Analysis Of Cash Flows And Taxation Obligations – AUSDRILL Report FY2017

• The requisite screenshots from the FY2017 cash flow statement have been pasted to highlight the key elements c

Customer receipts and payments to suppliers and employees

One of the key elements as indicated above is the customer receipts which unlike revenue reflect the actual cash that the customers have paid to the company with regards to the goods and services offered. It is apparent that there is a very marginal 1.5% increase in these receipts.  Another key element is the payment that is made to suppliers along with employees. This is imperative in order to provide customers with products and services having commercial worth. The increase in this regards in FY2017 is less than 1%.  Besides, these there are other items related to interest income and the underlying costs incurred in this regards. Also, the income tax paid has also been reflected based on which it is apparent that in FY2017, there is a significant jump over the previous year i.e. FY2016 (AUSDRILL, 2017).

Considering the capital intensive nature of the business, on expected lines the major element is the investment on PP&E which amounts for the major portion and has seen a big jump over the corresponding FY2016 which stood at $ 12.42 million. Besides this, there are payments on account of other assets that the company has purchased whereas proceeds tend to emerge from the sale of businesses and financial assets. In contrast with FY2016 where there was a net cash inflow to the tune of $ 60.85 million, FY2017 has a net cash outflow to the tune of $101.13 million. This has been caused due to decrease in proceeds from sale of business on one hand and increase in payments related to PP&E acquisition (AUSDRILL, 2017).

In relation the financing activities, the primary item relates to cash inflows and outflows arising from the increase in borrowings and also repayments of borrowings. For instance, in FY2016, the company made repayment to the extent of $ 38.1 million. However, there is no repayment on this count in FY2017. However, unlike in 2016 when no dividends were paid, the year FY2017 saw dividends to the tune of $6.25 million being paid to shareholders. The company seems to be relying unsecured borrowings for the time being since the previous one are repaid and incremental borrowings assumed. There is considerable drop in FY2017 cash outflow on account of financing activities when compared with corresponding value in FY2016 (AUSDRILL, 2017).

• The three major cash flows trends as highlighted over the past three years have been captured in the following table (AUSDRILL, 2017).

The key observations on account of the above cash flows are as follows (Deegan, 2014).

• The cash flow from operations has shown a slight dip which to an extent is attributed to the customer receipts. Considering, that this dip is not significant, not much should be read into this except that this presents the usual fluctuations.
• In relation to investing activities related cash flow, year FY2015 saw a mild outflow but in year FY2016, there were significant cash inflows on the sale of business. This coupled with limited spending on PPE implied a positive value for the investing activities related cash flow. However, in FY2017, major investments have been done by the company in PPE which are expected to result in increased future earnings.
• In relation to the financing activities related cash flow, the company has ensured that these have been negative over the last three years which ensures that the company is taking active measures to minimise the raising of cash from debt so as to strengthen the balance sheet and to ensure the leveraging remains within limits. Also, a key trend on the part of the company is to rely more on short term lending through unsecured borrowing instead of choosing secured borrowing aveneues.

• The statement highlighting the OCI (Other Comprehensive Income) for the company is attached as follows (AUSDRILL, 2017).

• The OCI contains various items which are explained below (AUSDRILL, 2017).

“Exchange (losses)/gains on translation of foreign operations”- The financial results of the company are presented as AUD which acts as the functional currency as well. But, considering the presence of company abroad especially Africa, the revenue realisation does not happen in AUD.  For the change of currency, there would be some time lag during which period currency change can happen which would lead to some gains or losses which are realised here.

The company has enacted joint ventures with different partners and owing to the comprehensive incomes statement of these joint ventures, the company also needs to recognise the combined share of all these joint ventures in accordance with the ownership held by the company in each case/

In relation to the fixed asset revaluation pertaining of financial assets on sales along with buildings and land, the fair value can be different from the carrying value which would culminate in the form of either loss or gain. These changes in value which are parallel recorded in the equity section are also represented here as part of the OCI so as to pass on this information to the user.

• The key reasons why the items highlighted above are not part of the income statement are given below (Petty et. al, 2015).
• The current regulatory framework with regards to preparing and presenting the financial statements does not provide scope for the same and it makes it very clear that the above items ought to be represented in the OCI statement only.
• Besides, some of gains/(losses) that are represented in the OCI highlight notional changes which are susceptible to be reversed in later years and hence do not make much sense since the company has not realised the same.
• Also, the items shown are not entered into by the company with the objective of earning profit and are rather incidental to the business.

