Corporate Accounting

Key Topics

Corporate Accounting  of Automotive Holding groups and Kathmandu Holdings.

Automotive Holdings Group

Question 1.

Answer :
From the financial report of Automotive Holdings Group for the period ending 30th June, 2017, hereby are the items of Equity:
a.Contributed Equity
b.Reserves and Retained Earnings
c.Other Reserves
d.Non-Controlling Interest
Contributed Equity:
It represents the total number of equity hold by the equity holders/owners of the company. As the definition suggested, the equity is the smallest part of the fund that is being contributed by the owner/shareholders to the company, so to participate in the profits/loss of the company operations. For the company being Automotive Holdings Group, the contributed equity, so called Ordinary Share capital has been divided further into: (amounts in ‘000)
a.Fully paid Ordinary share capital till date;
b.Institutional Placement
c.Share Purchase Plan
Fully Paid Ordinary Share capital:
This amount equals to the total number of shares issued by the company till date and represented by the par value of each shares, so issued for each share capital. As on 1st July 2016, the balance of ordinary shares were $541,532, no changes were recorded in the during the year in this group of contributed equity capital.
Institutional Placement:
This group represents the shares issued to outsiders specially QIP’s, without having to submit legal paperwork to market regulators. So, during the period funds worth $90,000 has added to this group. 
Share Purchase Plan:
Share Purchase plan means an offer given to the existing shareholders in a listed company, to purchase additional shares of the same company without paying any brokerage fees. So, during the period , $23362, has been added to this group.
Retained Earnings and Reserves: 
In a general term Reserve means the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days. So, the general reserves are being created from the funds of opening balance, so added by net profit during the period and reduced by dividend paid by the company.
As on 1st July, 2016, the opening balance was: 150,374, added by net profit during the period of 55,539 and reduced by dividend paid to the member worth: 74615. So, as on 30th june, 2017, the closing balance of Retained earnings and reserves is $131298.

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Other Reserves:
Other Reserves are being special funds created by the company for the unforeseen situations or for any special purpose. Such funds are being written off once the special purpose is fulfilled. During the period AHG has created reserves in terms of:
•Share based Payment Reserve
•Hedge Reserve
•Foreign Currency Translation
Share based Payment Reserve is used to recognize the grant date fair value of performance rights shares granted to employees but not yet vested, so for this purpose during the period the utilized were $152, and the remaining balance of the reserve as on 30th June, 2017 is $2063.
Hedge Reserve: This reserve illustrates the changes in the fair value of hedging instruments and accumulated out of the profit and loss accounts and other comprehensive income. During the period the total amount added to the funds were $910 and the closing balance leads to (after deducting taxes) ($780). 
Foreign Currency translation reserve:  This reserve represents any exchange difference arising on translation of the controlled foreign entity. During the period amount utilized through this fund is $157, and closing balance has been recorded at $1714.
Non-controlling Interest:
Non- controlling interest is the portion of equity ownership in a subsidiary not attributable to parent company, who has a controlling interest (greater than 50% but less than 100%) and consolidates the subsidiary’s financial results with its own. So, the NCI’s participates in the share capital and retained profits of the company. So, as on 30th June, 2017, the interest of NCI’s in Share capital is $9076 and in retained profit is $5838. Leads to total balance of $14,914.

Question 2.

Answer:
During the year the tax rate for the company was 30%. So, it has been observed that during the period the expense bearded by the company as the income tax expense was $28,901 (P.Y. 40,263). Due to lower in profit before tax amount from last year the tax expense has been reduced for the year. The income tax expense consist of Current tax worth $24,680, deferred tax worth $6,998 and Adjustment for current tax of prior period worth ($2,777).

Question 3.

Answer: 
As stated above, the income tax rate is 30% for the period, and the amount of tax expense is not only the figure of the firm’s accounting income multiplied to the tax rate, but it also consist of the deferred tax and so reduced by the prior period tax adjustments worth $6998 and ($2777) respectively.

Question 4.

