- Financial Analysis of Automotive Holdings Group
- 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?
Financial Analysis of Automotive Holdings Group
- Contributed Equity
- Reserves and Retained Earnings
- Other Reserves
- Non-Controlling Interest
Equity means the portion of total capital invested by the party in the company or as per the definition, 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. The Equity holders are the owners of the company in terms of decision making in AGM and also the person to approve the decisions taken by the Board of Directors. Further the equity holders get dividend for the amount so contributed in the company as a part of return on investment.
For the company being Automotive Holdings Group, the contributed equity, so called Ordinary Share capital has been divided further into: (amounts in ‘000)
- Fully paid Ordinary share capital till date;
- Institutional Placement
- Share Purchase Plan
The fully paid ordinary shares represents to the total number of shares that the company has issued during the period and the shareholders have paid whole amount to the shares so allotted to them. 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.
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 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.
Reserves are the funds that has been created by the company which will be used to forgo the future obligations or targets. Further the reserve amount is treated as a fund that is used to mitigate the project cost or repay the obligations for which the amount has been kept in the fund. 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.
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
Non-controlling interest means that total number of shares that are being hold by the independent equity holders which are usually less than the 50% of the total equity holding of the company. Usually, this figure is used when the group company use to prepare the consolidated balance sheet and where the total holding of the Holding company is shown in the subsidiary company and those portion of shares which are not hold by the holding company are being shown as Non-controlling Interest. 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.
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).
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.
Deferred tax assets means the amount of tax that the company has been paid on advance on those portion of expense that has been taken as per accounting books but the same is not taken as the revenue department disallows the same. So, for such expenses the company have to pay tax on those expenses, but it will be shown in the company financial as the “Assets”, and it will be used to settle the future tax obligations. Usually, depreciation are taken under this category. Temporary disallowance are considered for the deferred tax assets.
Similarly, the deferred tax liability means the liability that the company has created for which the company has to pay tax in future for those transactions which the company has not paid in the current year. These transactions are usually those permanent disallowance which are disallowed by the revenue department but the company has taken as their period expense. So, for these transactions the company have to pay tax in future.
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.
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 amount of tax the corporate have to pay on the profit amount that have been earned during the year and further the amount of tax is to paid as per the tax determined by the revenue department at the starting of the year. 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”.
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.
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.
Bloomberg, 2017, “ Company overview and the business of the company”, Available from: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=23553609
Annual Report, 2017, “Equity holding of the company”, Available from: http://www.ahgir.com.au/download/2016-ahg-annual-report-to-shareholders.pdf