• The income statement for the company highlights the tax expense of $ 13.885 million for FY2017 as captured in the income statement (AUSDRILL, 2017).

• The requisite calculations for ascertaining any difference is indicated below.

From the above, it is apparent that there is mismatching between the two figures which tend to arise owing to the various adjustments that are performed so as to account for the differences in tax related rules and corresponding principles for computation of income before tax. This can be better illustrated and understood on the basis of the following schedule (AUSDRILL, 2017).

In wake of the above, key observations are as follows.

• The tax expense calculation begins with charging a 30% corporate tax on the accounting income before tax that is arrived at.
• There is tax reconciliation so as to alter the above amount in view of the tax rules especially where the two recommend a different course of actions. More adjustments are required for the company considering that it works in foreign geographies where the tax rate is different.

• As per the annual report of the company for FY2017, the company has deferred tax assets to the tune of $36.37 million. The corresponding amount of deferred tax legalities as on June 30, 2017 stood at $ 22.1 million.

The deferred tax asset as reported on the last day of FY2017 is lesser in comparison to the corresponding figure reported for FY2016. This is because there is a decline on the temporary differences created on various items which essentially lead to the origin of deferred tax assets which allow the company to save the tax outflow in the future based on the transactions that have taken place in the present.  The detailed statement for deferred tax assets in relation to the company is highlighted as follows (AUSDRILL, 2017).

The detailed statement for deferred tax liabilities in relation to the company is highlighted as follows (AUSDRILL, 2017).

The deferred tax liabilities as reported on the last day of FY2017 are lesser in comparison to the corresponding figure reported for FY2016. This is because there is a decline on the temporary differences created on various items which essentially lead to the origin of deferred tax liabilities which oblige the company with increasing the tax outflow in the future based on the transactions that have taken place in the present

• The current tax assets on the balance sheet of the company as on June 30, 2017 stood at $3.03 million. The corresponding amount at the closing of the previous financial year was at $4.80 million (AUSDRILL, 2017). These current tax assets would enable the company to reduce their tax outflow or increase tax refunds in the next financial year and the amount highlights the extent of benefits (Petty et. al., 2012).

The income tax expense and income tax payable are not the same. The main reason for the same is that tax expense highlights the total amount of tax that the company must pay to the tax department for a given year. However, during the year based on the likely estimates of sales and profits, the company usually tend to pay taxes for the current year on an ongoing basis. As a result, the tax payable at the end would be computed by the difference of income tax expense and income tax paid (Deegan, 2014).

Hence, income tax payable  =  Income tax expense – Income tax actually paid for the given assessment year

• There is clear mismatch between the two items under consideration i.e. income tax paid ($11.78 million) and income tax expense ($13.88 million) for FY2017 (AUSDRILL,2017).  However, this difference is not unexpected, This is because income tax paid in a year can never be equal to the income tax expense. This statement is made since income tax expense is typically available only after the financial year ends. Thus, for FY2017, the income expense exact figure would be known only after June 30, 2017. Hence, if the figure itself is not known, then before June 30, 2017, the tax paid cannot match the income tax expense. Also, it is imperative to consider that tax paid in FY2017 would not correspond to taxes only for FY2017 but could also clear some current tax liabilities outstanding in FY2016 (Barkoczy, 2017).

• The surprising aspect was the creation of these tax assets and tax liabilities which are extended into the future. The origin of these lies in the temporary differences which in itself is quite confusing as a topic since in-depth understanding of the various depreciation norms as per tax rules and as per accounting principles and policies needs to be known. However, with repeated attempts, clarity did emerge which I found quite satisfying and value enriching. The key new insight which is gained related to tax expense which is contained in the income statement which I never knew requires so many complex adjustments and reconciliation between the tax and accounting rules.

References

AUSDRILL (2017), Annual Report FY2017, [Online] Available at https://www.ausdrill.com.au/images/ausdrill/files/20170823_AUSDRILL_ANNUAL_REPORT_2017.pdf (Accessed May 24, 2018)

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016, 9^th ed.  Sydney: LexisNexis/Butterworths.

Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2012) Financial Management, Principles and Applications. 6th ed.  NSW: Pearson Education, French Forest Australia.