In this report, an attempt is made to analyse the latest annual report of Blackham Resources Limited. The main purpose of the report is to discuss the items of the equity and the reason for their changes. The report also highlights the tax expenses of the company and the difference between accounting income and taxable income. The main aim of the report is analyse the annual report and highlight the findings related to tax.
In this report, the company whose financial statement has been analysed is BLACKHAM Resource Limited. In this part discussion regarding the company’s equity and changes in it is being undertaken. In accounting concepts, the word equity has different meanings. Generally, when the word equity is used it usually indicates the value of an asset subtracted from the other liabilities (Conrad et al. 2016). But in this context, equity means something else. Here equity means the total amount of contributions/ funds invested by the owner of the company toward the capital of the company and as well as the amount of retained earnings or reserves or any losses (Bruce-Twum and Mensah 2015). This figures which are put up on the company’s balance sheet together forms the Equity for the company. It is also referred as the Shareholders’ Equity. Under the head Equity, the items found in the balance sheet of Blackham Resources Ltd. are Issued Capital, Reserves and Accumulated Losses.
Figure 1: Equity
(Source: Blackhamresources.com.au, 2018)
Firstly, the term Issued capital refers to the amount or the number of shares that the company has already issued to its existing or new shareholders. The issued capital can never exceeds the company’s authorised share capital as this portion of the capital is a part of the authorised capital itself. On analysing the balance sheet of the company it was observed that at the end of the financial year 2016, the issued capital for the company was $52,356,000 which increased to $109,960,000 in the year 2017. This implies that the company has issued new shared to its shareholders amounting to $57,604,000 during the year 2017 (Dalnial et al. 2014). This is due to several events that took place in the year 2017 such as the company issued shares on exercise of option amounting to $1,070,000. The company has also made placements of shares amounting to $60,000,000 and also issued shares in lieu of payments was 75,000 shares. Due to this, the company has to make some transaction expenses that were amounting to $3,527,000 to give effect to the above issues.
Secondly, Reserves of the company was taken into account. Reserves refers to that accumulated fund which are held in the form of liquid assets by any company, business and even government so that they can meet any expected payments which are scheduled to be made in future (Grant 2016). This reserves can also be used by the company to meet and unforeseen or emergency events. Similar to the issued capital, the reserves for the company was also found to be increased from $4,854,000 in the year 2016 to $6,310,000 in 2017. This was due to fact that the company issued options amounting $759,000 and also performance rights were also issued for $697,000.
Finally the last item found under the head Equity in the balance sheet was Accumulated losses. During the past few years, the company was suffering losses thus in the current balance sheet, the accumulated losses was reflected. A situation for a loss occurs only when an asset of a company is sold or disposed of at a price which is lower than its purchase price. Thus when a company is suffering losses over the years and it is carrying forward its losses to adjust it with the profit of the current year is known as the accumulated losses for the company. In the current situation it can be observed that the accumulated loss for the company has increased from $23,101,000 in the year 2016 to $29,945,000 in the year 2017. Therefore, it can be understood that the company in the current financial year has also suffered from significant loss due to which the figure for accumulated loss has increased (Kablan 2016).
Figure 2: Tax expenses
(Source: Blackhamresources.com.au, 2018)
The business making profits or earning irrespective of small amounts or large amounts are liable to pay income tax to the municipal, federal, state, or provincial government at a specific rate that are decided by the government of the country where the company is operating. The income tax is charged on the company gross profit after deducting the applicable expenses (Ishibashi et al. 2016). But as it can be observed after analysing the balance sheet of the company that during the past two year i.e. 2016 and 2017 the company has undergone losses amounting to $8,009,000 and $6,844,000 respectively. Hence the company is not liable to pay income tax as currently it has no income or profits. Therefore as the company has no tax liability thus its tax expenses are also nil as shown in the company’s income statement.
As it was found in this case, that the accounting income of the firm was nil for both of the financial years 2016 and 2017 hence the firm was not liable to pay taxes over its accounting income. Due to this fact, as the accounting income was nil thus the tax expenses or tax payable for the company was also nil. However, if there were any accounting profits or income for the firm then the firm’s accounting income would not be equal to its tax expenses. This is because, the tax payable for the company are calculated at a certain percentage over its accounting income or profits (Buvaneswari and Lakshmi 2015).
The accounting income of a firm varies from that of its taxable income due to two major causes. One of them is due to the differences in timings while the other reason is due to the permanent differences (Maaloul and Zéghal 2015). The taxable income of a firm can be considerably different from its accounting income due to differences in the methods of accounting used. However, this timing differences can get solved or sorted out in the future course of time as it is automatically settled by the firm’s general ledger and its tax accounting. Moreover, this differences can also arise out because of the variances in methods of depreciation or amortization which the company undertake. In addition to these, sometimes a company record few incomes in its books of accounts before they are actually received. This treatment also causes differences between the company’s accounting and taxable incomes (Zeff 2016).
