- From your firm’s financial statement, list each item of reported in the cash flows statement and write your understanding of each item. Discuss any changes in each item of cash flows statement for your firm over the past year articulating the reasons for the change.
- Provide a comparative analysis of your company’s three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years. Other comprehensive income statement
- What items have been reported in the other comprehensive income statement
- Explain your understanding of each item reported in the other comprehensive income statement
- Why these items have not been reported in income statement/profit and loss statement accounting for croporate income tax
- what is your firm’s tax expense in its latest financial statements?
- Is this figure the same as the company tax rate times your firm’s accounting income? Explain why this is, or is not, the case for your firm.
- comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.
- Is there any current tax assets or income tax payable recorded by your company? Why is the income tax payable not the same as income tax expense?
- Is the income tax expense shown in the income statement same as the income tax paid shown in the cash flow statement? If not why is the difference?
- What do you find interesting, confusing, surprising or difficult to understand about the treatment of tax in your firm’s financial statements? What new insights, if any, have you gained about how companies account for income tax as a result of examining your firm’s tax expense in its accounts?
The company selected for this task is JB HI-FI. The latest annual report corresponding to the company available in the public domain corresponds to June 30, 2017. The other relevant aspects related to cash flow statement, other comprehensive income and tax flow are discussed below (JB HI-FI, 2017).
- The cash flow from operations for the company is represented through the screenshot below.
A brief description of the above items is mentioned below (Brunder, 2016).
- “Receipts are customers” – These tend to reflect on the monies that are received from customers for the various products provided to them and this contributes to the revenue. However, revenue in the income statement is prepared on accrual basis unlike customer receipts which are on cash basis and is collection of revenue receipts. Clearly, this item has shown a significant jump over the previous year with a y-o-y increase in excess of 40%.
- “Payments to suppliers and employees” – The company in order to procure goods has to pay suppliers and the various employees that are part of the value chain. The payments made have also increased to about the same extent.
Besides, there are other items related to interest received along with related finance costs. Also, the income taxes that the company paid during the year are also considered (Brealey and Myers, 2013).
The cash flow from investing for the company is represented through the screenshot below (JB HI-FI, 2017).
A brief description of the above items is mentioned below (Ogden, Jen and O’Connor, 2015).
- “Payment for business combination” – This refers to the money actually paid by the company for acquiring a given business which has been recorded after adjusting for the cash available on the books of the acquired business. It is apparent that the company has paid to the tune of $836.6 million for a business acquisition for the year ending on June 30, 2018.
- “Payments for plant and equipment” – This refers to the monies that the company has paid in the given financial year under consideration for acquiring plant and property. For the company, no significant change in observed in this regards for FY2017 over the previous year.
- “Proceeds from sale of plant and equipment” – The company also realises cash inflow on account of disposing off the plant and equipment that it already has but may not require the same or liquidate the same for raising money.
The cash flow from financing for the company is represented through the screenshot below (JB HI-FI, 2017).
A brief description of the above items is mentioned below.
- “Proceeds from issues of shares” – This refers to the monies that the company has raised during the given time period through the issue of shares or dilution of equity. There is a significant jump in this from $ 6 million for FY2016 to $ 395.9 million for FY2017.
- “Proceeds/(repayment) of borrowings” – This refers to the monies that the company either obtains in the form of incremental borrowings or repays to decrease outstanding borrowings. For FY2017, the incremental borrowings amount has increased to $ 450 million primarily to fund the business acquired.
Besides, the costs related to issue of debt and equity has also been realised in the above statement besides the cash outgo on account of dividends declared by the company.
- Over the last three years, the cash flow trends are captured as indicated below (JB HI-FI, 2017).
A healthy trend which is apparent from the above cash flow comparison is the constant increase the in the cash inflows generated for operating activities. This clearly augers well for the business. Further, the cash outflow on account of investing activities was tepid for two years i.e. FY2015 and FY2016 but has shot up due to business acquisition by the company. This business acquisition would allow the company to enhance earnings in the long run but in the short term may make the balance sheet leveraged to some extent. This leveraging of the balance sheet becomes evident from the financing activities related cash flow where the emphasis in FY2015 and FY2016 was on repayment of outstanding borrowing and instead raising capital through issue of equity (Burton, Reynold and Lombra, 2015). While the current strategy of raising funds through equity has continued, the major change in FY2017 has been on increased borrowings driven by the business acquisition. However, despite this, the company has made conscious efforts to strengthen the balance sheet by increasing equity based financing.
- The reported items in this statement are represented as follows.
- The items that are recorded in the OCI statement highlighted above are offered a brief explanation.
- “Changes in the fair value of cash flow (hedges) net of tax” – Owing to the foreign operations of the company and the realisation of proceeds in a currency different from AUD, the business has foreign exchange currency risk. In order to mitigate the same, the company has put in place cash flow hedges. These are financial instruments the value of whom is linked to the foreign exchange rate which determines the resultant cash flows and hence the value of these instruments keeps on changing which ought to be reflected in the books of account (Arnold, 2015). The various gains or losses in this regards by comparing the fair value at the start of the financial year and closing day of the financial year ought to be realised even though the gains/(losses) are notional only. The resultant tax implication of the possible gain or loss is also represented in this item (Brealey and Myers, 2013).
- “Exchange differences on translation of foreign operations” – Taking into cognisance the foreign operations of the company, there needs to be a translation of the foreign currency into functional currency (AUD). In order to translate this money from the foreign currency to AUD, potential losses or gains can realise which are recognised under this item (McLaney, 2015).
- The main reasons for the above items non-inclusion in the P&L statement are highlighted below (Brigham and Houston, 2014).
