against its explosives services business. I will discuss this news article further in the section titled Know your Firm “The Negative”

- Incitec Pivot also suffered recently from the Queensland floods. I will also discuss this further below in Know your Firm “The Negative”

Discuss with Others - SurveyAfter reading my Annual report, I was interested to know how my company compared to other student’s companies. I was also interested to see if other students felt the same as I do towards constructive criticism (I generally find it hard to provide) and seeing the accounting equation in action (I thought that it was great to have some practical experience). I wanted to get a lot of responses in a short amount of time, so I decided to conduct a survey. I have posted the results so far and a short summary on my blog. The results suggested that like IPL many companies had a sustainability report or a heavy focus on sustainability with 7 respondents recording a yes and 2 recording not applicable. This result did surprise me as I felt that this would apply to certain industry’s more than others. While we don’t know which industries the respondent’s companies were in I thought the results might be more 50/50. The other interesting results were that all companies appear to be successful. Could this result be influence by some marketing in the annual reports or only displaying certain aspects of the financials that appear to be positive in the written reports? Also, everyone so far (including myself) listed that they were happy with the company that they were allocated. Is this because we aren’t aware of better alternative companies? As we learn from each other about the alternatives would this result change?

Other helpful interactions Moodle ForumI found the following post in the ASS#1 (Steps 1-3) Forum particularly helpful

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It went on to state a long list in chronological order of what is required. My reply and her response are listed below.

Face to face interactionsI discussed my company with Mary-Anne Miller in person on campus at Cairns on Wednesday the 27th of March. Mary-Annes’s company was Oldfields Holdings. It’s an engineering firm and a leading supplier of scaffolding and painting supplies. It was interesting to note that Oldfields Holdings financial reports were named in the same manner as IPL’s.

- Profit and loss = Consolidated Statement of Profit and Loss and Other Comprehensive Income.

- Balance Sheet = Consolidated Statement of Financial Position. It appeared that Oldfields holdings was selling assets off and this was boosting its return in 2018. We chatted about our companies and what we had discovered so far. Mary-Anne stated that Oldfields is missing their 2016 annual report (this was mentioned in the notes in the Find Your Company spreadsheet). We both weren’t quite sure on how this could happen. Is it just not on the company website? Have they taken it down? Were they trading?

PASS Session 28/3/2019This PASS session highlighted the following for me

- An opportunity to briefly discuss some of our companies KCQ’s. Cassie gave a great example when she spoke about her company Ramsay Health Care and “Diversity”. She outlined her definition of diversity, then followed by how the company was flexible with people of different religions and their individual life commitments. She could relate it to the company that she currently works for as they also are very accommodating when it comes to diversity. She questioned whether there is any form of legislation regarding this area? I could relate this back to my company IPL. While it didn’t stand out like zero harm, sustainability or the company share buy back, IPL also are also managing,

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engaging and ensuring a diverse workforce. As they believe that “people and culture are key to creating the outstanding business performance required to deliver growth and innovation.” 2018 Annual Report pg 9.

- I learnt that it’s also good to compare to other businesses (not necessarily in the same field). This was great news for me as when I filtered the “Find Your Company” spreadsheet for other “Chemical” companies, Nufarm was the only other one.

- By discussing our KCQ’s with others it helped me to reinforce the process of understanding, communicate the responses and identify questions. I then realised that I hadn’t described my understanding of the key concept “Zero Harm” in my own words. I added this sentence to the paragraph “I understand Zero Harm to be a strategy IPL have implemented which involves minimising harm in the following areas of Health, Safety, Environment and the Community.”

Know Your FirmThe Positive

- After watching the videos posted on my blog “Incitec Pivot Fertilisers Video – Cultural Induction “ and also Dyno Nobel – “Groundbreaking Performance through Practical Innovation”. I was feeling positive about IPL. Even though they are promotional videos, I felt that the business was on the right track.

- Their Annual report figures suggested sales were increasing over the last two periods – See Below from the Annual Report 2018 pg 102

- Paul Brasher also stated in the 2018 Chairman’s Report a 9% increase in Net Profit After Tax of $347.4 million (excluding individually material items of $139.5 million). I considered a 9% increase to be a commendable return.

