HI5020 The Evaluation of Public Limited Companies
(ii) Provide a comparative analysis of the debt and equity position of the two firms that you have selected.
(iii) From the financial statement of your chosen companies, list each item 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 companies over the past years articulating the reasons for the change.
(v) Also provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis.
(vi) What items have been reported in the other comprehensive income statement for each company?
(vii) Why have these items not been reported in Income Statement/Profit and Loss Statements?
(viii) Provide a comparative analysis of the items shown in the other comprehensive income statement section for the two companies. If these items were included in the income statement / profit and loss statements of each company, how would the profit attributable to shareholders of the company be affected?
(ix) Should other comprehensive income be included in evaluating the performance of managers of the company?
(x) What are the tax expenses shown in the latest financial statements of the two companies that you have selected?
(xi) Calculate the effective tax rate for both companies that you have selected.Effective tax rate is calculated as (income tax expense / earnings before tax).Which one of the companies has the higher effective tax rate?
(xii) Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.
(xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies?
(xv) Calculate the cash tax rate for both companies. Which company has higher cash tax rate? (Please do your own research to familiarise yourself with how to calculate cash tax rate).
(xvi) Why is the cash tax rate different from the book tax rate?Please remember some aspects of your companies’ treatment of tax can be a very complicated area, particularly for some companies. For a better understanding of the concepts included in the assignment that has not been introduced in the class, please do your own research.
Answer:
The report will be prepared for the evaluation of the two public limited companies listed on Australian stock Exchange (ASX). The companies are operating in the field of property investments, Lessor of premises to franchise, hotel and other hospitality services. The names of the companies are Harvey Norman Holdings Limited and The Star Entertainment Group.
Harvey Norman Holdings Ltd. (HVN) is successfully operating in diverse businesses such as integrated retail, digital and franchise activity, property investments and offering wide range of retail products through franchise model. The products it is offering are computerized communications, kitchen appliances and other household items (Harvey Norman Holdings Limited, 2018). It is also successfully operating in Ireland, New Zealand, Singapore and Malaysia.
The Star Entertainment Group (SGR) owns several hotels in the name of The Star Gold Coast, The Star in Sydney, Jupiters hotel and Casino on the Gold Coast. It also manages the Gold Coast Convention and Exhibition centre (The Star Entertainment Group, 2018). There are several upcoming projects with the company that will lead to achieve a vision to become Australia’s leading integrated resort Company.
The report will evaluate the annual reports of both the companies for the year 2015, 2016 and 2017 and will analyse the changes in the owner’s equity, cash flow statement, other comprehensive income statement and corporate income tax.
(i) It is one of the major components of business which represents the owner’s investment in the business. This is the amount of the money that is introduced by the owners for carrying out the establishment and commencement of the business (Dagwell, Wines, and Lambert, 2015). In accounting owners equity can be obtained by deducting the amount of liabilities from the total assets. The items listed under the equity head are as below:
Contributed equity/Share capital
The share capital is the amount of the money that is contributed by the shareholders of the company in the exchange of the shares that are publically issues in the capital market. The contributed equity of HVN in year 2015 was $380.328m which has increased to $385.296m in the next year indicating issue of under executive share option plan worth $4.968m (HVN, 2016). There is also an increase in the contributed equity of HVN to $386.309m in year 2017 (HVN, 2017). This change has occurred due to issue of shares under ESOP for amounting $1.013m. On the other side, there is no change in the share capital of SGR 2580.5m in year 2015, 2016 and 2017 (SGR, 2017).
Reserves
Reserves are considered as the part of the profit that is retained for the purpose of meeting some specific purpose. This is the amount held from the amount held for disbursement as dividends. The reserves held with HVN in year 2015 were $113.290m which has increased to $155.814m till the end of year 2016 (HVN, 2016). There are several heads that has resulted to increase in the reserves of HVN the major contributors are Revaluation of land and building, unrealized gain on available for sale investments, reserve expired or realized cash flow hedge reserves (Dagwell, Wines, and Lambert, 2015).
