HI5020 Accounting for Corporate Income Tax
website of your company. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name.
In this section, go to your firm’s annual reports and save to your computer your firm’s latest annual reports consecutively for last three years. For example, these may be dated 30 June 2016 or 31 March 2017. Do not use your firm’s interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firm’s financial statements carefully and include information from these footnotes in your answer.
You need to do the following tasks:
CASH FLOWS STATEMENT
(i) 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. (ii) 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
(iii) What items have been reported in the other comprehensive income statement (iv) Explain your understanding of each item reported in the other comprehensive income statement (v) Why these items have not been reported in Income Statement/Profit and Loss Statement
ACCOUNTING FOR CROPORATE INCOME TAX
(vi)What is your firm’s tax expense in its latest financial statements?
(vii) 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.
(viii) Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.
(ix)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?
(x) 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?
(xi)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?
Please remember some aspects of your firm’s treatment of its tax –can be a very complicated area, particularly for some firms.
PRESENTATION
You will have to do a presentation in the class where your lecturer will question you from different angles of the assignment and you will have to satisfy the lecturer that you were sufficiently and appropriately involved in preparing the assignment. The presentation will take place in the last hour of the class of week 11 and week 12. It is the discretion of the lecturer to ask any student to do the presentation or to award marks to a student without asking to do the presentation. But every student need to be prepared for the presentation and well conversant about everything that has been written in the submitted assignment.
Assessment marking criteria
(i) Doing the assignment on three years annual report for your company and doing appropriate comparison
(ii) Insightful description of each item of your firm’s cash flows statement – indicating a degree of understanding of what each item is
(iii)Insightful explanation of changes in each item of the cash flows statement
(iv)Insightful explanation of each item of Other Comprehensive Income Statement
(v) Clear description of your firm’s income tax expense
(vi)Insightful explanation of whether, and if so why, your firms’ income tax expense differs from the corporate tax rate times the accounting income
(vii)Explanation of why the income tax expense shown in the income statement is different from income tax shown in the cash flow statement
(viii) Understanding of deferred tax assets and deferred tax liabilities and why they have changed over the previous year.
(ix)Convincing evidence (if needed, class by presentation) that the student was sufficiently and appropriately involved in preparing the assignment.
Answer:
In order to fulfil the criteria of this assignment, the organisation chosen is Virgin Australia Limited, which is operating in the aviation industry of Australia. The airline has found itself listed on the ASX and its ticker symbol is VAH. It contains certain sections in its cash flow statement and they are elucidated briefly as follows:
Cash flows from operating activities:
This section involves various items listed, which are considered as significant business aspects for Virgin Australia Group. The items listed include the following:
- Amounts collected from the customers
- Amounts paid to the staffs and suppliers
- Receipt and payment of finance income and finance expense
The customer receipts are those amounts obtained from credit sales (Reid & Myddelton, 2017). Since the organisation has tightened its credit policy, it has experienced a significant increase in amounts received from the customers. The supplier and staff payments are the amounts that Virgin has purchased on credit and salaries to the employees.
There is cons
iderable increase in this item, as Virgin Australia has to meet the rising c
onsumer demand by buying additional materials from the suppliers. Finance income could be explained as the revenue made and reported on the monetary statements of a business organisation. Since some part of the loans provided could not be accumulated, a rising trend could be observed in finance income (Virginaustralia.com, 2018). The short-term and long-term dues of the airline are considered in the form of finance income and decline is inherent in this item in 2017, as the payment of interest on loans taken is minimised.
Cash flows from investing activities:
The main items listed under this section comprise of payments for and proceedings from property, plant and equipment, proceeds from and advances to deposits and others. It is necessary to pay certain amount for acquiring property, plant and equipment and payments are to be made for carrying out the overall business operations. On the other hand, as these assets provide economic benefits to the organisation, which are considered as proceeds.
It could be observed that Virgin Australia has minimised its investment in this item and due to this, it has not generated adequate cash flows from such items, as it has sold a part of its property, plant and equipment. The deposit proceeds and payments are financial instruments. in which the organisation would earn and pay the principal along with interest obtained and interest paid (Collins, Hribar & Tian, 2014). Due to higher payments of interests, the proceeds are deemed to be lower than payments.
Cash flows from financing activities:
The main items that are included under this head are repayment of and proceed from borrowings, equity distributions and other items. In loan agreements, the lenders disburse amounts to the borrowers (Miao, Teoh & Zhu, 2016). In accordance with the latest annual report of Virgin Australia, the organisation has failed to increase the earnings from borrowings. On the other hand, it has made more borrowing payments in the year 2017. Equity distribution signifies the annual cash flow, which is given to the shareholders of an organisation. For Virgin, the amount has declined in 2017, since emphasis has been placed on maximising retained earnings.
Requirement (ii):
There are various categories of cash flows, which are disclosed in the annual report of Virgin Australia Group in 2017. The comparative analysis of all these categories in the cash flow statement for three years is represented as follows:
Other comprehensive income statement:
Requirement (iii):
According to the annual report of Virgin Australia Group in 2017, the main items listed in the comprehensive income statement comprise of the following:
- “Foreign currency translation reserve”
- “Cash flow hedge reserve”
- “Income tax benefit or expense”
Requirement (iv):
As commented by Collins, Hribar & Tian (2014), for foreign currency translation reserve, it is necessary to necessary to ascertain the currency, in which the foreign unit operates. After such ascertainment, it is crucial to regauge the financial reports of the foreign unit to the domestic currency and accordingly, profits or losses would be measured based on currency translation. Cash flow hedge reserve is important for minimising the cash flow variations, as certain risk changes are inherent like debt interest rate and rate of floatation (Graham & Lin, 2018). On the other hand, income tax expense is the amount incurred on profit before tax of the organisation.