Answer:
As the definition suggests, the deferred tax liability occurs when taxable income is smaller than the income reported on the income statements. So, as this is a temporary difference so resulted from the accounting treatment of certain income and expense accounts with the treatment done by the income tax authority. Usually, “Depreciation” is usual expense come under this purview.
Deferred tax assets is the opposite of a deferred tax liability. And so they are the reasons for reduction in future tax payable, as the company has already paid taxes on book income to be recognized in the future, just like a prepaid tax paid by the company.
AHG have reported deferred tax liability worth $ 21,136, for the period 30th June, 2017. Out of which the elements that will be settled in near 12 months period is $1083. The balance comprises of the temporary difference attributable to comprehensive income in terms of Finance lease of worth $1083 and others worth $20,053. 
AHG have reported the deferred tax assets worth $ 60,866 and these were recorded as the temporary difference in tax rate for the reason of acquisition of subsidiaries of worth, $2048, debited income worth ($1662) and credited to equity worth $298. Further these balance has been shown as the difference attributable and recognized in the statement of profit and loss account because of Doubtful debts worth $1403, Inventory $6275, PPE $7760, Accrued expenses worth $10248, Provision for employee benefit worth $4199, provision for warranties worth $2415, provision for other reasons worth $2582 and others being $2582. It has been further added that no deferred tax liability has been recognized in relation to expenses other than a business combination that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Question 5.

Answer:
In the Consolidated statement of Profit and loss account the income tax expense has been recorded as $28,901, out of which the current tax amount is worth$24,680 and income tax receivable has been recorded as (4,110). As the definition suggested income tax expense is calculated based on standard business accounting rules and income tax payable is the actual amount that the company owes in taxes, based on the rules of the tax codes. The first on is shown in the profit and loss account and later is shown in the balance sheet. So, as shown in the balance sheet the income tax receivable is different than income tax expense as both are calculated on the net profit, based on accounting and taxation principles.
The tax expense shown in the profit and loss account includes the expenses that is being allowed as per accounting principal, but as per the rules of the tax codes there are some sorts of expenses that are not allowed during the period, so called temporary difference and hence the deferred tax calculation is being done. So the deferred tax asset is being adjusted from the total tax expense calculated during the year and so there leads to the difference in the tax amount shown in the profit and loss account and the amount shown in the balance sheet as “income tax payable/receivable”.

Question 6.

Answer:
No, the income tax expense shown in the income statement is worth $28901 and the income tax paid shown in Cash Flow statement is worth $30,940.
The difference is because of the reason that Cash flow from operating activities is being calculated by adding depreciation to the earnings before income and taxes, and then subtracting the taxes. The tax amount shown in the cash flow accumulates the total tax paid in cash during the period, and that also includes the advance tax paid and taxes on other incomes. But the tax expense calculated in the profit and loss account shows the amount calculated at the year end, after deducting all the expenses and adjusting the previous year advance tax paid and the adding the prepaid tax paid. So, the total tax expense differs in terms of accumulating the whole year tax expense. 

Question 7.

Answer:
In the Automotive Holdings Group, tax treatment shows a confusing understanding of the tax treatment, as income tax expense has been shown as a three elements, Tax expense for the period, adjustment of prior periods, deferred tax assets and deferred tax liabilities. In the single financial statement there is tax treatment for both deferred tax assets and liabilities and after adjusting these elements the tax amount paid during the period is $30,940 and the expense shown in profit and loss account is $28901, but the tax expense receivable shows $4110. 
As a whole what new insight has been observed is that, AHG use to show the gross calculation of each element of tax expenses. Usually, many other firms shows the tax treatment as a net amount payable after adjusting the deferred tax assets/liabilities for the year. Usually, one firm has one element either the deferred tax asset or liability, and after adjusting the balancing figure the amount is shown in the profit and loss account. But as AHG group shows the effect of deferred tax assets/liabilities differently along with the foreign exchange gains treatment of tax liability for the year. 
As the tax rate of the company is 30% but the tax expense calculated as per the accounting principal and the tax code shows different figures as of the different elements of the financial books.

Kathmandu Holdings

Question 1.