There is significant increase in the reserves due to currency translation differences that were (5.317m) in 2015 and have positive balance of $29.492m as on 30 June 2016. The amount of reserves again increases to $174.950m at the end of year on 30 June 2017. At the same time, SGR was having negative reserves of $(7.4m,) in year 2015 which has improved to $5.4m in year 2016 (SGR, 2016). This improvement takes place due to improved position of the hedging reserve and share based payment reserves. But again in year 2017 the reserves fell to negative figure of $(7.2m) (SGR, 2017).
Retained profits
Retained earnings are the profits of the company that are earned at the end of the financial year after the distribution of the dividends or any other benefits to the investors. Large amount of retained earning depicts healthy financial position of the companies. At the time of analysis the retained profits of HVN it is identified that the reserves were 2043.463m in year 2015 that increased to 2125.186m in year 2016 and again improved to 2229.200m in year 2017 (HVN, 2016). The major contribution was due to increase in profits. The company also declared dividends of 344.962m in year 2017 (HVN, 2017). Similarly, SGR is also having increased retained earnings in year $462.3m in 2015 which has increase to 561.8m in year 2015 (SGR, 2016). The increased profits in the next year lead to improvement in the retained earnings of the company to $702.3m (SGR, 2017).
(ii) Debt and equity position
From the available information in the annual reports of both the companies, it is identified that the total equity of HVN was 2556.860m in 2015 which was increased to 2688.674m in year 2016 (HVN, 2016). On the other side, the debt position of the company was 518.605m in year 2015 which are paid to some extent lead to a balance of 464.114m in year 2016. In year 2017 the equity position of HVN is 2812.907m and the debts were also increased and reached to $633.412m (HVN, 2017).
The main reason for this increase in the debt was due to increase in the interest bearing loans and borrowings and deferred income tax liabilities. At the same time, SGR was having equity of $3035.4 which has improved to $3147.7m in year 2015 and 2016 respectively. The debt position in the period was $989.20m and $1068.00m. In the next year, 2017 the equity of SGR was again improved and resulted to $3275.6m and debts were also increased to $1150.4m (SGR, 2016). The major increase in the debts was interest bearing liabilities reached to 915.0m in year 2017 in comparison to that of 813.5m in 2016.
(iii) Cash flow comprises of three activities first head is operating activities related to the core operations followed by investing activities related with purchase and sale of fixed assets and other capital investments and sales (Wilson, Freeman, and Freeman, 2015). At last, it consists of financing activities that leads to complete the finance needs of the company such as issue of share capital, borrowings and so on.
As per the analysis of cash flow statement of HVN and SGR is identified that the cash flow statement of HVN records net receipts from franchise, receipts from customers, payments to the suppliers and employees, distribution received form joint ventures, GST paid, interest received, interest and other financial costs paid, income tax paid and dividends received (Armstrong, Blouin, Jagolinzer, and Larcker, 2015). There is an increase in the cash flow from operating activities from $340.488m in year 2015 to $437.691m in year 2016 but there is slight decline in the net inflows in year 2017 to $425.140m the main reason for the decline was due to decrease in the net receipts from franchise and increase in the income taxes paid by the company (HVN, 2017).
On the other side, SGR is having the net cash receipts from customers. This is the proceeds of the cash sales from the various activities of the company. Payments to the suppliers and employees indicate the expenses actually incurred during the year and paid to the various creditors and salaries to the employees and other staff. This also includes the taxes and levies for the various facilities to the customers paid to the government (Wilson, Freeman, and Freeman, 2015). The last two heads are interest received it will be the income on investments or savings. The income taxes paid is the actual paid tax for the current year.
The next head is the cash flow from investing activities; HVN has made investments in the plants, property and intangible assets since purchase leads to outflow of cash this is the reason it is deducted from the cash inflows or shown in negative figures. Next is the purchase of investment properties that again leads to decrease in the cash position of the firm.
Thereafter, the proceeds of the sales of the assets recorded which leads to increase the cash of the company. There is a significant increase in the investment properties in the current year from 64.338m in 2016 to 114.752m in year 2017 (HVN, 2017). On the other side, the investing activities of SGR indicate purchase of the property, plant, equipment and investments in associate and joint venture activities. The purchase of property, plant and equipments are 407.6m in year 2017 and investments in associate and joint venture entities are 183.9m (SGR, 2017).