I found three more news articles and posted links to them on my blog, see here “News Articles.” I will discuss my findings from these articles below.

- Another positive news story of fertiliser development was the improved blending plant in Port Lincoln. I found I could relate to this article as it’s close to where I previously lived. This upgrade allows IPL to blend different fertilisers to suit the farmers (ie. their customers) specific requirements. It was great to see another positive news story regarding IPL, but then came the bad news.

The Negative

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- I found an article titled this article “Incitec Pivot FY profit falls 35% to $208m”. The article goes on to state that this is due to a previously announced non-cash goodwill impairment against Dyno Nobel Asia Pacific industrial explosives and blasting services business. I’m not sure what the impairment means? Hopefully someone might be able to help me understand this when providing feedback?

- Another line in the article that stood out was, “Shares in the company fell more than 7.5 per cent following Tuesday's announcement, making them the worst performing of the top 100 companies on the ASX.”

- Then I found this more recent article “Incitec’s earnings hit from Qld floods.” The Queensland floods have forced the closure of the rail line between Townsville and Phosphate Hill. It is estimated to cost the company between $100 million and $120 million in lost earnings. IPL have a strategy in place to supplement the rail service with road transport as required once the rail line reopens.

- Reading the Annual report more closely I also realised that total equity from 2017 of 4759.1m actually decreased to 4744.2m in 2018.

Original video / news article links can be found below1. Incitec Pivot Fertilisers Phosphate Hill Cultural Induction 2. Groundbreaking Performance through Practical Innovation 3. Fertiliser development 4. Incitec Pivot FY profit falls 35% to $208m 5. Incitec’s earnings hit from Qld floods

Overall, it appears that the future of the company isn’t looking bright for IPL. Prior to this slightly deeper level research, IPL appeared to be successful. I will sum it up by saying that, I wouldn’t like to be a shareholder right now.

Studiosity ExperienceI found the help from Studiosity to be fantastic. The editor was very consistent in highlighting my problem areas, mainly the need to sound more formal and less casual. They offered some great tips on how to do this. For example, I had used an ellipse at the end of a list. I have now changed to “Some included” and then listed the items, resulting in a less casual tone. I would certainly use Studiosity again. The feedback was of a high standard and I felt it has improved my assignment immensely. Others in the group found Studiosity to be really helpful also (see screenshot from Facebook).

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Blogs visited and left feedback

An Accounting Journeyhttps://anaccountingjourney.home.blog/2019/03/28/ass1-step-3/comment-page-1/#comment-39

DWhttps://welcomedw.home.blog/2019/03/28/draft-2-for-steps-3-6/comment-page-1/#comment-33

Top three blogs and favourite blog and include the links to their blogs (Comment on these in the blog links forum in moodle.

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Step 4 Inputting your company’s financial statements into your spreadsheets

I found the following comments on Facebook helpful when working through entering IPL’s financial statements into my spreadsheet. IPL had values that had changed. I initially had the same question as Claudia. After reading Kym’s response I learnt that I could just use the updated figures.

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Step 5 KCQs Ch 2 and Ch 3 (Sections 3.1 and 3.2)

As I read Chapter 2 the generally accepted accounting principles (GAAP) stood out to me. I understand GAAP to be the minimum standard used by listed companies when preparing financial statements for people outside the company. These rules vary from country to country and they are constantly in a gradual state of change. I imagined the GAAP to be thousands of pages long and complex, as I thought this would allow detail to deal with all the various scenarios and situations that might occur. I found it odd that no one person knows all of these rules. I thought that the very best accountants would know all the rules and how to apply them, especially if they had worked in the industry for many years. Having previously worked in Durum Wheat Breeding and farming I was accustomed to shades of grey, without black and white rules or answers. As I started out my university education I felt that accounting would have very defined rules, so the line “and these written rules are not even all the rules” did cause me some concern. I was looking forward to simply learning the answers and applying, without the actual thinking or understanding. I now view it differently and I feel that ‘the grey area’ will add to the excitement. The variety of ways things can be recorded has been highlighted as we compare our financial reports with other students. I do question, if I started reading the GAAP would I be able to understand the content?

