1. From your firm’s financial statement, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firm over the past year articulating the reasons for the change.
2. What is your firm’s tax expense in its latest financial statements?
3. 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.
4. Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.
5. 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?
6. 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?
7. 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?
There are three major items in the balance sheet of the companies and one of these items is Equity. There is not any exception of this fact in case of Retail Food Group (RFG). According to the Balance Sheet 2017 of RFG, there are three major items under equity; they are Issued Capital, Reserves and Retained Earning. Issued capital is considered as the equity of the business organizations (Saunders and Cornett 2012). Business organizations use to raise one portion of capital required for their businesses. The calculation of issued capital is done by multiplying the number of shares of stock outstanding by the par value of the shares. According to the annual report of RFG, an increase in issue capital can be seen in 2017 as compared to 2016; that is $ 402,472,000 in 2017 from $ 324,072,000 in 2016 (rfg.com.au 2017). The major items under issues capital are issue of ordinary shares, cost of the issue of shares and income tax related to issue of shares. The next item in the equity of RFG is Reserves. Under the concept of financial accounting, reserve is considered as a part of the company’s equity. This is considered as the extra amount except for basic share capital. The latest annual report of RFG states that there is an increase in equity reserves in 2017 as compared to 2016; that is $ 106,000 in 2017 from $ 1,495,000 in 2016 (rfg.com.au 2017). In RFG, three components of equity reserves are reserve for equity –settled employee benefit, reserve for foreign currency translation and reserve for hedging. The next item under the equity of RFG is Retained Earning. It represents the total profit and losses of the company from the time of its formation decreased by any dividend paid by the shareholders. The latest annual report of RFG states that the company has retained more earnings in the year 2017 as compared to 2016; that is $ 62,594,000 in 2017 from $ 52,555,000 in 2016 (rfg.com.au 2017). The positive retained earnings state that RFG has more profits than losses. The components of retained earnings in RFG are net profit attributed towards the members of the company, dividends given or paid and impact of restatement (Almazari 2012). All these above-discussed components are the major items of equity in RFG.
In the business organizations, different types of expenses can be seen like selling expenses, administrative expenses and many others. One of such expenses is Tax Expenses. In addition, tax expense is considered as a major liability of the companies owing to the federal, state and municipal governments of the country (Chetty and Hendren 2013). The calculation of tax expense is done by multiplying the appropriate tax of the business by the income before taxes after factoring some major items like non-deductable items, tax assets and tax liabilities. There is not any exception of this fact in case of RFG as the company has its tax expenses. According to the latest annual report of RFG, the company has reported $ 87,613,000 in 2017 and $ 76,583,000 in 2016 as their profit from continuing operations before income tax (rfg.com.au 2017). According to the regulations of Australian Tax Law, the corporate tax rate for the Australian companies is 30%. Based on the tax rate of 30%, the total tax expenses of RFG is $ 25,686,000 in 2017 and $ 23,620,000 in 2016 (Burman and Phaup 2012). This is the main tax expenses of the company for 2017 and 2016. It can be observed that there has been an increase in the total tax expenses of the company due to the rise in income for the company in 2017 as compared to 2016.
From the above discussion, it can be seen that RFG has $ 87,613,000 in 2017 and $ 76,583,000 in 2016 as profit from continuing operation before changing income tax. In addition, the latest annual report of RFG states that the company has used the rate of 30% in financial year 2017 and 2016. In the rate of 30%, the total income tax expenses of RFG should be $ 26,284,000 ($ 87,613,000*30%) in 2017 and $ 22,975,000 ($ 76,583,000*30%) in 2016. However, the actual tax expense for RFG in 2017 and 2016 is $ 25,686,000 and $ 23,620,000 respectively (rfg.com.au 2017). Thus, a clear difference in the tax expenses of RFG can be seen. In case of RFG, there are some specific reasons for the differences in the tax expenses in spite of having the same tax rate of 30%. There are some specific items that are either included or excluded in the preliminary total tax expenses. These items can be considered as the reasons for the difference in tax expenses. In RFG, there are five such items having additional effects on the total tax expenses of the company. The first item is non-deductable expenses for the determination of taxable profits (Piketty and Saez 2013). There are some expenses in RFG that should not be deducted from income of the company. As a result of this, $ 879,000 and $ 638,000 added in 2017 and 2016 respectively (rfg.com.au 2017). The next item is the presence of different tax rates for the subsidiaries of the company. RFG has 30% tax rate. However, the subsidies of RFG have 28% tax rate in New Zealand and 34% in United States of America. Due to this difference in tax rate, $ 12000 and $ 17000 is deducted from the original tax expenses of the company. The third item is the presence of deferred tax assets. Companies get tax benefits for the presence of deferred tax assets (Piketty and Saez 2012). For this reason, $ 177,000 deducted from the tax expenses of RFG in the year 2016. There are some other items that are required to be added back with the tax expenses of RFG. Due to this, $ 82000 and $ 201,000 was added. The last item is the presence of non-assessable incomes. Some incomes are not required to be assessed under taxation. Thus, $ 1,547,000 is added with the total tax expenses.
