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James Hardie Industries Limited
James Hardie Industries Limited
James Hardie Industries LimitedLecturer: Stephen LimGroup members: Shaun R. Stewart 12064681Luke Rowles 10742029Joshua Chhay 10276374Xin Xiao 11870957Raed Al-Bader 11669761MD Feisul Kahir 11070226
Table of Content
1.Companys activities and strategies
James Hardie Industries Public Limited Company operates in the construction and building materials sectorFounded in Melbourne, Australia in 1888 the company is now incorporated in Ireland, however it is listed on the ASX with stock code JHXCore 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
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 DOCUMENTDETAILAmended & Restated Final Funding AgreementThis 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 arrangementsValuation 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 StatementsThe 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 PolicySTI20%Individual Performance Plan (STI): 1 -3 year performance targets set internally via matrix dependent upon business stream80%Company Performance Plan: 1 -3 year performance targets set internally via matrix with industry peer comparison.Revenue GrowthEBIT (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 Companys capital efficiency over time;30%Relative Total Shareholder Return (TSR) RSUs an indicator of the Companys 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 executives 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)201220132014Central Estimate $1.58$1.69$1.87Management Adopted Estimate$1.66$1.69$1.71
Asbestos Offset Asset ITEMINCOME TAX RECEIVABLE & INSURANCE RECEIVABLEDESCRIPTIONThe 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.OUTCOMEThese items offset the large Asbestos Liability held on balance sheet improving the Equity Ratio and Current Ratio.
Asbestos ExpenseITEMASBESTOS ADJUSTMENTSDESCRIPTIONActuarial estimates of the Asbestos liability are reassessed each year and changes in the liability estimate are expensed each year.STRATEGYThe Asbestos Liability is re-estimated annually by KPMG Actuaries.The company uses the Asset and Liability method to assess deferred Tax Assets and Liabilities allowing the accrual of Tax AssetsOUTCOMEIncreases in the Actuarial Estimate of Asbestos Liability are expensed each year.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 auditors report by Ernst & Young.
5. Quality of the DisclosureOther Information Operation scopeProduction 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 Numbers1. 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)201220132014AssumptionsCentral Estimate by Actuary $1.58$1.69$1.87InflatedDiscountedPost-Insurance RecoveryManagement Adopted Estimate$1.66$1.69$1.71UninflatedUndiscountedPre-Insurance Recovery
7. Undoing DistortionsThe inclusion of such adjustments reduces the liability by almost half in 2014 from Gross Amount $3,132m to $1,870m. CURRENT ASBESTOS ASSETS109.1CURRENT ASBESTOS LIABILITIES185.8CORRECTIONRestricted Cash & Equivalents - Asbestos60.2Current Portion of Long Term Debt- Asbestos47.047.0Restricted Short Term Investments - Asbestos0.1Asbestos Liability134.5134.5Insurance Receivable - Asbestos28.0Workers Compensation - Asbestos4.34.3Workers Compensation - Asbestos4.3Deferred Income Taxes - Asbestos16.5NON-CURRENT ASBESTOS ASSETS700.9NON - CURRENT ASBESTOS LIABILITIES1,619.3Insurance Receivable - Asbestos198.1Asbestos Liability1,571.72,950.5Workers Compensation - Asbestos47.6Workers Compensation - Asbestos47.647.6Deferred Income Taxes455.2TOTAL ASBESTOS ASSETS810.0TOTAL ASBESTOS LIABILITIES1,805.13,183.9NET ASBESTOS LIABILITIES995.12,373.9
7. Undoing DistortionsP&L$,000CORRECTIONNet Sales1,493.81,493.8COGS-987.4-987.4GROSS PROFIT506.4506.4General Admin Expenses-224.4-224.4Research Expenses-33.1-33.1Asset impairments-Asbestos Adjustments-195.80Net Interest-1.1-1.1Other Income2.62.6Income before Taxes54.6250.4Income Tax Benefit44.90*Net Profit99.5250.4
*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 Hardies 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.
NumberKey Accounting Polices20142013ChangesChange in%
2Property, Plant & Equipment$711.2$658.9+$52.3+7.94%
3Cash flow hedge $0.9-+$0.9-
6Asbestos LiabilityCurrent - $134.5Non Current - $1,571.7$135$1,558.7-$0.5+$13-0.4%0.8%
Key Accounting policiesAASB accounting standard & rules
InventoryAASB 102 InventoriesParagraph 23 FIFOParagraph 23-25Write-Off, Write-Down
Property, Plant & EquipmentAASB 116 PPEParagraph 43-49 DepreciationParagraph 62Straight-line methodParagraph 30 Cost Model
Financial InstrumentsAASB 139 Financial instruments: Recognition and measurement. Paragraph 95 Cash flow hedge
WarrantiesAASB 137 Provisions, Contingent liabilities, Contingent Assets.
Revenue Recognition AASB 118 Revenue
Asbestos LiabilityAASB 137 Provisions, Contingent liabil