Secondly, the variations in the amount of taxable income and accounting income may also arise due to permanent differences. There are few items which are recognised as accounting incomes or profits by the company which are not taxable in nature. Due to such circumstances, the company’s accounting profits get increased when such incomes does not affect the tax liability of the company. Thus the company’s taxable incomes remains unchanged. This creates significant differences among the company’s accounting and taxable profits. Moreover unlike temporary variations, the permanent difference are not settled in the future course of time for the company (Ehiedu 2014). Two such examples of permanent differences among taxable and accounting incomes for a company are proceeds from life insurances and interest earned bonds that are non-taxable in nature.
Thus, due to the following differences in accounting items and treatments, there always exists a difference among the firm’s accounting incomes and taxable incomes.
Under any such situation, where a company pays its taxes well in advance or may overpay its tax liability and that is shown on its balance sheet is known as deferred tax asset for the company. On the other hand, any account on the balance sheet of the company that is due to the temporary differences between the carrying values of tax and is termed as the deferred tax liability for the company (Wang 2017).
In the balance sheet of the company, as shown in the below figure, under the notes to accounts section and further under the head Income Tax, the workings for the deferred tax assets have been provided which is not recognised in the balance sheet of the company. The unrecognised deferred tax assets for the company was found to be $5,213,000 in the year 2016 which increased to $8,459,000 in the year 2017. Major items due to which the deferred tax assets increased in the year 2017 were due to substantial increase of Income Tax losses, Equity raising costs and minor increase in borrowing costs (Weygandt et al. 2015). Moreover there were no deferred tax liabilities for the company was observed in the balance sheet. This is because of the fact that as the company was suffering losses, thus there was no obligation for the company to pay income tax and hence there was no deferred tax liability for the company.
Figure 3: Deferred Tax
(Source: Blackhamresources.com.au, 2018)
The company is liable to pay income tax at a certain rate over the company’s income or profits. The amount which the company or a firm has to pay or it is liable to pay at a certain rate over its income or profits as tax is known as the income tax payable for that particular company. The amount of income tax varies from one country to another due to the difference in the rate of taxation as fixed by the governments (Clor-Proell et al. 2015). In this case, as already mentioned earlier that the company has not made any profit from its operations thus it is also not liable to pay any tax. Hence there are no income tax payable or current tax assets recorded by the company in its balance sheet.
Figure 4: Income tax Expenses
(Source: Blackhamresources.com.au, 2018)
An account which records the amount of tax which a company is liable to pay to the government in any particular financial year which is further reflected in the company’s balance sheet under the head current liabilities is known as income tax payable. The income tax expenses is also very similar to the income tax payable. At the time of preparing any financial report, every businesses follows certain guidelines that are often somewhat different from those policies that are undertaken while calculating the income tax for the company (Jahan 2016). Due to this, the actual or original tax bill of the company is not similar to that of the tax amount figured out by the company. Thereafter, this difference is reflected on the financial statements of the company which ends up creating a difference between the tax payable and tax expenses.
In the current case, the company Blackham Resources Limited was not able to generate any income or profits during the past few years. This is also quite evident from the fact that in the company current balance sheet the amount of accumulated losses have increased from that of the previous year. This fact clearly signifies that the company has made no profit during the current financial year (Ball et al. 2015). Hence due to the above mentioned reaso
n, the company is also not liable to pay any tax as its income is nil. Hence the tax expenses for the company is also nil which is mentioned in its income statements.
Figure 5: Income tax expenses
(Source: Blackhamresources.com.au, 2018)
Similarly, as the company’s income is nil and subsequently the tax expenses or liability is also nil, thus there is no obligation for the company to pay tax. Therefore, in the company’s cash flow statement, there are no such item or entry recorded as income tax paid.
In this case, the primary objective was to figure out the tax expenses of the company that was provided. While working out the report, I was able to gather significant knowledge regarding the concept of equity for a company. Moreover I also learnt how a firm actually calculates its tax expenses. I found this quite an interesting experience. The most confusing and difficult thing which I encountered was the difference among the accounting income and taxable income for a firm. Both of them are so closely related to each other that it becomes very difficult to figure them out individually and accurately. However, in this company there was no tax liability for the firm as it was suffering losses for the past few year. This was a bit surprising to me. Hence due to lack of income and profit the tax expenses for the company was also nil.
Reference
Ball, R., Li, X. and Shivakumar, L., 2015. Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), pp.915-963.
Blackhamresources.com.au. (2018). Cite a Website – Cite This For Me. [online] Available at: https://blackhamresources.com.au/wp-content/uploads/2017/10/171023-BLK-Full-Annual-Report-30-6-17-FINAL-5.pdf [Accessed 12 Jan. 2018].
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