The association between tax and liability - MyAssignmenthelp.com

Question: 1. From your firms 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 firms tax expense in its latest financial statements? 3. Is this figure the same as the company tax rate times your firms 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 firms financial statements? What new insights, if any, have you gained about how companies account for income tax as a result of examining your firms tax expense in its accounts? Answer: Answer 1 Different types of financial statements provide the overall picture of the financial health of the companies. Three major substances of the financial statements of the companies are Assets, Liabilities and Owners Equity (Brigham Ehrhardt, 2013). This part attempts to analyze all the items of equity of CSR Limited, Australia. According to 2017 Annual Report of CSR Limited, four items of equity of the company are Issued Capital, Reserves, Retained Profits and Non-Controlling Interests (csr.com.au, 2017). Issued capital refers to the share capital issued to the shareholders in order to raise capital for business operations. The latest annual report of CSR Limited shows a slight fall in issued capital in 2017 from 2016; that is $ 1036.8 in 2017 and $ 1041.1 in 2016 (csr.com.au, 2017). Total number of share issued in 2017 and 2016 are 504,480,858 and 505,700,315. Less number of issued shares is the reason for the decrease in issued capital in 2017 over 2016 (csr.com.au, 2017). The next item is Reserves. Reserves refer to the excess amount of money paid by the shareholders apart from the par value of shares. As per the annual report of CSR Limited, the amount of reserve was positive in 2016 that is $ 20.4 million; but in 2017, drastic decline in reserve can be observed and it has become negative that is $ (73. 4) million (csr.com.au, 2017). The major purpose of reserve in CSR Limited is reserve for hedge, restive for foreign currency transition, reserve for employee shares, reserve for share-based payment trust, non-controlling reserve and other reserves. In 2017, the major reasons for the decline in reserve are compensation of hedge loss in equity, transfer of hedge profit, recycling of foreign currency, disposal of equity investments, acquisition of treasury shares and non-controlling interest on subsidiary acquisition (Brigham Houston, 2012). The next item in equity is Retained Profit that is the total profit or loss of the organizations from foundation time. The annual report of CSR Limited shows a large increase in retained profit in 2017 from 2016; the amount is $ 191.6 million and $ 123.2 million in 2017 and 2016 respectively (csr.com.au, 2017). The main reason for CSR Limited to increase their retained profit is the increase in profit after tax. The next equity item is non-contro lling interests that shows a massive dip in 2017 as compared to 2016; that is $ 51.5 in 2017 and $ 132.5 in 2016 (csr.com.au, 2017). Answer 2 Companies have to incur different types of expenses like selling expenses, administrative expenses and other operating expenses. One of such important expense for CSR Limited is Tax Expenses. Tax expenses can be obtained by multiplying the tax rate with the before tax income of the companies after the process of tax reconciliation (Thomas Zhang, 2014). It needs to be mentioned that CSR Limited owes their business tax expenses to the government of Australia. According to the regulation of Australian Taxation Law, income tax rate for CSR Limited in 2017 and 2016 was 30%. According to the annual report of CSR Limited, decrease in income tax expenses can be seen; that is $ 61.7 million in 2017 and $ 64.4 million in 2016 (csr.com.au, 2017). CSR Limited has shows their total income tax expenses in two parts; they are Current Tax Expenses and Deferred Tax Expenses for the movement of deferred tax balances. Decrease in current tax expenses can be seen in 2017 from 2016; that is $ 29.3 milli on in 2017 and $ 43.9 million in 2016 (csr.com.au, 2017). On the contrary, increase in deferred tax expenses can be seen for CSR Limited in 2017 from 2016; that is $ 32.4 million in 2017 and $ 20.5 million in 2016. CSR Limited has $ 9.3 million and $ 34.5 million as income tax payable for their consolidated group; that are PGH Bricks Pavers Pty Limited and Gove Aluminium Finance Limited (csr.com.au, 2017). Answer 3 According to 2017 Annual Report of CSR Limited, the company has $ 266.8 million and $ 233.7 million as profit before income tax in 2017 and 2016 respectively. At the same time, CSR Limited has 30% tax rate applicable on profit before income tax (csr.com.au, 2017). In this tax rate, the tax expense of CSR Limited should be $ 80.0 million ($ 266.8 million*30%) in 2017 and $ 70.1 million ($ 233.7 million*30%) in 2017. However, the reported income tax expenses of CSR Limited are $ 61.7 million and $ 64.4 million in 2017 and 2016 respectively. It implies CSR Limited has clear differences between the actual and reported income tax expenses. The observation of the tax reconciliation statement of CSR Limited shows the presence of some specific factors that are responsible for this difference in CSR Tax expenses. These items are adjusted with the calculated tax expenses of CSR Limited after the payment of tax and thus, difference can be seen. The first item is share of net profit of joint ven ture entities. It implies that CSR Limited has earned some profit from their joint venture business and thus, it is required to deduct tax from that portion of profit (Dhaliwal et al., 2013). For this purpose, $ 4.3 million in 2017 and $ 3.7 million has been deducted (csr.com.au, 2017). The next item is non-taxable profit on property disposal. It needs to be mentioned that companies are required to pay tax on the income from disposal of any asset and the same has happened with CSR Limited. For this reason, CSR Limited had to deduct $ 1.9 million in 2017 and $ 5.9 million in 2016. The next substance is under payment and over payment of income tax in 2016 and 2015. For this reason, in 2016, CSR Limited received a tax refund of $ 3.0 million that has been added with the tax expenses. However, in 2017, CSR