Another key concept is accrual accounting. I consider accrual accounting it to be the process where a company records a transaction when it occurs and not when they are paid. Companies might receive payment before or after the customer receives the product or service. This concept becomes very important when we want to compare economic performance (over a period) and a company’s financial position (on a certain day). I agree with the concept and believe that it makes sense to analyse the financial information in this manner as it allows us to compare results with a greater level of accuracy. I felt that the explanation with the examples provided allowed me to quickly understand the concept. I can relate accrual accounting to my experience with our accountant and paying for the services. He provided the service and this is when he records the transaction for his business, as this is where the economic activity has taken place. He sends out a total of the amount payable and I pay for the service about 14 days later. The concept does raise some questions for me regarding larger firms. As accrual accounting is subjective, how do accountants make the appropriate call and ensure that they are acting in the best interests of the company, but also their shareholders? If a firm deliberately records business activities incorrectly, what is the punishment? Is it common practice amongst companies to make things look as good as possible for shareholders?

Chapter 3.1 mentions a firm’s balance sheet. I understand a firm’s balance sheet to be a statement of its financial position on one day. It includes assets, liabilities and equity and has no specific format. The balance sheet allows us to assess how well the business is going over a period of time, as we don’t want to wait until the end of the firm’s life. The balance sheet is set out on one page for a clear overall picture with footnotes providing the additional detail. The balance sheet will display all the economic activity of the company in one document. As almost

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all listed companies are a group of companies it will display the combined result of all the groups. I found this to be the case with IPL, a single list of assets, liabilities and equity with the various sub headings. There was no mention of Incitec Pivot Fertilisers or Dyno Nobel and their contribution to the various amounts. This surprised me, as I thought that the separate businesses financial information would be recorded separately on the balance sheet. After thinking and learning about the business I can see why it’s not, a group of companies might contain many subcompanies, this would make the report many pages. I can relate the balance sheet back to my personal experiences, as I record our personal finances in a similar way. Around every three months, on an individual day, I record our assets and subtract our liabilities to calculate total equity. It is a simple process and it allows me to see if our equity is increasing or decreasing.

The statement of changes in equity was a term that I had never heard of before. I didn’t understand the concept, but I now define it as a financial summary of all the key elements which effect total equity. To increase my understanding of the statement of changes in equity I decided to record the various components and then locate them in IPL’s other financial reports for 2018.

Name LocatedOpening balance Balance sheet - previous years close / statement changes in

equity – previous years close Profit for the year Income statement – profit for the yearTotal other comprehensive income for the year

Other comprehensive income statement – other comprehensive income for the year, net of income tax

Dividends paid Statement of cash flows – Sum of all dividends paidShare buy-back Statement of cash flows – Payment for buy-back of sharesPurchased shares for IPL employees

Statement of cash flows – Purchased shares for IPL employees

Share-based payment transactions

Statement of cash flows – Non-cash share-based payment transactions

Closing balance Sum of all the above / balance sheet – total equity

All the information in the statement of changes in equity comes from other pages in the financial report. From the table it’s clear that anything to do with dividends or share buy backs is recorded in this statement as these transactions directly effect equity. While looking at the statement of changes in equity I have gained a better understanding of the topic, although I feel that I have so much more to learn. It currently hasn’t raised any questions specific questions for me. I could relate the total other comprehensive income for the year, to the fluctuations in the current market price for our house. This is because the increase/decrease would effect our total equity. As this increase/decrease isn’t profit/loss or to do with dividends, it needs its own category to allow total equity to be adjusted appropriately.

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Step 6 Providing and receiving feedback

Questions asked during for survey:

1. Were you impressed by your company’s website?2. Does your company use videos to explain or promote its business?3. Does your company have a strong focus on safety or reducing injuries?4. Does your company have a sustainability report or appear to have a heavy focus on sustainability?5. Did you enjoy seeing the “Assets = Equity + Liabilities” equation in action while entering your company’s financial information?6. When entering your company’s financial information were the totals of some categories different (for example, when comparing the 2015/2016 report to the 2016/2017, the 2016 totals were different in some places)?7. Does your company appear to be successful?8. Do you find it hard to provide constructive criticism?9. Are you happy with your company?

Survey Results Attached as at 27/3/2019

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