HI5020 Corporate Accounting Item 2 Assignment Essay

Question:

What items have been reported in the other comprehensive income statement for each company?
Why have these items not been reported in Income Statement/Profit and Loss Statements?
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?
Should other comprehensive income be included in evaluating the performance of managers of the company?

Answer:

Introduction

For the purpose of the report Woolsworth Group Limited and Seafarms Group Limited is selected. Woolsworth Group Limited is a diverse group of Retail businesses and registered as a public limited company in Australia. Woolworths Limited is a pioneer when it comes to the retail industry in Australia. Further, the market is diversified in various segments such as hotel, gaming pokers and liquor. The customer base stretches to more than 3000 and is the second largest when it comes to the revenue point next after Wesfarmers on the contrary Seafarms Group Limited is an Agri-food company sealing in high quality seafood and registered as a public limited company in Australia. Seafarms is engaged in the project of aquaculture operations. The company has its operations divided into three main segments.

The last segment of the company is engaged into production of prawns like banana and black tigers that are sold under Crystal Bay Prawns brand.

Owners equity

(i) In the case of Woolsworth, the Total Equity for the year 2018 was $10849m in comparison to $9876m in the year 2017 (Woolsworth, 2017).

The increase has been due to change in various constituents of equity which can be seen from the given table from the annual report of the company.

Contributed equity has increased due to an issue of new shares under the dividend reinvestment plan & employee long-term incentive plan.

Reserves have decreased due to share-based payment expenses.

Change in the retained earnings and non-controlling interests is due to an increase in net profits of the company even after payment of dividends to the shareholders (Woolsworth, 2017).

In the case of Seafarms Group Limited, the total equity has decreased from $32718620 in June 2017 to $ 15842803 in June 2018 (Seafarms Group Limited, 2017).

The increase has been due to change in various constituents of equity which can be seen from the given table from the annual report of the company.

There has been an increase in the Contributed Equity due to an issue of share capital.

The reserves have increased from the previous year due to performance rights issued to the employees, recognition of share-based payments and options lapsed in share-based payment reserves.

Retained earnings are in negative as there have been accumulated losses for the past few years. In the year ending 30th June 2018, there has been an increase in accrued losses which was $19947283 which contributed more to the retained losses (Seafarms Group Limited, 2017).

(ii) If we compare the position of debts and equity of the two companies, we can see that the company Woolsworth Group Limited is in the much better place about owned capital funds. This company is more funded by equity and lesser by debts or borrowings. Moreover, the investment has increased from last year. Whereas, the company Seafarms Group Limited is equally financed by equity and debt. The ownership has declined since last year, and the borrowings have increased (Seafarms Group Limited, 2017). This company does not have a very sound financial position.

Cash flow statement

The company Woolsworth Group Limited has the following components in its cash flow statement:

Cash flow from operating activities consists of the routine expenses and incomes of the company during the year. The net cash from operating activities has decreased in comparison to last year due to massive payments to suppliers and employees.

Net cash used in Investing Activities has increased since last year. The reasons are higher payments for the purchase of businesses, lesser proceeds from the sale of property, plant and equipment, etc. as compared to the last year.

There have been lesser cash used in financing activities than last year. Although there is an increase in the dividends paid there has been smaller repayment of borrowings since the previous year.

The net result of all these three activities is increasing in cash and cash equivalents at the end of the period which is a sign of financial growth.

The company Seafarms Group Limited has the following components in its cash flow statement:

Cash flow from operating activities consists of the routine expenses and incomes of the company during the year. There has been net cash outflow from operating activities which has increased in comparison to last year due to massive payments to suppliers and employees in contrast to the receipts from customers (Melville, 2013).

Net cash used in Investing Activities has increased since last year. The reasons are higher payments for the purchase of property, plant and equipment, and zero proceeds from other financial assets as compared to the previous year.

The cash inflow from financing activities is lesser than last year. Although there is a massive increase in the borrowings during the current year, there has been a smaller increase in the proceeds from the issue of shares and other securities (Melville, 2013). The net result of all these three activities is a considerable decrease in cash and cash equivalents at the end of the period which is a sign of financial decline.

Other comprehensive income statement

(vi) The following items have been reported in Comprehensive Income Statement of Woolsworth Group Limited:

The movement in the fair value of cash flow hedges and income tax thereon.

Foreign Currency translation and the income tax effect thereon.

Equity Instrument Reserve movement.

Defined Superannuation plans gains or losses.

(Woolsworth, 2017)

There is no comprehensive income of Seafarms Group Limited during the current year and hence nothing is reported in Comprehensive Income Statement of Seafarms Group Limited:

(vii) The Comprehensive Income statement comprises of those revenues and expenses which have not been realised yet. Once these are accomplished, the gains or losses of these transactions are recognised as gains or losses realised and are shown in the income statement (Leo, 2011). So, the comprehensive income statement has been prepared separately for the unrealised sales. If these incomes are reported in the Income Statement, it will depict that the income which has not been received has also been shown in the Financial Statements. As per IFRS and GAAP, the full salaries should be reported separately to show that there are possibilities of such income occurring in the future (Marsh, 2009). But these should be displayed outside the Income Statement as these incomes have not been earned in the current year.

(viii) As in the case of Seafarms Group Limited, there is no comprehensive income during the relevant years under consideration, hence comparative analysis of the two companies is not possible (Seafarms Group Limited, 2017). Following items have been shown under the Comprehensive Income Statement of Woolsworth Group Limited:

  • The foreign currency exchange differences that have arisen on the translation of international operations- the settlement of these transactions are not planned, or certain shortly and hence have been reported outside the income statement.
  • Equity instrument reserve that has arisen due to the revaluation of equity securities invested. On their disposal, the gains or other losses shall be transferred to equity.
  • Cash flow hedge is shown about the effective gain or loss on the derivative financial instrument.
  • The company recognises the actuarial gains or losses on the net defined benefit liability in the year when they occur and are shown in the comprehensive income statement. These do not get reclassified to Income Statement.

