1. a) Briefly outline your company's main business activities. This should include discussion of the market sector/s (for example, financial services, energy, consumer products and services, health care, telecommunications, information technology, utilities) in which your company operates andthe main products and/or services from which your company derives its income.
b) Has your company made investments in the equity (shares) of other companies that do not result in your company having significant influence, joint control or control over the investee? To determine this, you should examine the asset section (both current assets and non-current assets) for something like ‘other investments’, ‘other current assets’, ‘other non-current assets’, ‘current financial assets’, non-current financial assets’. Then go to the note indicated next to the item which will provide details about any investments. If so, you should clearly indicate the number of the note in your answer.
c) Explain whether an investment in the equity of another company (that does not result in the investor having significant influence, joint control or control over the investee) satisfies the definition of a financial instrument.
d) What is a derivative financial instrument? Is an investment in the equity of another company (that does not result in the investor having significant influence, joint control or control over the investee) a derivative financial instrument?
e) Explain how an investment in the equity of another company (that does not result in the investor having significant influence, joint control or control over the investee) would be measured: (1) on initial recognition; and (2) subsequent to initial recognition?
2. a) What is your company’s income tax expense (or income tax benefit) for the period covered by the Annual Report? If your company reports income tax expense, what is the amount of: (1) the current income tax expense; and (2) deferred income tax expense?
b) How would you explain current income tax expense and deferred income tax expense? How is current income tax expense calculated? How is deferred income tax expense calculated?
c) What are the amounts of deferred tax assets and deferred tax liabilities reported by your company? Are these amounts shown separately in the Statement of financial position or are they offset? Under what circumstances can deferred tax assets and deferred tax liabilities be offset?
d) Does your company provide a reconciliation of (1) income tax on the company’s profit before tax to (2) the income tax expense? What is the amount of income tax on the profit before tax? What is the amount of income tax expense? What are the reasons for these two amounts being different?
e) Explain why the amount of income tax expense reported by a company may not be the same as the amount of income tax paid to the Australian Taxation Office (ATO).
a). Outline – Company’s Main Business Activities and Revenue Generation
Nearmap Limited is company incorporated in the country of Australia and it’s a listed company. The company has been established in the year of 2000. Its headquarters are located at Underwood Street, Sydney, Australia. The company is engaged in the business of operating the web portal which provides the clear images of the addresses along with the geo code along with innovative tiles and the adequate technology. In other words the company is engaged in the business of providing online photomap with the high quality defined photos and maps. It is regarded as the leader in the service industry serving the businesses, enterprises and the other stakeholders of the business including the Government and other individuals. Thus, the company operates in the service sector which not only provides services to the specific country but across the globe. The company has been engaged with the small as well as the big organizations and also has worked for the local and municipal governments of the Australia and has been striving for the reputation in the market by providing the innovative technologies and the best photo map (Company Official Website, 2017).
The company has three operating segments located at Australia, United States and Corporate.
The major source of revenue is the subscription revenue. The other sources of revenue are Royalty Income, on demand revenue, Grant Income and Interest Income (AASB, 101). This is as per the Note number four forming part of the Annual Report of the company. The total revenue that the company has generated is $31289000 during the period for which the annual report of the company has been considered which is 30th of June 2016 and out of this amount the subscription revenue comes out with $30592000 and the remaining consists of other revenues. In the current year the company has not generated any income pertaining to the research and development area (Fridson, 2015 and Hoove 2016).
b). Investments in Other Companies
No the company has not invested in any company which has resulted in no significance influence or the case where the entity is controlled jointly or direct or indirect control on the entity in which investment has been done. This is as per the note number 16 of the financial statements and also the heading of Current Assets and Non Current assets under the Balance Sheet. The company wholly owned subsidiaries and the same has been listed in the Note number 17 of the Financial Statements.
c) Financial Instrument
As per the Australian Accounting Standard number 132 on the Presentation of the Financial Instruments, it is defined as the contract which results in the generation of financial asset of the one company and simultaneously it will result in the financial liability of the other company. And it is defined as the asset which consists of cash, an equity of the other company, a right which is contractual and gives the company the right to have the cash or the other financial asset from the other company or the right to receive the financial asset or the liability in exchange with other financial asset or the other financial liability and right which again is contractual but which will be or may be settled in the company’s own equity. The last one contractual right includes the financial derivatives or the non derivative instruments (AASB, 132).
