This report is developed solely for the purpose of analyzing and examining the organizational performance of an ASX listed entity with the help of financial statements. The financial statements developed by a business entity helps in assessing its financial position by gaining an examination of the various items reported in these statements. The report has mainly undertaken an analysis of the financial statement of cash flow and other comprehensive income statement of AGL Energy Limited; recognized ASX listed energy companies of Australia involve sin retailing of energy and gas products and services. The major items reported in the income and cash flow statement is analyzed in the report of the company. Also, the detailed analysis regarding the accounting for corporate income tax in the financial statements is carried out in the report.
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Important cash flow items that are presented in cash flow statement |
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AGL Energy |
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Data for last two years |
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Amount in $ million |
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Financial Items |
2017 |
2016 |
Change |
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Amount |
in % |
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Cash flow activities that has been carried out in operating activity |
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Cash collected from the Debtors |
$ 13,552.00 |
$ 11,903.00 |
$ 1,649.00 |
13.85% |
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Cash payments made to employees and company’s supplier |
$ (12,216.00) |
$ (10,397.00) |
$ (1,819.00) |
17.50% |
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Cash payments for cost of finance |
$ (188.00) |
$ (186.00) |
$ (2.00) |
1.08% |
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Cash used to pay the income tax |
$ (292.00) |
$ (166.00) |
$ (126.00) |
75.90% |
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Cash flow activities that has been carried out in Investing activity |
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Cash used to pay the amount for property, plant and equipment |
$ (498.00) |
$ (533.00) |
$ 35.00 |
-6.57% |
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Payments for making investments in joint venture and associates |
$ (13.00) |
$ (30.00) |
$ 17.00 |
-56.67% |
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Cash received on sale of Fixed assets |
$ 278.00 |
$ 8.00 |
$ 270.00 |
3375.00% |
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Cash received on sale of subsidiaries and other businesses |
$ – |
$ 673.00 |
$ (673.00) |
-100.00% |
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Cash flow activities that has been carried out in Financing activity |
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Cash payments used to buy back the equity shares |
$ (473.00) |
$ – |
$ (473.00) |
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Cash collected through loans taken from banks |
$ 1,472.00 |
$ 550.00 |
$ 922.00 |
167.64% |
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Cash payments for repayment of borrowings |
$ (1,146.00) |
$ (1,371.00) |
$ 225.00 |
-16.41% |
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Cash utilization of paying dividends |
$ (517.00) |
$ (446.00) |
$ (71.00) |
15.92% |
(Annual report. 2017: AGL Energy and Annual report. 2016: AGL Energy)
Items shown under operating activity: Operating activity provides list of cash flows that generated or used while performing the operations. Company mainly receives the cash from the customers and pays maximum part of it to their employees and suppliers. It has been seen that cash flow receipts from customers has been increased by 13.85% while there was increase of 17.50% in cash used for payment to suppliers and employees. In current year AGL Energy has paid $292 of income tax which was increased by 75.90% as compared previous year.
Items shown in investing activity: Investing activity consists of cash flow used or recovered on purchase or sale of fixed assets. Cash is used to buy the plant, property and equipment and also there is cash inflow through the sale of these assets when they got retired. There was about 7% reduction in cash used for buying the plant, property and equipment. In year 2017, company has sold their major asset that has increased its cash inflow to $278 million (Jury, 2012).
Items shown under the financing activity: Cash used or generated from the financing activities like issue of shares, buy back shares, repayment of borrowings, cash received from borrowings and dividend paid are shown under this activity. There has been increase of 167.64% in cash generated from borrowing and 15.92 % increase in cash dividend paid to shareholders.
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Activities of Cash flow statement |
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AGL Energy |
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Financial data for last three years |
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Amount in $ million |
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Particulars |
2017 |
2016 |
2015 |
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Cash provided by operating activity or (Cash used by operating activity) |
$ 891.00 |
$ 1,186.00 |
$ 1,044.00 |
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Cash provided by investing activity or (Cash used by investing activity) |
$ (302.00) |
$ 81.00 |
$ (2,175.00) |
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Cash provided by financing activity or (Cash used by financing activity) |
$ (687.00) |
$ (1,274.00) |
$ 924.00 |
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Net impact on cash and cash equivalents after the impact of all the activities of cash flow statement |
$ (98.00) |
$ (7.00) |
$ (207.00) |
(Annual report. 2017: AGL Energy and Annual report. 2016: AGL Energy)
It has been that there was constant decrease in cash flow from operating activity and in year 2017 there was major decrease as cash generated from the operating activities was only $891 million in year 2017 as compared to $ 1186 in year 2016. It means cash flow position of AGL Energy has been worst in current year as compared to previous year. In current year the overall cash used in investing activity and financing activity are greater than the cash generated from operating activity that signifies that company was incapable for generating the enough cash flow to finance its investing and financing activity (Klammer, 2018).
