In this report, an attempt is made to analyse the financial statement of Fleetwood Corporation. The Annual reports of the company contain all necessary information, financial as well as non-financial, to assess the performance and position of an entity. However, it is important to have proper knowledge about different items in financial statements to understand the actual implication of different items in the financial statements. The main aim of this report is to critically analyse the significant areas related to movement in equity and tax expenses.
Discussion related to Items of equity and reason for change
Fleetwood Corporation has issued equity shares to the public to arrange the required amount of funds to finance the operations of the company. Issued capital represents that part of the capital which has been issued and subscribed by the shareholders of the company. The issued capital of the company is $195,079m for the financial year ending in 2016.
The company has created different reserves to be used for specific purposes. These reserves are not allowed to be used for distribution of dividend. Thus, these are not free reserves and are to be used only for specific purposes. The amount of reserves that the company has at the end of the financial year 2016 is $244m (Muller and Kolk 2015).
The company has retained earnings of $8,508m in the financial year 2016 that is the accumulated balance of profit over the years. The balance of profit that have not been distributed by the company neither transferred for any specific purposes to any reserves (Alstadsæter et al. 2016).
Tax expense provided in the financial statement:
The company recorded current tax benefit in the income statement for the financial year 2016 of $1531m as against a tax expense of $508m in the previous year 2015.
Comparing the income tax expenses and the Accounting income:
No, the current tax expense or benefit in this case is not similar to that of the taxation-law rate multiplied to the income of the company. In-fact the company incurred a loss from the business operations in the financial year 2016 (Dowling 2015). The reason for the difference is that there are other tax items such as deferred tax assets, deferred tax liabilities, advance tax which are adjusted against the current tax liabilities to determine the amount of current tax expense or benefit which is to be provided in the profit and loss account of an entity.
Relationship between the deferred tax assets and liabilities:
Fleetwood Corporation has showed a deferred tax asset of $14,121m in 2016 compared to $4,822m a year ago. No deferred tax liabilities have been reported by the company as the financial statement of the company only shows deferred tax assets.
Though the company has not reported any deferred tax liabilities however, let us evaluate the reasons for recording deferred tax assets and deferred tax liabilities by an entity in the financial statements. Before directly getting into the reasons for creation of deferred tax liabilities or assets in the financial statements of an entity let us provide brief descriptions on deferred tax assets and deferred tax liabilities.
Deferred tax asset is created due to the difference between the accounting profits and taxable profits calculated in accordance with the provisions of income tax rules. The accounting profits are calculated by an entity in accordance with the accounting standards issued by the Australian Accounting Standards Board (AASB) and in accordance with the provisions of the Corporations Act, 2001. Whereas, the assessable profit of an entity is ascertained in accordance with provisions of the Income Tax Assessment Act, 1997. Thus, the taxable profit on which the amount of income tax has to be paid by an entity is seldom the same with that of the accounting profit. In case the accounting profit is lower than the taxable profit, an entity generally recognizes deferred tax assets in the books of account as long as the difference between the two is due to the timing difference and not permanent difference (Cai et al. 2014).
In the report, discuss the reasons for creation of deferred tax assets in the books of accounts of an entity. The following points broadly cover these reasons.
Difference amount of Depreciation under accounting and taxable provisions:
The income tax provisions have different rates that are allowed as depreciation on non-current assets to determine the amount of taxable profit of an entity compare to the rates that have been prescribed in AASB 116. Thus, in case the amount of depreciation is allowed under the income tax act is lower than the amount of depreciation under AASB 116 then that will result in creation of deferred tax assets (Towery 2015).
Expenditures disallowed by income tax provisions:
The income tax provisions do not allow certain expenditures to calculate the taxable profit on which income tax is to be charged which may have been deducted in computing the accounting profit. Thus, the taxable profit will be higher in such case to result in creation of deferred tax asset for the entity concerned (Dyreng and Markle 2016).
Incomes that may have been deferred to compute accounting profit of a year might needed to be included to compute the taxable profit:
The taxable provisions might need an entity to record a particular income to be included in the income statement to compute the taxable profit that might have been deferred to later periods in the income statement prepared under the accounting rules of the country. As a result of this the taxable profit of an entity will be higher than the accounting profit to create deferred tax assets (Shen et al. 2016).