- The current account norms and related regulations as released by IASB and AASB do not allow recognition of these items in the conventional profit and loss statement.
- The essential nature of these items is different particularly since underlying losses or profits could be notional and not real. The value of the cash hedge is an example in this case.
- Also, this loss or gain usually is not the direct or intended consequence of the operating activity. However, it does not imply that items listed in the OCI statement lack significance.
- For the year ending on June 30, 2017, the tax expense would be listed in the income statement. Based on the same, the tax expense of the company has been recorded at $86.8 million. For FY2017, there has been an increase in the tax expense as compared to the previous year when it was $65.6 million.
- The accounting income of the given firm for FY2017 is $ 259.2 million. Also, the prevalent corporate tax rate at that time was 30%. Thus, theoretical tax expense expected for 2017 = 0.3*259.2 = $77.8 million
However, the actual tax expense recorded in the profit and loss statement is higher at $ 86.8 million. This difference can be explained on the basis of the following note to accounts.
From the above computation, it is apparent that the first step in computation of tax expense is $77.8 million which further has undergone certain adjustments so that there can be reconciliation between tax based income and also accounting based income. With regards to tax rules, there are certain expenses which might not be deductible which may have been deducted for income computation (Payne and Guifer, 2016). Similarly, there are other deductions that would be valid under tax norms but not so under accounting. Therefore, in order to obtain the tax payable various adjustments are carried out as shown below.
- Deferred Tax Assets
Tax Flow
Their definition can be understood from their name since these refer to the amounts that would be possible saved in tax outflow in the future on the basis of transactions in the present (Payne and Guifer, 2016). The company has deferred tax assets to the tune of $ 105 million as on June 30, 2017. The composition of the same is highlighted as follows.
These deferred tax assets have arisen on account of the temporary difference and relate to the items indicated above. It is apparent that there has been a significant jump in these assets as on June 30, 2017 compared to the previous year primarily has been owing to deferred revenue based tax assets to the tune of $ 55.2 million in comparison to $0 for the corresponding year ending on June 30, 2016.
Their definition can be understood from their name since these refer to the amounts that would be possibly incurred as additional tax outflow in the future on the basis of transactions in the present (Brunder, 2016). The company has deferred tax liabilities to the tune of $ 113.2 million as on June 30, 2017. The composition of the same is highlighted as follows.
These deferred tax liabilities have arisen on account of the temporary difference and relate to the items indicated above. It is apparent that there has been a significant jump in these liabilities as on June 30, 2017 compared to the previous year primarily has been owing to brand name & pre-payments based tax liabilities to the tune of $ 110.3 million in comparison to $12.9 million for the corresponding year ending on June 30, 2016.
- The company in the balance sheet has current tax liabilities to the extent of $ 11.8 million as on June 30, 2017. This amount has witnessed slight increase as compared to the corresponding value from the previous year which stood at $ 10.9 million. The fact that these are recorded as current liabilities is because this amount of tax needs to be paid by the company during the next financial year (Ross, et.al., 2014).
The income tax payable is not the same as income tax expense since income tax expense refers to the expense related to income tax which is recorded on accrual basis in the income statement. However, during the year the company pays some income tax to the tax department on a periodic based on the estimated profit generation. As a result, the tax payable highlights the outstanding amount which still is outstanding at the end of the financial year and thus would be paid in the next year (Lasher, 2014).
- The income tax expense for FY2017 ($86.8 million) is not the same as income tax paid for FY2017 ($98.5 million). The two amounts are different since in FY2017 tax related payment, some part of the tax is paid for FY2016 which was recorded as outstanding tax liability. Also, the tax paid in FY2017 corresponding to the same year to an extent is driven by estimates of tax liability based on the business performance. The tax expense as reported in the income sheet is prepared only after the closing of the year. Thus, the tax paid on account of the remaining amount is typically done the next year (Ogden, Jen and O’Connor, 2015).
- With regards to the treatment of tax, the most confusing aspect was the deferred tax asset and liabilities whose creation I found quite puzzling. As a result, I had to go through the relevant schedule over and over again to gain clarity in this regards. A key insight about the tax expense which I gained from the accounts of my company is that tax expense is based on the reconciliation between the tax treatment for accounting and income tax purposes. As a result, it deviates from the theoretical value so as to make relevant adjustments (Brigham and Houston, 2014).
References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times Management.
Brealey, R. and Myers, S., (2013) Principles of Corporate Finance. 9th ed. New York City: McGraw –Hill.
Brigham, E. F. and Houston, J. F., (2014) Fundamentals of Financial Management. 14th ed. Boston: Cengage Learning.
Bruner, R. F. (2016) Case Studies in Finance. 7th ed. New York City: McGraw-Hill Education.
Burton, M., Reynold, N. and Lombra, R. (2015) An Introduction to Financial Markets and Institutions. 2nd ed. New York City: Routheldge.
JB HI-FI (2017) Annual Report 2017. Available at: https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf (Accessed: 23 May 2018).
Lasher, W. R. (2014) Practical Financial Management. 5th ed. London: South- Western College Publisher.
McLaney, E.J. (2015) Business Finance – Theory and Practice. 8th ed. New Jersey: Prentice Hall.
Ogden, J., Jen, F. C. and O’Connor, P. F. (2015) Advanced Corporate Finance. 3rd ed. London: Pearson Publisher.
Payne, J. and Gullifer, L. (2016) Corporate finance law: Principles and policy. 4th ed. Oxford: Hart Publishing.
Ross, S.A., Trayler, R., Bird, R. and al, et (2014) Essentials of corporate finance. Sydney, Australia: McGraw-Hill Australia.
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