In the given case of Nearmap Limited, since the company has not invested in the equity of another company and thus it cannot be said whether the investment made by the company satisfies the definition of the financial instrument or not.
d) Derivative Financial Instrument
Financial Instruments as per AASB 132 includes the accounts receivables, accounts payables and the equity component and the derivative financial instruments includes the financial options, futures, forwards, swaps including swapping in the currency fluctuation and the swapping in the interest rates. Derivatives are also in the scope of this standard. It is defined as the asset which derives its asset with the value of underlying asset. As per Note number 9 of the financial statements, the company has hedged its foreign currency exposure through the derivative and the non derivative financial instruments and has valued the same on the basis of the value which it will fetch in the market as on that particular date and transfer the hedging currency gain or loss to the statement showing Other Comprehensive Income which is prepared immediately after the preparation of statement of profit and loss.
In the given case company has not invested in any entity which does not give them the right of having the significant influence or control over the other company and hence the question of discussing whether the investment made by the company includes the derivative financial instrument is or not.
e) Recognition of the Investment
As per paragraph 4 of the AASB 9, the company may value its investment as the financial instrument at the value which it will fetch in the market through the statement of Income account. With this the company will have the higher transparency and the company will have no confusion as to how the assets or the liabilities in the nature of financial instruments are valued. The financial asset and the financial liability are recognized in the Balance Sheet as on that date and it is done only when the company has the legal and enforceable right to become the party to the contract relating to the investment. As per paragraph number 33 of the AASB 9, at every subsequent year the investment will be valued at the fair value less or add the changes if any occurs during the period. The change so made will be transferred to the statement of Income. In this way, investment made by the company is valued initially and then subsequently (AASB 9 and AASB 139).
The method so adopted has been named as the equity method and are applicable in case of the joint ventures and the associates also. The same way of recognition has been listed in the International Reporting Financial Standards and the same has been mentioned in the Australian Accounting Standards (IAS 28, 2011).
In the given case as the company has made the investment only in the wholly owned subsidiary companies and hence the need for initial and subsequent recognition of the investments will not arise in any manner.
2. a. Company’s Income tax expense in the year ending 30thJune 2016 is as follows:
Income Tax Benefit $869000
Deferred Tax Expense $1573000
Total Income Tax Expense that has been reported by the company is $2442000.
b. Whenever the tax expense is calculated then it includes two expenses. One is the current income tax and the other one is the deferred tax expense. Both are disclosed in the statement of Income and the respective cumulative balances are disclosed in the Balance Sheet.
Current Tax Expense
This expense is the income tax which is required to be valued on the net profit of the company at the rate of 30% and is deducted from the profit of the company and is transferred to the Balance Sheet of the company prepared as on that date. In accordance with the Note number seven of the financial statements of the company, current tax expense or the current tax benefit is measured at the amount which the company expects and measures accordingly to be recovered from the taxation authorities or to be released in favor of the taxation authorities (AASB,112). The income tax on the current year income is calculated at the rates which are made available for the companies to be computed as on the year end. In the given case the current income tax has been calculated at rate of 30% which is defined as by the Australian Taxation Authorities.
Deferred Income Tax Expense
As per Australian Accounting Standard 112 on Income Taxes, company assess its profitability to the best judgment in the manner that future profits will be available with the company against which the company will be able to set off its unutilized tax losses and the temporary differences which are deductible in the near future periods. Deferred income tax is calculated on the differences which are not permanent in nature and that are available at the reporting date on which the financial statements are prepared (AASB,112). The temporary differences are those which can be easily reversed in the near future. For example depreciation, preliminary expenses, etc. On these temporary differences, the tax is calculated at the rate of 30% which is prevailing at the time of the reporting date and whether it results to the deferred tax expense or the deferred tax income depends on the results of the temporary differences.
c. Deferred Tax
Following are the amounts of deferred tax assets and deferred tax liabilities which have been reported in their Balance Sheet forming part of the Annual Report for the year ending 30th of June 2016:
- Assets $2624000
- Liabilities $2525000
Both have detailed in the Note number 7 of the Annual report of the company.