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Items that are reported in statement of other comprehensive income statement of AGL Energy |
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Figures are provided for last two years |
2017 |
2016 |
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Amount in $ m |
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Profit or loss as reported in the income statement |
$ 539.00 |
$ (407.00) |
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Items of other comprehensive income statement that has been included in this statement |
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Items that will not be reclassified subsequently to profit or loss |
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Re-measurement gain/(loss) on defined benefit plans |
$ 107.00 |
$ (111.00) |
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Income tax relating to items that will not be reclassified subsequently |
$ (32.00) |
$ 33.00 |
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Sub Total |
$ 75.00 |
$ (78.00) |
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Items that may be reclassified subsequently to profit or loss |
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Cash flow hedges |
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Gain in fair value of cash flow hedges |
$ 72.00 |
$ 12.00 |
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Reclassification adjustments transferred to profit or loss |
$ (15.00) |
$ 29.00 |
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Share of other comprehensive income of a joint venture |
$ – |
$ (1.00) |
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Reclassification of joint venture losses transferred to profit or loss on disposal of investment |
$ – |
$ 15.00 |
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Income tax relating to items that may be reclassified subsequently |
$ (17.00) |
$ (12.00) |
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Sub Total |
$ 40.00 |
$ 43.00 |
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Other comprehensive income for the year, net of income tax |
$ 115.00 |
$ (35.00) |
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Comprehensive income including the changes due to the other comprehensive items |
$ 654.00 |
$ (442.00) |
(Annual report. 2017: AGL Energy and Annual report. 2016: AGL Energy)
There are mainly two items are that are reported in the other comprehensive income statement. One is item that that may be reclassified subsequently to profit or loss and other one is item under heading Items that will not be reclassified subsequently to profit or loss. AGL has reported two items under heading item that will not be reclassified subsequently to profit or loss, they are gain or loss on defined benefit plan due to its measurement and impact of tax due to change in change profit of the company. These items will not affect the income statement in subsequent period but it has impact on actual profit that is attributable to equity shareholders (Nikolai, 2009).
The reason why the items of other comprehensive income statement are reported in the income statement is because income statement shows only those income and expenses that are related to period for which income statement is drawn. On the other hand other comprehensive income statement shows financial items that belong to income statement but are not related to same financial period. Other comprehensive income statement also shows item that has no relation to income statement but they impact the accounting profit attributable to the equity shareholders (Weil, Schipper and Francis, 2013).
A tax expense refers to the accounting tax expenses that has been calculated on the accounting profit and adjusted for some changes. Tax expense is reported in the income statement of the company as it is regarded as the expenses that to be bear by the company. The current tax expense as reported in the income statement of AGL Energy was $ 225 million for year 2017. IN year AGL Energy has suffered a loss that helps to gain the income tax benefit of $67 million in year 2016. The income tax benefit can be utilized in subsequent year to pay the tax liabilities (Sullivan, 2012).
An income tax expense is calculated using the flat tax rate of 30% but due to various conditions the calculated tax @ 30% is subjected to various adjustments. Adjustment here can be due to accounting income tax of previous year and adjustments related to impairment loss on noncurrent assets. After making adjustments to the current tax calculated using the tax rate of 30%, the figure of tax expense is being calculated in order to report it in income statement.
On the basis of evaluation it has been found that income tax expense reported in the income statement and tax calculated @ 30% are not same. Tax reconciliation statement showing the difference between tax expense and tax @ 30% is presented below:
(Annual report. 2017: AGL Energy and Annual report. 2016: AGL Energy)
Deferred tax assets reported by the AGL Energy its balance sheet are $762 million for year 2017 and $953 million for year 2016. There are non deferred tax liabilities reported by the company in its balance sheet.
The income tax calculated on the accounting profit or book profit and profit as per income tax provisions are different due to reason of difference in treatment of some items under accounting rules and income tax provisions. The difference in treatment of various items gives rise to timing differences. Timing differences can be temporary or permanent in nature. Temporary timing differences are capable of reversing in subsequent financial year whereas permanent timing differences are not capable of reversing in any subsequent period. The tax differences between accounting tax and actual income tax liabilities give rise to either deferred tax assets or deferred tax liabilities. Deferred tax assets are those assets that will provide income tax relief in subsequent time period. It means extra income tax has been paid in current year according to accounting rules and tax authorities are liable to give it back in form of tax reliefs. On the other deferred tax liabilities are those liabilities that are due in current year but it has not been deposited with the tax authorities (Harris, 2013).
AGL Energy has shown the current tax liabilities or income tax payable under the current liabilities section of balance sheet. The amount of current tax liabilities was $13 million in year 2017 and $102 million in year 2016. The figure shown as current tax liabilities and income tax expense are not same. The main for this difference is that income tax liabilities is merely a notional tax figures that is calculated for accounting purpose whereas current tax liabilities represents the amount of tax remained to deposited with the government in current financial year.
The income tax paid shown in cash flow statement represents the amount that are actually paid in the current year to the income tax authorities whereas income tax expense shown in income statement represent only a notional figures for the accounting purpose that has no connection with income tax actually paid to tax authorities. The income tax paid and income tax expense reported in AGL Energy are not same (Sullivan, 2012).
I find very interesting the method used to calculate the tax expenses and it is very surprising to known that tax expenses reported in income statement and actual income tax liability are two different things. It is very difficult to understand the treatment of deferred tax assets and deferred tax liabilities (Sullivan, 2012).
Conclusion
Understanding the treatment of various items in the financial report is very complex and it requires high level of skill and knowledge to understand the accounting perspective of various financial items.
References
Annual report. 2016. AGL Energy. [Online]. Available at: https://www.agl.com.au/-/media/agl/about-agl/documents/investor-centre/160828_ar_1587084.pdf?la=en&hash=C46CD0D73E513450DA3914840026B78A9BC0ADC0 [Accessed on: 25 May, 2018].
Annual report. 2017. AGL Energy. [Online]. Available at: https://agl2017.reportonline.com.au/sites/agl2017.reportonline.com.au/files/full_financial_annual_report.pdf [Accessed on: 25 May, 2018].
Harris, P. 2013. Corporate Tax Law: Structure, Policy and Practice. Cambridge University Press.
Jury, T. 2012. Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data. John Wiley & Sons.
Klammer, T. 2018. Statement of Cash Flows: Preparation, Presentation, and Use. John Wiley & Sons.
Nikolai, L. 2009. Intermediate Accounting (Book Only). Cengage Learning.
Sullivan, M. 2012. Corporate Tax Reform: Taxing Profits in the 21st Century. Apress.
Weil, R., Schipper, K. and Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
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