Answer:
Each company prepares the Statement of Equity as the notes to the financial statement. Further it represent the changes during the current year and any else adjustment during the current year and the same is being compared with last year. The statement of Equity represent the changes in the total share Capital of the company and adjustments related to retained earnings and dividends. So here are the illustrative list of the Statement of Equity.:
  • Contributed Equity- Ordinary Shares
  • Ordinary Shares during the period
  • Retained Earnings and Reserves
  • Cash Flow hedging reserve
  • Foreign Currency translation reserve
  • Share based payments reserve
  • Dividends
  • Capital risk Management
Contributed Equity:
As the definition suggested, the Contributed Equity represent the total funds invested by the shareholders in the company. The amount of funds invested will leads to percentage of the holding in the company. This contributed equity is called the “Share Capital” and it has been sub categorized into Authorized Share Capital, Issued Share Capital, Subscribed Share Capital and Paid Up share capital. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds so the total amount shown in the statement of equity are amount shown the net of tax (if any). (amounts in ‘000)
Ordinary Shares                                                      NZ $’000
Balance at beginning                                                  200,191
Shares issued to Executive and 
other senior management as a Long 
term Incentive Plan                                                        19
Balance at the year end                                              200,209
The given amount shown as the total share value at the end of the year. The company has separate element of shares issued during the period, in term of shares issued under Incentive plan. The total shares issued under such plan is $13,000. The company doesn’t shows their total subscribed capital and the number of shares issued for the public during the year, so the ordinary shares balance has not been increased to large extend.
Retained Earnings and Reserves: 
Reserves of the company is created for any special purpose and that will be used for the payment for future obligations or losses for which such reserve is created. Kathmandu Holdings have created Reserves for the three basic purpose and the elements itself shows:
  • Cash Flow Hedging reserve
  • Foreign currency translation reserve
  • Share based payments reserve
Cash Flow Hedging Reserve: 
This reserve is used to record gains or losses on a hedging instruments in a cash flow hedge that are recognized directly in other comprehensive income of the Kathmandu Holdings plc. During the year it has been observed that the total amount shows as:
Cash Flow hedging Reserve                                    NZ $ ‘000
Opening Balance                                                        (5531)
Revaluation- gross                                                      8142
Deferred taxation on revaluation                                  (628)
Transfer to hedged asset                                             (7171)
Transfer to net profit- gross                                          (134)
Closing balance                                                           (5322)
Foreign Currency translation reserve:
Kathmandu Holdings created this reserve to record any differences arising on the foreign translation of the group entities results and financial position. It has also been reported that these amounts are being accumulated in other comprehensive income and recognized in profit and loss when the foreign operation is partially disposed of or sold. 
Kathmandu Holdings have reported the changes in these reserve during the period as shown as:
Foreign Currency Translation Reserve                 NZ $ ‘000
Opening Balance                                                    (19702)
Currency Translation difference-Gross                        91
Currency translation difference- taxation                  118
Closing balance                                                       (19,493)
Share based Payments reserve:
Kathmandu Holdings also distributes some shares to their employees based on ESOP concepts. In this concept the a reserve is created and used to recognize the fair value of share options and performance rights granted but not exercised or lapsed. So, any amount that have been transferred to share capital when vested options are exercised by the concerned employee to whom the share option has been given are shown in the financials of the company. 
Kathmandu Holdings shows the changes made in this reserve during the period as shown as:
Particulars                                                       NZ $’000
Opening balance                                                     692
Current year amortization                                      1139
Transfer to share capital on 
vesting of shares to employees                               (18)
Share options/Performance Rights lapsed    -
Closing balance                                                      1813
Kathmandu Holdings have further reported the total amount of reserve created accumulating all the reserves amount as on 31st July 2017 worth $23002.
Dividends:
In the statement of change in Equity the company usually shows dividend paid during the year along with the comparing such amounts with the previous year amount. Dividend paid during the year shown as:
Particulars                                                         NZ$’000
Prior year final dividend paid                                16119
Current year interim dividend paid                         8060
Capital Risk Management:
Kathmandu Holdings objectives is to provide safeguard to the going concern of the company and provide returns for shareholders and benefits for other stakeholders and to maintain an optimal structure to reduce the cost of capital.

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Question 2.

