James Hardie Industries Limited

James Hardie Industries LimitedLecturer: Stephen Lim

Group members:

Shaun R. Stewart 12064681

Luke Rowles 10742029

Joshua Chhay 10276374

Xin Xiao 11870957

Raed Al-Bader 11669761

MD Feisul Kahir 11070226

Table of Content

1

• Introduction of James Hardie’s Activities,Strategies and Market Segment

2 • Key accounting policies of James Hardie

3 • Evaluate the flexibility management

4 • Evaluation of Accounting strategy employed

5 • Evaluate the quality of the disclosure

6 • Potential questionable accounting numbers

7 • Undo Accounting Distortions

8 • Financial press discussion

9 • Conclusion

1.Company’s activities and strategies• James Hardie Industries Public

Limited Company operates in the construction and building materials sector

• Founded in Melbourne, Australia in 1888 the company is now incorporated in Ireland, however it is listed on the ASX with stock code JHX

• Core to the strategy of James Hardie has been to invest in high-return organic growth with a focusing on capacity expansion across the US and Australian businesses

Market Segment• Key profit driver: Manufacturing

and distributing fibre cement products throughout Australia ,the Asian Pacific region, the USA and Europe

• Competitive advantage: Development of its research capabilities to develop differentiated, unique and superior products.

2. Key Accounting Polices

Related Accounting Standard and Rules

3. Management Flexibility

4. Disclosure Strategy DOCUMENT DETAIL

Amended & Restated Final Funding Agreement

This agreement is intended to ensure “JHISE Group's commercial viability and success will provide the basis for the long term funding of the claims which are to be subject to those funding arrangements”

Valuation of Asbestos-Related Disease Liabilities of former James Hardie entities (“the Liable Entities”) to be met by the AICF Trust Prepared for Asbestos Injuries Compensation Fund Limited (“AICFL”):

This actuarial estimation of the Asbestos Liability is the detailed basis for the liability appearing on balance sheet.

Asbestos Injuries Compensation Fund Limited (“AICFL”) Statutory Financial Statements

The annual report for the Asbestos compensation fund, which also forms part of the JHX consolidated annual report. JHX is required to pay annually 35% of Free Cash Flow as defined by the agreement as “net cash provided by operating activities (as calculated in accordance with US GAAP, paid to the AICF.

Management Remuneration PolicySTI

20% Individual Performance Plan (STI): 1 -3 year performance targets set internally via matrix dependent upon business stream

 

80%

Company Performance Plan: 1 -3 year performance targets set internally via matrix with industry peer comparison. Revenue Growth EBIT (indexed to housing starts) excluding asbestos, asset impairments, ASIC expenses

and New Zealand product liability. Above the 75th percentile (top 25%) of peer group performance in Revenue and

Profitability.

LTI40% Return on Capital Employed (ROCE) RSUs – an indicator of growth in the value of the

Company’s capital efficiency over time;

 

30%Relative Total Shareholder Return (TSR) RSUs – an indicator of the Company’s performance relative to its US peers; Above the 75th percentile (top 25%) of peer group performance in Revenue and Profitability.

 30% Internal Individual Scorecard LTI – an indicator of each senior executive’s contribution to

the Company achieving its long-term strategic goals.

Accounting Strategy The AFFA allows a framework to partial quantification. The combined liability is forecast annually by external KPMG Actuaries for a central estimate, then NPV adjustments are disclosed for:

• Inflation (discounted for future inflation)• Discounted (return on funds in escrow and operations owed but not yet

paid)• Net of anticipated Insurance Recoveries

The impact of such adjustments reduces the liability by almost half in 2014 from Gross Amount $3,132m to $1,870m.

(US $billions) 2012 2013 2014

Central Estimate $1.58 $1.69 $1.87

Management Adopted Estimate

$1.66 $1.69 $1.71

Asbestos Offset Asset ITEM INCOME TAX RECEIVABLE & INSURANCE RECEIVABLE

DESCRIPTION

The Tax Receivable estimate is clearly a theoretical asset dependent upon future positive income. Under US GAAP Tax Receivables are allowed to be recognised in full and revalued over time.Insurance Receivable is Audited under terms of the AFFA as it was seen as a measure which could be manipulated to reduce the cash outflow to ACIF due to a clause in the AFFA in which JHX must maintain capital acceptable to undertake its business.

STRATEGYValuation of these items is not documented or implied in the notes to the accounts as these items are complex to estimate due to their contingent relationship with the Asbestos Liability estimate which itself is fraught with complex assumptions regarding timing and value.

OUTCOME These items offset the large Asbestos Liability held on balance sheet improving the Equity Ratio and Current Ratio.