If these items were included in the income statement of the company, then the profits attributable to the shareholders of the company would get reduced, as the net effect of these transactions of Woolsworth Group Limited has resulted into losses and these would have to be borne by the shareholders. This would have been a wrong treatment as the losses or gains from such extraordinary transactions are not specific as to their occurrence. Hence, it is correct to show these transactions outside the Income statement.

(ix) The items that are shown in the Comprehensive Income Statement are those whose realisation is not inevitable. It means that the company does not know when these transactions are bound to happen (Laux, 2014). But these transactions can help in evaluating the company’s future profitability along with the Income Statement. For example, analysis of comprehensive income can show the position of investments of the company and how likely are they going to produce gains or losses. Hence, it can be said that these comprehensive incomes help to evaluate the performance of the company as a whole but not individually of the managers of the company.

Accounting for corporate income tax

(x) The tax expenses shown in the financial statements for the year ended 2018 are :

Woolsworth Group Limited- the income tax expenses shown in the consolidated profit or loss account are $ 718m. Previous year theses expenses were $ 651m. These income tax expenses are on the profits from continuing operations. The tax expenses on the discontinued operations profits were $74 m for the year ended 2018 (Woolsworth, 2017).

Seafarms Group Limited- the income tax expenses as shown in the consolidated profit or loss account are $ 3576 (Seafarms Group Limited, 2017).

(xi) Calculation of effective tax rate-

Effective Tax rate is calculated by dividing the income tax expenses with the earnings before tax of the company.

Woolsworth Group Limited-

Income Tax Expenses- $ 718m

Earnings before tax- $2394m

Effective Tax Rate= $718m/ $ 2394m *100= 30%

Seafarms Group Limited-

Income Tax Expenses- $ 3576

Earnings before tax- There are losses for the financial year ending 30th June 2018.

As per the Annual Reports, the Effective Tax Rate is 30%

Hence, both the companies have the same effective tax rates.

(xii) Woolsworth Group Limited-

In the year 2018, the net deferred assets shown in the balance sheet are $ 271m. In the previous year these were $372m. The deferred tax assets is calculated to record the temporary differences between the carrying amounts of the assets and liabilities of the company for the taxation purpose and for financial reporting purposes.

Seafarms Group Limited-

In the year 2018, the net deferred assets shown in the balance sheet are Nil. In the previous year also these were Nil. The deferred tax is calculated to record the temporary differences between the carrying amounts of the assets and liabilities of the company for the taxation purpose and for financial reporting purposes (Seafarms Group Limited, 2017). The differences have been set off in the same year itself.

(xiii) As it can be seen in the tables above, there was decrease in deferred tax assets in Woolsworth Group Limited from $372m in 2017 to $271m for the year ending 2018. The increase in the deferred tax assets is due to changes the timing and permanent differences in assets and liabilities (Woolsworth, 2017). But there was no change in the deferred tax assets of Seafarms Group Limited as the deferred tax assets were Nil in 2018 as well as 2017 (Seafarms Group Limited, 2017).

(xiv) For calculating the cash tax amount using book tax amount, changes in deferred tax assets and deferred tax liabilities, following calculations can be done:

Woolsworth Group Limited:

Total Tax Provision as per Company’s Income Statement – ($718m)

Decrease in Deferred Tax Assets - $90m

Less :Provisions and Accruals in DTA - ($44m)

Decrease in Deferred Tax Liability - $11m

Cash Tax Amount $661m

Seafarms Group Limited:

Total Tax Provision as per Company’s Income Statement – ($3576)

Decrease in Deferred Tax Assets - Nil

Less :Provisions and Accruals in DTA - Nil

Decrease in Deferred Tax Liability - Nil

Cash Tax Amount $3576

(xv) Cash Tax Rate can be calculated by dividing the above calculated cash tax by profits before tax (Laux, 2014). For Seafarms Group Limited, it will be same as effective tax rate which is 30%.

For Woolsworth Group Limited, cash tax rate will be calculated as:

Woolsworth Group Limited-

Cash Tax Amount- $ 661m

Earnings before tax- $2394m

Effective Tax Rate= $661m/ $ 2394m *100= 27.61%

The company Seafarms Group Limited has a higher cash tax rate as compared to Woolsworth Group Limited.

(xvi) Cash tax is the amount of tax that is actually paid by a company to the government authorities and is the amount which is reported in the income tax return of the company.

Book tax is the amount of income tax that the companies report in its financial statements. These financial statements are used by all the stakeholders including investors, lenders etc to analyse the financial performance of the company (Laux, 2014). Along with the book tax, the deferred tax assets and deferred tax liabilities are also reported in the financial statements which help in the ascertainment of actual cash tax payable by the company. For depicting the whole financial position, the company reports its income tax liability in its financial statements even if the same will be paid in the next year (Laux, 2014).

The difference between cash tax and book tax arises due to the deferred tax assets and deferred tax liabilities and the provisions made for income tax liabilities standing in the financial statements.

Conclusion

From the study of above report, we can say that the company Woolsworth Group Limited has a much better financial health in comparison to the other company Sea farms Groups Limited. The company Sea farms Group Limited is incurring huge losses since past years and is on the verge of closure if efficient steps are not taken for its financial growth. The company is highly dependent on external borrowings and finance and has a low equity proportion. Whereas the company Woolsworth Group Limited is sufficiently funded by Equity Funds and has lower debts.

References

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Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online] Available from: [Accessed 16 September 2018]

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