Requirement (v):
In the words of Nejad & Ahmad (2017), the expanded view of net income is considered as other comprehensive income. Virgin uses this statement for providing important details on the values of the above-mentioned items. The main reason that these items are mentioned under other comprehensive income statement is that they provide comprehensive and holistic overview of the drivers related to business operations and thus, they are not disclosed in the income statement (Nejad & Ahmad, 2017).
Accounting for corporate income tax:
Requirement (vi):
Tax expense is taken into account as an important obligation of an organisation due to federal, municipal and state governments of the nation. In case of Virgin Australia, it has not incurred tax expense; instead, it has obtained income tax benefit in both the years 2016 and 2017. It could be observed that Virgin Australia has managed to earn income tax benefits in both the years 2016 and 2017
Requirement (vii):
The significant rise in operating expenses has resulted in loss for Virgin Australia, as stated in its annual report before tax. A tax rate of 30% is to be charged on the earnings before tax so that the final profit that is available in the hands of the organisation could be ascertained. However, since the airline has incurred loss before income tax, it is not possible to account for income tax expense. Hence, it is not possible to determine whether the tax expense of the airline that needs to be mentioned in the income statement is calculated by using 30% tax rate on profit before income tax expense (Dyreng, Hoopes & Wilde, 2016).
Requirement (viii):
There are various situations due to which the organisations mainly incur deferred tax assets. This might be due to the fact that taxes are paid before earnings are realised or the tax payments made have exceeded the actual tax amount to be incurred. On the other hand, deferred tax liabilities are those, which are evaluated or they are due for the existing period, since payments are not yet made (Taylor & Richardson, 2014).
For Virgin Australia, the deferred tax assets amount to $1,017.6 million in 2017, which were $857.9 million in 2016. On the other hand, the deferred tax liabilities have been $463.4 million in 2017 compared to $434.4 million in 2016. Since Virgin Australia has incurred additional amount on depreciation due to the variation in depreciation rate, deferred tax assets have deemed to occur in the year. Recognition of deferred tax liabilities is made due to temporary variations in profits, due to which it has obtained tax benefits in both 2016 and 2017.
Requirement (ix):
For the ASX listed entities, it is necessary to pay income tax for complying with the taxation law of the nation. According to the annual report of Virgin Australia, it has been evaluated that the current tax assets constitute of the expected tax payable or receivable on taxable income or loss for the specific period. They are gauged with the help of tax rates and tax laws enacted at the reporting year (Dowling, 2014). However, the airline has recognised net loss in the year 2017 and the same amounts are reported in the section of reconciliation of net loss to net cash from operations in its annual report. The main reason that these two items depict the same values is that no excess tax expenses are incurred on the part of the organisation in both the years.
Requirement (x):
In accordance with the annual report of Virgin Australia in 2017, it could be observed that the organisation has not incurred any income tax expense in both the years 2016 and 2017. Instead, it has earned income tax benefit in the stated years and this is the main reason that income tax paid is not included as an item in the cash flow statement of the organisation (Bennedsen & Zeume, 2017).
Requirement (xi):
After critical assessment of the tax treatment of Virgin Australia, the surprising element that has been found is that it has suffered loss before incurring income tax expense in both 2016 and 2017, due to which it has earned income tax benefit. As a result, it has become difficult to relate the actual tax expense paid with the prevailing tax rate of the nation. In addition, since no income tax expense has been incurred, there is no mentioning of income tax paid in the cash flow statement of the organisation. However, it has made relevant disclosures regarding the income tax benefits obtained and this helped in acquiring knowledge about its tax treatment.
References:
Virginaustralia.com. (2018).
Reid, W., & Myddelton, D. R. (2017). Cash flow statement. In The Meaning of Company Accounts (pp. 16-16). Routledge.
Miao, B., Teoh, S. H., & Zhu, Z. (2016). Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), 473-515.
Collins, D. W., Hribar, P., & Tian, X. S. (2014). Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), 173-200.
Nejad, M. Y., Ahmad, A., & Embong, Z. (2018). Value Relevance Of Other Comprehensive Income. Asian Journal of Accounting and Governance, 8, 133-144.
Graham, R. C., & Lin, K. C. (2018). The influence of other comprehensive income on discretionary expenditures. Journal of Business Finance & Accounting, 45(1-2), 72-91.
Nejad, M. Y., & Ahmad, A. (2017). Value Relevance of available-for-sale financial instruments (AFS) and revaluation surplus of PPE (REV) components of other comprehensive income. In SHS Web of Conferences (Vol. 34). EDP Sciences.
Marchini, P. L., & D'Este, C. (2015). Comprehensive Income: which potential effects on firms’ performance evaluation and users’ decision process?. Financial reporting.
Dyreng, S. D., Hoopes, J. L., & Wilde, J. H. (2016). Public pressure and corporate tax behavior. Journal of Accounting Research, 54(1), 147-186.
Taylor, G., & Richardson, G. (2014). Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics, 10(1), 1-15.
Dowling, G. R. (2014). The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), 173-184.
Bennedsen, M., & Zeume, S. (2017). Corporate tax havens and transparency. The Review of Financial Studies, 31(4), 1221-1264.
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