Asbestos ExpenseITEM ASBESTOS ADJUSTMENTS

DESCRIPTION Actuarial estimates of the Asbestos liability are reassessed each year and changes in the liability estimate are expensed each year.

STRATEGY1. The Asbestos Liability is re-estimated annually by KPMG Actuaries.2. The company uses the ‘Asset and Liability method’ to assess

deferred Tax Assets and Liabilities allowing the accrual of Tax Assets

OUTCOME

1. Increases in the Actuarial Estimate of Asbestos Liability are expensed each year.

2. This decreases Net Profit creating a Tax Shield, and regularly originates a deferred Tax Asset to offset against Tax Expenses in current and future trading years.

5. Quality of the Disclosure Financial Information

• All relevant statements have been provided.

• Prepared in accordance with US GAAP. Management is required to make assumptions that affect the amount of assets and liabilities.

• The assets, liabilities, revenues and expense are stated in US Dollar.

Non-Financial information

• All related reports have been provided including the auditor’s report by Ernst & Young.

5. Quality of the Disclosure Other Information

• Operation scope

• Production

• Asbestos Injuries Compensation. Supplementary Material

• Amended & Restated Final Funding Agreement (AFFA).

• Valuation of Asbestos-Related Disease Liabilities of former James Hardie entities.

• AICF Annual Financial Statements

6.Potential Questionable Accounting Numbers

1. Management discretion presenting the Asbestos Liability

2. US GAAP requirements when recognising provisions are comparatively more aggressive when compared to IFRS when realising a provision:

- The realisation must have 75% or greater probability –(IFRS uses a 50% probability)- Amount of loss can be reasonably estimated- Use best estimate, or Lowest Range – (IFRS requires a Mid-Range if no best estimate)

3. The Asbestos liability is offset against related assets Insurance Receivable and Unrealized Tax Assets that are heavily contingent on the liability itself and other future events such as Net Profit and Compensation Claims.

(US $billions) 2012

2013

2014 Assumptions

Central Estimate by Actuary

$1.58

$1.69 $1.87

InflatedDiscountedPost-Insurance Recovery

Management Adopted Estimate

$1.66

$1.69 $1.71

UninflatedUndiscountedPre-Insurance Recovery

7. Undoing DistortionsThe inclusion of such adjustments reduces the liability by almost half in 2014 from Gross Amount $3,132m to $1,870m.

CURRENT ASBESTOS ASSETS 109.1

CURRENT ASBESTOS LIABILITIES

185.8 CORRECTION

Restricted Cash & Equivalents - Asbestos

60.2 Current Portion of Long Term Debt- Asbestos

47.0 47.0

Restricted Short Term Investments - Asbestos

0.1 Asbestos Liability 134.5 134.5

Insurance Receivable - Asbestos

28.0 Workers Compensation - Asbestos 4.3 4.3

Workers Compensation - Asbestos

4.3      

Deferred Income Taxes - Asbestos

16.5      

NON-CURRENT ASBESTOS ASSETS

700.9 NON - CURRENT ASBESTOS LIABILITIES

1,619.3  

Insurance Receivable - Asbestos

198.1 Asbestos Liability 1,571.7 2,950.5

Workers Compensation - Asbestos

47.6 Workers Compensation - Asbestos 47.6 47.6

Deferred Income Taxes 455.2      TOTAL ASBESTOS ASSETS 810.0 TOTAL ASBESTOS LIABILITIES 1,805.1 3,183.9    NET ASBESTOS LIABILITIES 995.1 2,373.9

7. Undoing DistortionsP&L $,000 CORRECTION

Net Sales 1,493.8 1,493.8

COGS -987.4 -987.4GROSS PROFIT 506.4 506.4General Admin Expenses -224.4 -224.4Research Expenses -33.1 -33.1Asset impairments -  Asbestos Adjustments -195.8 0Net Interest -1.1 -1.1Other Income 2.6 2.6Income before Taxes 54.6 250.4Income Tax Benefit 44.9 0*Net Profit 99.5 250.4

*Tax benefit treatment incalculable due to non-disclosure in the financials

8.Financial Press Discussion Binsted (2015a) in the Sydney Morning Herald highlights the

11% rise in third-quarter adjusted profit to $US48.6m, even in light of an underwhelming United States housing recovery.

Binsted (2015b) in a further article in the Sydney Morning Herald illustrates that taxpayers may need to cover any asbestos related payouts if contributions from James Hardie were insufficient to cover claims.

Towards the end of 2014 there was much discussion around James Hardie’s tax minimisation efforts, with Aston (2014) highlighting in the Sydney Morning Herald that James Hardie has “paid an average of $0 in corporate tax over the past decade”.

Conclusion