The selected firm for this task is Santos Limited which is primarily an energy company. The relevant analysis required is carried out below (Demello, 2005).
It is apparent that the customer receipts has shown an increase of about 18% which augers well for the company and implies that the business is robust and witnessing rapid growth (Arnold, 2005). Further, it is interesting to note that despite the jump in the customer receipts, the increase in payments to suppliers and employees is quite minimal which hints at potential expansion of profit margins. The increase in borrowing cost paid may reflect higher borrowings but this is not the case as the debt on the books has actually come down for the company (Santos, 2017; 2018).
It is apparent that the company has continued to invest in new oil and gas assets, which was apparent in 2016 also. Also, assets related to exploration and evaluation has also drawn sizable investment in both 2016 and 2017. There is cash inflow arising from non-current asset disposal but it is significantly lesser in 2017 as compared to the corresponding figure in 2016 (Santos, 2017; 2018).
From the above, it is apparent that the company paid some dividends in 2016 but did not pay any dividend for 2017. The key aspect is that the company has made a repayment of debt in 2017 to the extent of $ 2.4 billion which augers well for the balance sheet strength coupled with reduced financial risk owing to high debt. Also, the company has raised proceeds from equity in both 2017 and 2016, however, the proceeds from equity are much lower in 2017 as compared to 2016 (Santos, 2017; 2018). Thus, it is apparent that there is a deliberate attempt on the part of the company to lower the debt and raise money through equity so as to reduce the overall leverage (Damodaran, 2015).
The three years trend highlights an encouraging trend for the company and the shareholders. There is constant improvement in the operating cash flows from on y-o-y basis. Further, the cash outflow on account of investing activities seems to have slowed to some extent which implies that the company has acquired the requisite assets for future growth and perhaps has now started leveraging the assets leading to higher cash flow generation from operating activities. An additional positive for the company is that borrowings are on the decline and as highlighted in 2017, the company intends to make repayments of borrowings so as to strengthen the balance sheet (Bodie, et.al., 2013). For this endeavour, the company has also resorted to equity financing which has enabled deleveraging balance sheet which is clearly apparent (Santos, 2017; 2018). Thus, the trends emerging from the cash flow statement seem to be quite encouraging and indicate better days for the investors in the future (Northington, 2015).
The explanation with regards to each of the items reported in the other comprehensive income is as follows (Santos, 2017; 2018).
The firm tax expense can be extracted from the income statement pertaining to FY2017 ending on December 31, 2017. Considering that the firm had posted an pre-tax loss for the year FY2017, hence instead of tax expense, the company has obtained tax benefit to the extent of US$ 225 million (Santos, 2017; 2018).
(vii) For the FY2017, the accounting income before tax is -$585 million. Considering that the firm has made losses, hence no taxes would be charged and potentially there would be some credit. However, in the given case, the tax benefit is substantial which clearly implies that there is impact of temporary differences as is apparent from the following table obtained from the relevant schedule related to tax outflow for the company in FY2017 (Santos, 2017;2018).
From the above, it is apparent that tax benefit to the extent of $ 350 million has arisen on account of deferred tax benefits. Majority of these have arisen due to temporary differences related reversal and origination (Coleman, 2011). These temporary differences arise due to difference in the accounting and tax treatment particularity with regards to charging depreciation on the assets. The net result is that the carrying value of the assets becomes different with regards to accounting and tax thereby paving way for emergence of temporary differences which as highlighted above has a significant impact on the tax expense or benefit as may be the case (Damodaran, 2015).
The balance sheet for the year ending December 31, 2017 needs to be considered for highlighting the deferred tax assets/liabilities which may be recorded. There are deferred tax assets for the company for FY2017 to the tune of US$ 1,419 million. This refers to a potential relief in tax that the company expects to gain in the future owing to previous losses being carried forward or overpayment of taxes which might have been done earlier. The relevant details in this regards are given below (Santos, 2017; 2018).
It is apparent from the above that a significant deferred tax asset has emerged on account of the losses being carry forwarded owing to company reporting losses Coleman, 2011). Further, potential losses may have arisen with regards to the various assets such as oil & gas. These losses could potentially result in lower tax outflow in the future and hence have been assessed as deferred tax assets (Northington, 2015).
Also , there are deferred tax liabilities for the company for FY2017 to the tune of US$ 240 million. This refers to the potential of higher tax outflow in the future owing to either outstanding tax not being paid or any transaction which might have occurred in the present and would lead to higher tax outflow in the future (Gilders, et.al. 2016). These are on account of evaluation and exploration assets besides other assets and the expected gains that the company might have realised on their sale which would result in higher tax outflow later (Parrino and Kidwell, 2014).
For the financial year ending on December 31, 2017, the company has reported current tax liabilities to the tune of US$ 17 million. This implies that there is an income tax payable to the tune of US$ 17 million that needs to be paid in FY2018 (Santos, 2017; 2018). The income tax expense and income tax payable are not the same owing to the different rules which are involved in the determination of the two items (Gilders, et.al. 2016). The income tax expense is determined considering the accounting income which typically tends to be different than the taxable income determined through the relevant income tax provisions. The income tax payable is based on the taxable income and allows some deductions which are not allowed in computation of profit before tax. The difference between the profit before tax and taxable income lead to the difference between tax expense and tax payable (Brealey, Myers and Allen, 2014).
No, the income tax benefit recognised in the income statement is not the same as that indicated in the cash flow statement. The key reason for this difference is the fact that the income statement is prepared on accrual basis so the tax expense is realised completed in the income statement irrespective of it being paid or not. However, the cash flow highlights the actual income tax related outflow has occurred and thereby records transactions based on the cash basis. An additional reason for the difference is on account of income tax paid being linked to tax payable rather than income tax expense (Petty et. al., 2015).
In theory, tax seems a quite straight forward affair which is applied at a particular rate on the pre-tax profits. However, in reality, determining the taxable income and hence income tax payable is quite complex owing to the tax rules that are applicable which are comparatively more complex (Deutsch, et. al., 2015). Further, the most interesting aspect which I found was the reconciliation between the accounting and tax treatment which is captured in the financial statements through the use of various assets and liabilities along with adjustments based on temporary difference. This was quite fascinating but simultaneously challenging considering the wide scope of the same (Barkoczy, 2017).
References
Arnold, G. (2005) Corporate Financial Management. 3rd edn. Sydney: Financial Times Management.
Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2nd edn. Sydney: Oxford University Press Australia.
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N. (2013) Fundamentals of corporate finance. London: Pearson Higher Education AU.
Bodie, Z., Merton, R. C., and Cleeton, D. L. (2009). Financial economics (2nd ed.). New Delhi: Pearson Education India.
Brealey, R. A., Myers, S. C., and Allen, F. (2014) Principles of corporate finance, 2nd ed. New York: McGraw-Hill Inc.
Coleman, C. (2011) Australian Tax Analysis. 4th edn. Sydney: Thomson Reuters (Professional) Australia.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
Demello, J., (2005) Cases in Finance. 2nd edn. New York City: McGraw-Hill.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook. 8th edn. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th edn. Sydney: LexisNexis/Butterworths.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia.
Santos (2017) Annual Report 2016, [online] Available at https://www.santos.com/media/3525/san675_annualreport2016_fa3_low-res_.pdf [Accessed May 16, 2018]
Santos (2018) Annual Report 2017, [online] Available at https://www.santos.com/media/4319/2017-annual-report.pdf [Accessed May 16, 2018]
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