Deferred tax liabilities are also created due to the timing differences in accounting and taxable provisions. The deferred tax liabilities will be created in case the accounting profit of an entity is higher than the taxable profit ascertained in accordance with the provisions of the income tax rules and regulations provided in the Income Tax Assessment Act, 1997.
The deferred tax liabilities are created for the following raesons:
Accounting profit higher than the taxable profit:
The accounting profit if is higher than the amount of taxable profit then an entity will require to create deferred tax liabilities is the difference in taxable and accounting profit is due to timing differences.
Higher amount of depreciation is allowed in the income tax rules:
In case the taxable provisions allow higher rate of depreciation on non-current assets than the rate prescribed and used to charge depreciation on non-current assets to calculate accounting profit of an entity. In that case, the accounting profit will be higher than the amount calculated as profit under taxable provisions (Bratten et al. 2016). As a result of this the entity will have to create deferred tax liabilities in the books of accounts of an entity.
Comparing income tax expenses with income tax payable:
The company, i.e. Fleetwood Corporation, though has recorded any tax liabilities under current liabilities as can be seen from the financial statements of the company for the financial year ending in 2016 however, a year before the company did record an amount of $959m as current tax liabilities (Rao 2016).
The reason are discussed below:
An entity often need to pay advance tax:
In case, an entity pays certain amount of advance tax on provisional income basis to comply with the income tax rules and regulations in the country. In that case, it must be adjusted against the income tax expense of the entity at the end of the financial year when the amount of income tax is ascertained for the financial year (Agrawal et al. 2014). Generally the difference between the income tax expense and advance amount of income tax is either recorded as the amount of income tax payable or tax assets under current liabilities or current assets in the statement of financial position as the case may be.
Adjustment of deferred tax items:
Also after ascertaining the amount of income tax expense from the income statement of an entity necessary adjustment for deferred tax assets and deferred tax, liabilities have to be made to ascertain the amount of income tax liability or assets, as the case may be, to include show in the Balance sheet of the company (Adeler 2014).
Therefore, it can be said that for the above reasons there is a difference between the income tax payable and the income tax expenses.
The relationship between the Income tax payment and expense:
The cash flow statement of the company shows that the following amounts have been paid as income tax in the year 2015 and in the year 2015:
As in the year 2016, the company has incurred financial loss there has been no income tax expense in the year. It can be seen that there exists a significant difference between the income tax expenses and the income tax expenses provided in the cash flow statement (Zhang et al. 2016). The reason for the difference between the two items of financial statements are as following:
There is a difference between the income tax expense and the amount of tax paid:
The income tax expense is the amount of income tax on the taxable profit of an entity whereas the income tax paid in the cash flow statement shows the amount of cash outflow in respect of the income tax. The cash out flow for income tax is generally the payment of adjusted income tax that is due to the government after making all necessary adjustments (Ranchhod and Finn 2016).
Generally, the payment of income tax in cash flow statement could be for income earned in earlier periods. Whereas the income tax expenses is calculated on the amount of income earned by an entity for the current income tax period as per the income statement of an entity. Thus, there would bound to be a difference between the amount of income tax paid as per the cash flow statement and the income tax expense as provided in the income statement of an entity (Le 2017).
While assessing the income tax expense, deferred tax assets, deferred tax liabilities, income tax payable or income tax asset and payment of income tax as per the cash flow statement of Fleetwood Corporation. There have been number of new aspects that have interested curiosity in us and made us think about the different treatments of tax related provisions in the financial statements of the company (Morcol et al. 2017). However, at the same time it is essential for an entity to keep record of each and every single item related to the financial transactions as the same might influence the final liability of an entity while it come to the payment of income tax liabilities for the income earned by the company.
The most interesting aspect of them all is the number of different items which are related with the income tax provisions for the income earned by the company. It is not only about current income tax expense on the amount of taxable profit but the recognition of deferred tax assets or deferred tax liabilities, providing for income tax liability as income tax payable under current liabilities and finally the payment of income tax in the cash flow statement of the company. However, while evaluating the financial statements of the company the number of items that have to be recorded to keep track of income tax provision of the company is quite difficult to summarize in a single place.
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