Yes both the figures pertaining to the assets and liabilities in the nature of deferred tax have been shown separately under the proper head of the Balance Sheet which is Non Current Assets and Non Current Liabilities as on that date respectively. Both the amounts have not been set off rather have been disclosed separately and that too has been done as per the provisions of the accounting standard 112 issued by the Australian Accounting Standard Board.
As per paragraph number 74 of the Australian accounting standard 112, the company can set off both the figures of the assets and the liabilities if following conditions are satisfied:
- The company is legally allowed to adjust its tax assets against the tax liabilities as on that date and
- The assets and liabilities which are deferred in nature so computed have been regulated by the same taxation authorities on:
- The similar company which is taxable
- The different companies which are taxable and which intends either to adjust the tax assets and liabilities simultaneously or on the one hand recognizes the current tax assets and settles the liabilities in the future periods in which the amount of the tax assets or liabilities so created are liable for set off or settled in the future periods.
Thus, in this manner both the tax assets and tax liabilities are reported in the statement of financial position as period ending as on that date.
d. Income Tax Reconciliation
Yes, the company has provided the reconciliation of the company’s profit before tax to the income tax expense. On profit before tax the company has reported the tax of $1408000 in Note number 7 of the financial statements. The amount of Income Tax expense that has been reported is $2442000 for the year ending 30th of June 2016.
Following are the reasons for differences in the aforesaid amounts:
- Research and Development Grant amounting to $266000.
- Effect of higher tax rate in the USA, being one of operating segments of the company, amounting to $600000.
- Share based payment expense amounting to negative $532000
- Entertainment expense amounting to negative $79000.
- Other non deductible expenses amounting to $31000
- The amount of current year losses for which the company has not recognized any tax assets in the nature of deferred tax in the financial statements. These are equivalent of negative 4320000.
- The amount of $184000 which has been overprovided in the prior year.
e. Yes the figure of income tax detailed by company is not similar to the amount which is required to be released to the Australian Taxation department. As per the Note 7 of financial statements the entity has paid the tax of $1408000 but the company has booked the income tax benefit of $2442000 in the balance sheet. In this manner the income tax reported by the company in the annual report and the income tax released by the company is totally different.
AASB, (2017), “AASB101 Presentation of Financial Statements” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-04_COMPsep05_01-06.pdf accessed on 19/08/2017.
AASB, (2007), “AASB132 Presentation of Financial Instruments” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB132_07-04_COMPapr07_07-07.pdf accessed on 19/08/2017.
AASB, (2010), “AASB9 Financial Instruments” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-10.pdf accessed on 19/08/2017.
AASB, (2013), “AASB139 Financial Instruments : Recognition and Measurement” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB139_07-04_COMPoct10_01-11.pdf accessed on 19/08/2017.
AASB, (2012), “AASB112 Income Taxes” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf accessed on 19/08/2017.
Company official Website ,available on https://www.nearmap.com.au/about accessed on 20/08/2017
Fridson M, (2015), “Financial Statement Analysis”, available on https://books.google.co.in/books?id=Iha4OzyPN48C&printsec=frontcover&dq=online+free+books+on+presentation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false accessed on 16/08/2017.
Hove M, (2016), “Consolidated Financial Statements – An International Perspective”, available on https://books.google.co.in/books?id=BcgtnlDHsXcC&printsec=frontcover&dq=online+free+books+on+consolidation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false accessed on 16/08/2017.
IAS Official Website, (2011), “IAS 28 – Investments in Associates and Joint Ventures” available at https://www.iasplus.com/en/standards/ias/ias28-2011 accessed on 17/08/2017