While analysing the investing activities it is identified that HVN has significant decline in the proceeds from the shares from $4.968m to 1.013m in year 2017. There is also proceeds from syndicated facility amounting to $70.00m. The other activities include dividends paid, loans received and repayments or proceeds from other borrowings that helps in boosting or leveraging the business (HVN, 2016). On the other side, SGR is having financing activities such as interest bearing liabilities $434.5m (SGR, 2017). The outflow in financing activities includes repayment interest, dividends and finance costs.
(iv) Comparison of the three broad categories
The cash flow from operating activities of HVN in year 2015 were 340.448m which has increased to 437.691m in year 2016 but there is downfall in the proceeds from operating income in year 2017 to 425.140m (HVN, 2016). On the other hand, the proceeds of the operating activities of SGR were, 485.5m, 377.9m and 473.3m in years 2015, 2016 and 2017 respectively (SGR, 2017). The main factor contributing to the increase in year 2017 was proceeds of the net cash receipts which are increased by 60.7m (2348.3-2287.6).
Investing activities of HVN indicates that there is more outflow of cash in year 2015 amounting $81.803m and 179.853$ in year 2016. There is also an increase in outflow in 2017 by $198.765 the main contribution in this outflow is purchase of investment properties and plant/property contributing $114.752 and 89.366 respectively (HVN, 2017). Similarly, SGR is also have negative figures from investing activities 140.2m, 321.8m and 591.5m in years 2015, 2016 and 2017 respectively (SGR, 2017). The main investment was in property, plant, equipment and intangibles amounting to 407.5m. The company has also increase the investments significantly during the periods of the assessment.
Proceeds of the financing activities indicate that HVN is having negative cash inflows from financing activities. $220.597m was the outflow in year 2015 which is again increased and $307.427m were paid as dividends and loans repayments under financing activities in year 2016. The financing activity outflow was $287.124m in year 2017 (HVN, 2017). At the same time, SGR were having more cash outflow similar to HVN. The outflow for year 2015 was $297.7m and 93.7m in year 2016. There is proceed from the interest bearing liabilities amounting $434.5m that leads to raising more funds and the company net inflow was 72.9m in year 2017.
At the end the overall cash position of the HVN was 153.220m, 103.631m and 42.882m in year 2015, 2016 and 2017 respectively(HVN, 2016). On the other side, the overall cash position of SGR is better amounting to 196.6m, 159.0m and 113.7m in the same period (SGR, 2017).
(v) While analysing the cash flow statements of both the companies, it is identified that HVN and SGR are investing majority of the amounts in investing among the various assets indicating the continuous focus towards enhancing the opportunities. It is also indentified that HVN is continuously issuing shares for financing the business where as SGR is having focus towards bank loans and private placements (Gitman, Juchau, and Flanagan, 2015). The investment in property, plant and other equipments were financed by interest bearing liabilities to leverage the business. In addition to this HVN and SGR are paying dividends the dividends for year 2017 were 344.962m and 123.9m respectively.
statement of comprehensive income of HVN records asset revaluation reserve, available-for-sale reserve, foreign currency translation reserve, income tax effect on cash flow hedge reserve and non-controlling interests. It also includes items that were not reclassified to profit/loss such as fair value revaluation of building and land and income tax effect on fair value revaluation of buildings and land (Robinson, Henry, Pirie, and Cope, 2015). On the other side, SGR records net loss/gains on cash flow hedges, transfer of hedging reserve to income statement and taxes on both the accounts.
(vii) This statement records the items that are not realised till the date of the preparation of the accounts but as per the needs and requirements of IFRS, AAS and IASB it is needed to disclose the information (Wilson, Freeman, and Freeman, 2015). Along with this, it is also needed provide the information to the investors and creditors so these are recorded in other comprehensive income statement. This is the reason these above mentioned items are not recorded in Income statement and need of other comprehensive income arise.
(viii) In case these transactions were attribute to income statement then the profits of the current years for HVN will be increased from 452.966m to 470.191m (HVN, 2017). Similarly, the profits of SGR will decrease from $264.4 to 251.0 in year 2017 (SGR, 2017).