Deferred tax assets and liabilities are two of the major concepts for the tax operation of the companies. Deferred tax assets refer to the situation where the companies overpay taxes or pay taxes in advance on their financial assets (Laux 2013). On the other hand, deferred income tax liabilities represent a situation where difference can be seen in the profit and tax carrying value of the company (Harrington, Smith and Trippeer 2012). In case of RFG, it can be seen that the company has reported both their deferred tax assets and liabilities in the statement of financial position. It shows that RFG has deferred tax assets of $ 13,657,000 in 2017 and $ 7,394,000 in 2016. In addition, the company has $ 119,433,000 in 2017 and $ 115,908,000 in 2016 as deferred tax liabilities (rfg.com.au 2017). Considering the accounting rules and regulations of deferred tax and assets, there are some reasons for the development of deferred tax assets and liabilities. In case of deferred tax assets, the reason may be the excess payment of depreciation by the company due to the difference in depreciation and taxable depreciation rate. Due to the excess payment in depreciation, RFG will not have to pay the additional tax in next year; thus, it is considered as an asset. In case of deferred tax liabilities, it may be happened due to the temporary differences in company profits, the company had to pay less taxes in the current year (Gallemore et al. 2012). Thus, it is required for the company to pay that in the next years. For this reason, it is considered as liability.
Current tax assets or income tax payable is considered as an important aspect for the business organizations. In the annual reports of RFG, the company has reported about their current tax assets. According to 2017 statement of financial position of RFG, it can be observed that RFG has not reported any amount for current tax assets in the year 2017. However, in the year 2016, the company reported $ 4,455,000 as their current tax assets. In addition, in the year 2017, RFG has reported $ 2,546,000 as their current tax liabilities or current tax assets (rfg.com.au 2017).
In companies, it can be seen that there is a difference between income tax expenses and income tax payable and some specific reasons can be held responsible for this disparity. The first reason is the presence of deferred tax assets. There are many instances where the company pays extra amount of taxes as compared to the tax expenses (Rego and Wilson 2012). In this situation, the extra amount of tax paid will be considered as deferred tax assets that create the difference. The next reason is the difference between the rules of financial accounting and the rules of tax accounting. Under this aspect, the example of depreciation can be mentioned. Difference for depreciation can be seen under financial accounting and tax accounting for different rate of depreciation (Khurana and Moser 2012). Thus, the amount of final depreciation payable can be either increased or decreased. Thus, these are the main reasons behind the differences between income tax payable and income tax expenses.
In the financial statements of RFG, the company has mentioned about their tax expenses in the income statement and in the statement of cash flows. However, it can be observed that RFG has reported two different set of amounts in income statement and cash flow statement. In the income statement, RFG reported $ 25,686,000 in 2017 and 23,620,000 in 2016 as income tax expenses; and in the statement of cash flows, RFG reported $ 21,460,000 and $ 19,298,000 (rfg.com.au 2017). There are some specific reasons for this disparity in the amounts of income tax expenses. In the income statements, the company shows the whole amount of tax expenses by charging the tax rate of 30% on the profit from continuing operation before tax. However, the case is different in case of cash flow statement. In this context, it needs to be mentioned that the tax expenses come under the cash flow from operating activities (Auerbach et al. 2013. ). Under this section of cash flow statement, some items of the income statements are treated differently. It implies that certain changes take place in the current assets and liabilities of the companies. In RFG, the payment of income tax is considered as a current asset. In the cash flow statement, some reduction in the components of income tax expense has been brought that indicates the use of cash. It implies that some components of tax expenses have been cut off before considering them in the statement of cash flows (Canto, Joines and Laffer 2014). For these reasons, the difference in tax expenses can be seen in the income statement and statement of cash flows.
After the observation of the tax treatment in the financial statements of RFG, it needs to be mentioned that there is not any confusing and surprising elements in the tax treatments. RFG has conducted all of their tax treatments by complying with the rules and regulations of Australian Taxation Law (rfg.com.au 2017). In addition, RFG has provided all the explanations and justifications of various taxation factors like tax rate, deferred tax assets and liabilities, current tax assets, current tax liabilities and others. However, there are some interesting factors in the tax treatment of RFG. The most important factors is the explanation of the company about the difference between total tax expense. RFG has provided explanation about the five major factors responsible for creating difference in tax expenses (rfg.com.au 2017). In this table, RFG has also shown the calculation. Another important factor is the difference in tax expenses in income statement and cash flow statement. All these interesting factors are very much helpful for enhancing the understanding as well as knowledge in company taxation. From this analysis, one can gain insight and knowledge about the tax treatments by the companies.
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