Answer:
The tax rate during the period was 28%. During the year it has been observed that the income tax expense recorded by Kathmandu Holdings was $16935 (P.Y. 13,804). The tax expense during the year has been increased as increase in the total profit before income tax. 

Question 3.

Answer: 
The income tax expense shown by the company in the financials of the company is 16935 and the income tax calculated as per tax rate @28% is $15393. The both the tax amount is different as in the profit and loss account the adjustments related to non-taxable income, foreign currency translation reserve and expenses related to prior period are taken in the books. The same adjustments are shown to get the net tax charge to be reported in the statement of comprehensive income.

Question 4.

Answer:
As the definition suggests, the deferred tax liability occurs when taxable income is smaller than the income reported on the income statements. So, as this is a temporary difference so resulted from the accounting treatment of certain income and expense accounts with the treatment done by the income tax authority. Usually, “Depreciation” is usual expense come under this purview.
Deferred tax assets is the opposite of a deferred tax liability. And so they are the reasons for reduction in future tax payable, as the company has already paid taxes on book income to be recognized in the future, just like a prepaid tax paid by the company.
As per IAS 12, Income Taxes, the company have reported the Deferred tax liability worth $44879, 000. The reason for such liability is due to decrease in tax rate from 33% to 28% during the period. The total Deferred tax shown during the year worth $674’000 in the profit and loss account of the company. The deferred tax balance relates to:
  • Property, plant and Equipment temporary differences
  • Employee benefits accruals
  • Kathmandu brand
  • Unrealized gain/loss on foreign exchange
  • Inventory provisioning
  • Temporary differences arising from landlord contribution and rent free periods

Question 5.

Answer:
The current tax liabilities of the company has been recorded as $ 3,475 and the income tax expense recorded in the books of accounts is $16,935. As the income tax expense recorded by the company consist of deferred income tax charge for the year at $106000, and the current income tax charge is worth $16829.
Temporary Difference is the difference amount calculated because of some expenses booked by the books of accounts and not book by the tax code, or any percentage of tax levied by the income tax code is higher or lower than the tax rate booked by the books of account, and hence for this purpose the deferred tax calculation is being done. So the deferred tax asset is being adjusted from the total tax expense calculated during the year and so there leads to the difference in the tax amount shown in the profit and loss account and the amount shown in the balance sheet as “income tax payable/receivable”.

Question 6.

Answer:
No, the income tax expense shown in the income statement is worth $16,935 and the income tax paid shown in Cash Flow statement is worth $14,571.
The difference is because of the reason that Cash flow from operating activities is being calculated by adding depreciation to the earnings before income and taxes, and then subtracting the taxes. The tax amount shown in the cash flow accumulates the total tax paid in cash during the period, and that also includes the advance tax paid and taxes on other incomes. But the tax expense calculated in the profit and loss account shows the amount calculated at the year end, after deducting all the expenses and adjusting the previous year advance tax paid and the adding the prepaid tax paid. So, the total tax expense differs in terms of accumulating the whole year tax expense.

Question 7.

Answer:
In the Kathmandu Holdings, the tax treatment shown in the firm financial statement shows interesting as it gives clear picture about the amount of tax booked by the company. As shown in the books of accounts, the income tax expense shown in the financial books is $16935, and further in balance sheet the deferred tax liability and assets has been shown in the form of Temporary difference because of Tax Depreciation rate, worth $48000, Employee obligation worth $1722, Brand of the company shows liability worth $43580, Foreign exchange component worth $185 and other timing difference worth $ 6211. So, accumulating all the figures it quite interesting to determine the total amount of deferred tax calculated liability for the period worth $34027
Further, as it is quite interesting and new insights to show the tax elements in terms of wages, rental and operating leases, PPE and other elements separately. Further during the period the tax rate has been increased to 31% from 29%, the deferred element has been increased. In cash flow element it has shown the income tax paid worth $14571, so it means the amount of tax paid by the Kathmandu holding during the period which also includes the total interim tax, foreign gain tax and other tax in assertion to the business income and fixed interest elements.
So, where a company’s financials shows each element of tax in a different way, then it’s a perfect view for stakeholders to review the amount of tax paid by the company and the elements involved for paying such tax portion.

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