(ix) It is identified that the other comprehensive income should be included in the evaluation of the performance of managers as the activities that are carried out such as investments and foreign exchange transactions hedging etc. it helps to get more accurate measure of the fair value of the companies investments so this is suggested to take care of the other comprehensive income for the purpose of evaluating the performance (Gitman, Juchau, and Flanagan, 2015).
(x) As per the information available in the annual report for year 2017, the tax expenses of HVN were$186.840m and the taxes paid were $152.454m and the income tax expenses paid by SGR were $115.6m and tax paid were 95.6m.
(xi) Effective rate calculation
Effective tax rate = Income tax expense/earnings before tax
HVN
Year 2015 = 109.186/378.100 = 0.289
Year 2016 = 142.423/493.763 = 0.289
Year 2017= 186.840/639.806 = 0.292
SGR
2015 = 67.9/287.1= 0.236
2016 = 84.8/279.2 = 0.304
2017= 115.6/380.00 = 0.3042
It is identified from the above calculations that Star Entertainment Group is having high effective tax rate in comparison to Harvey Norman Holdings Limited.
(xii) Deferred tax assets and liabilities
The deferred tax assets of HVN were $23.670m and 29.013m in year 2015 and 2016. The amount of these assets increase and reached to 31.417m. Similarly, the deferred tax liabilities were 298.636m in year 2017. The deferred tax liability in year 2015 and 2016 were 222.398m and 255.267m respectively.
In the same period of time the deferred tax assets of SGR were 116.5m, 122.1m and 106.6m in year 2015, 2016 and 2017 respectively. On the other side, the deferred tax liabilities were 174.8m, 181.9m and 188.2m for the same period of time.
(xiii) There is an increase in the deferred tax assets of the HVN, this has resulted to a figure of $31.417 in year 2017 but at the same time there is also increase in the deferred tax liabilities of the company year by year and lead to $398.63m in the same year. On the other hand, SGR have decrease in such assets from 122.1m in 2016 to 106.6m in year 2017. The deferred tax liabilities of the company have increasing trend and were 188.2 m in 2017.
(xiv) Cash tax amount calculation
Cash tax = book tax + increase in deferred tax liabilities less increase in deferred tax assets
HVN = 186.840m + 398.63m -31.417 = $554.053m
SGR = 115.6m + 188.2 m - 106.6m = $197.2m
(xv) Cash tax rate for HVN and SGR
HVN = 186.840m/$554.053m = 0.337 or 33.7%
SGR = 115.6/$197.2m = 0.586 or 58.6%
(xvi) Cash tax rate differs from book tax rate as book tax rate is the calculated amount of tax in the financial statements that is recorded as per the identified possible profits and stakeholders and other parties are able to view the same. Whereas cash tax rate is the rate at which the tax is paid by the company to the government (Armstrong, Blouin, Jagolinzer, and Larcker, 2015). Cash tax rate is always higher than book tax rate as it is planned and management tries to adjust the transactions to save tax.
Conclusion
It can be concluded that both the companies are growing at rapid pace especially the assets portfolio is enhanced year by year. Harvey Norman holdings Limited and Star Entertainment Group are operating successfully in the Australian and overseas market. While analysing the owners equity it is identified that there is significant growth in the share capital of HVN where as SGR have stable capital. The retained earnings of both companies increase during the period of assessment. Cash flow statement indicates investments in property, plant and equipments and investment properties. At last corporate tax was calculated and compared with cash tax and effective rate of tax.
References
Armstrong, C. S., Blouin, J. L., Jagolinzer, A. D., & Larcker, D. F. (2015). Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), 1-17.
Dagwell, R., Wines, G. & Lambert, C. (2015). Corporate Accounting in Australia. Australia: Pearson Higher Education.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. AU: Pearson Higher Education.
Harvey Norman Holdings Limited (2018). COMPANY OVERVIEW.
Higgins, R. C. (2012). Analysis for financial management. USA: McGraw-Hill/Irwin
Robinson, T., Henry, E., Pirie, W., & Cope, A. (2015). International Financial Statement Analysis. USA: John Wiley and Sons.
The Star Entertainment Group (2018). THE STAR ENTERTAINMENT GROUP.
Wilson, V., Freeman, S. & Freeman, J., (2015). Accounting: A Practical Approach. Australia: Pearson Higher Education.
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