Limited had to pay the rest of income tax of 2016 that leads to the payment of $ 11.4 million as income tax in 2017 (csr.com.au, 2017). The next item is other items that include the i mpact of permanent differences regarding significant items (Armstrong, Blouin Larcker, 2012). For this reason, $ 0.7 million has been deducted in 2017 and $ 3.0 million has been added in 2016 (csr.com.au, 2017). These above-mentioned factors are responsible for creating difference in income tax expenses in the presence of same tax rate. Answer 4 There are many instances of the payment of extra amount of tax on the assets by the companies and these assets are called Deferred Tax Assets (Laux, 2013). On the other hand, companies have been seen to pay less amount of tax for the liabilities and they are called Deferred Tax Liabilities (Harrington, Smith Trippeer, 2012). In the balance sheet or statement of financial position of CSR Limited, the reporting of both deferred tax assets and liabilities can be observed. As per the statement of financial position of CSR Limited, in 2017 and 2016, the amounts of deferred income tax assets are $ 201.2 million and $ 239.3 million respectively (csr.com.au, 2017). The observation of the statement of financial position of CSR Limited shows that the company has not reported ant differed tax liabilities in 2017 and CSR Limited had $ 20.9 million in 2016 as deferred tax liabilities. Thus, the net deferred tax assets of CSR Limited are $ 201.2 million and $ 218.4 million in 2017 and 2016 respec tively (csr.com.au, 2017). There are some reasons in CSR Limited behind the recording of deferred tax assets and liabilities. The main reason is the cost of depreciation of the assets as difference can be seen in the value of depreciation in income statement and taxable income statement. In CSR Limited, the company has paid advance tax due to the difference in the cost of depreciation and thus, it has been considered as an asset for the company. The main reason for the recording of deferred tax liability is the less amount of tax payment. Answer 5 Current tax assets or income tax receivables generate when the companies have already paid excess income tax in advance. On the other hand, current tax liabilities or tax payable generate when the companies are supposed to pay certain amount of taxes of pervious year in the current year (Hutchens Rego, 2013). Both are important in tax treatment of the companies. As per the annual report of CSR Limited, the company has $ 0.5 million in 2017 and $ 0.5 million in 2016 as current tax assets (csr.com.au, 2017). In addition, the company has $ 10.3 million in 2017 and $ 38.1 million in 2016 as current tax liabilities. The annual report of CSR Limited also shows that the company has $ 61.7 million and $ 64.4 million as income expenses for 2017 and 2016 respectively (csr.com.au, 2017). It can be observed that there is a difference between income tax payable and income tax expenses. After observing the financial notes of income tax expenses of CSR Limited, it can be seen that the income tax e xpenses represents all expenses under for that particular year under tax; they are current tax expenses, deferred tax expenses and current tax payable. It implies that income tax payable is a part of the total income tax expenses of CSR Limited. In addition, the company many not pay the whole amount of income tax payable in the current year. Thus, for all these reasons, there is a difference between the amounts of income tax payable and income tax expenses of the company. Answer 6 In the financial statements, the companies use to report their tax expenses in two places; they are the Income Statement and Statement of Cash Flows. There is not any exception of this fact in case of CSR Limited. The annual report of CSR Limited shows the reporting of tax expenses by the company in Income statement and statement of cash flows. The amount of tax expenses in income statement is $ 61.7 million in 2017 and $ 64.4 million in 2016; and the amount of tax payment in the statement of cash flows is $ 52.7 million in 2017 and 14.6 million in 2016 (csr.com.au, 2017). Thus, a clear difference can be seen in the amounts of tax expenses reporting in income statement and statement of cash flow. It needs to be mentioned that statement of cash flow shows the amount of cash inflow or outflow due to the increase or decrease in the current assets and liabilities of the companies. It implies that the statement of cash flows only takes into consideration the current assets and current lia bilities. Now, the statement of financial position of CSR Limited states that only income tax payable comes under the head of current assets. Hence, it is clear that the statement of cash flows has only shown the payment of income tax payable and it has not included the tax expenses of this current year (Rego Wilson, 2012). For this reason, difference can be seen between the tax expenses in income statement and statement of cash flows. Answer 7 From the above discussions, it can be observed that CSR Limited has carried on their different tax treatments in a well controlled and interesting manner. It needs to be mentioned that CSR Limited has provided all the necessary justification as well as clarification of their tax treatment in the financial notes along with proper calculation. The most important part is tax reconciliation statement and the deferred tax statement. In the tax reconciliation statement, the company has mentioned about all the factors responsible for creating difference between the calculated and reported tax expenses. After observing the tax treatment of CSR Limited, one can come to know the reasons behind the difference in tax expenses recorded in income statement and statement of cash flows. As CSR Limited provided necessary supporting evidence to each tax treatment, it is very much helpful in developing deep insight about the manners of tax treatment of the companies. References Annual Meetings and Reports. (2018).Corporate. Retrieved 6 January 2018, from https://www.csr.com.au/investor-relations-and-news/annual-meetings-and-reports Armstrong, C. 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