Analysis Of Tax Expense, Deferred Tax Assets, And Impairment Recognition In Financial Statements

Tax Expense and Deferred Tax Asset Liability of Two Australian Companies

The company that has been selected for analysis includes Wesfarmers Limited and ANZ bank Limited. Both the said entities are listed on Australian Stock Exchange. The annual report of 2018 and 2017 has been selected for Wesfarmers and data for 2017 and 2016 has been selected for ANZ bank limited.

The analysis part included reporting of current tax expense reported for the year and on perusal it shall be seen that tax expense is 32.36% of Profit of company for FY 2018 and 29.75% for year 2017. Further, for other comprehensive income there has been no tax for Year 2018 and 2 Mio for year 2017.

On analysing the Deferred Tax Asset and Deferred Tax Liability of the company, it shall be seen that deferred tax asset exceeds liability for both years in the statement of financial position. ( Defmacro Software Pvt. Ltd., 2018) For detailed analysis, refer Appendix-1.

 Further, deferred tax asset that has been booked under Profit and loss this year stands at $ 29 Mio and $ 7 Mio for 2017.

The analysis part included reporting of current tax expense reported for the year and on perusal it shall be seen that tax expense is 33.30% of Profit of company for FY 2018 and 30.06% for year 2017. Further, for other comprehensive income there has been a tax impact of $ 20 Mio for Year 2018 and no impact for year 2017.

On analysing the Deferred Tax Asset and Deferred Tax Liability of the company, it shall be seen that deferred tax asset exceeds liability for both years in the statement of financial position. For detailed analysis, refer Appendix-1.

 Further, deferred tax asset that has been booked under Profit and loss for year 2017 stands at $ 257 Mio while for 2018 there has been deferred tax liability booked.

For Case Information -2, an analysis has been carried out regarding impairment of asset under both revaluation model and cost model in terms of AASB. Further, the case also deals with unrealistic assumption regarding future cash flow and corresponding impact on the impairment of asset in term of AASB as impairment is carried out when carrying value is higher than recoverable value which in term is dependent on Value- in-use. Thus, a higher cash flow leads to higher value in use and low or no impairment and vice versa. The case deals with the impact of judgement, estimate, and assumptions on the recognition of impairments. The analysis also touch Positive account theory, management incentives, debt incentive and political cost.

For Case Information-3, the analysis deals with owner-managing agency relationship and shows the rationale for reluctance on the part of the management to adopt the acceptance of IFRS16/AASB 16 and the violation of covenant of 60% of total liability/ total asset. Further, the analysis inks out the impact of the such adoption on the Company’s executive remuneration contracts.

Case-2- In depth analysis

To understand the analysis, it shall be pertinent to understand the recognition of impairment in the books. The testing of impairment involves checking whether the carrying value of the asset is greater than recoverable value. (AccountingCoach, 2018) For computing recoverable value, one need to compute value-in-use and Fair Value less cost of disposal. Higher among both is taken as recoverable value.

For computation of value-in-use, there involves estimation of cash flow, discount rate, duration of cash flow and hence involve estimation. The variation in the same can impact the computation of Value-in-use by a significant level and accordingly shall impact the recognition of impairment in the books.

For Computation of fair value less cost of disposal there are too assumption involved regarding the market and the cost of disposal as true and exact value can only be ascertained on execution. Thus, Subjective assumption has a strong impact on the computation of impairment of assets in books of accounts of the company.

Yes, positive theory does explain the management acceptance or reluctance to account for impairment in the books of company. The rationale for the same has been detailed here-in-below:

• Management Incentive: As the profits of the company have a strong impact on the remuneration and incentives of the managers, impairment plays a crucial role as impairment is expensed in Profit and Loss Account. Thus, impairment impacts profit of the company and correspondingly remuneration incentives;

• Debt Incentive: When the asset are impaired, the same leads to violation of covenants of debt to asset or debt to equity ratio resulting in restriction in the hands of the management to borrow additional amount in the market. Thus, the impairment has an impact on balance sheet of the company and the debt of the company. Further, the amount of debt of the company has impact on profitability as cost of debt is lower than cost of equity.

• Political Cost: Large entities generally prefer higher impairment on the asset so as to reduce profits of the company and accordingly protect the company and the board from any legal scrutiny and issues.

Wesfarmer  Limited
For the year ended 30 June, 2018
In $ Mio
Sl No	Particulars	2018	2017
1	Profit before Income Tax	3850	3929
2	Tax Expense	-1246	-1169
3	Profit from Continuing operations	2604	2760
4	Effective Tax Rate	32.36%	29.75%

In $ Mio
Sl No	Particulars	2018	2017
1	Tax effect	0	-2

In $ Mio
Sl No	Particulars	2018	2017
1	Current Year Tax Expense
	-Current Year	1283	1187
	-Adjustment for prior years	-8	-18
2	Deferred Income Tax Expense
	-Temporary Differences	-29	-7
	-Adjustment for prior years		7
3	Income Tax Reported in Profit and Loss Account	1246	1169

Deferred Income Tax  ( BS)
In $ Mio
Sl No	Particulars	2018	2017
1	Provisions	250	338
2	Employee Benefits	427	417
3	Accrued and other Payables	130	141
4	Borrowings	103	143
5	Derivatives	5	53
6	Trading Stock	90	98
7	Fixed Asset	273	432
8	Other individual  insignificant balances	87	71
	Deferred Tax Assets	1365	1693
1	Accelerated Depreciation for Tax Purposes	212	253
2	Derivatives	155	148
3	Accrued income and other	159	155
4	Intangible Assets	106	107
5	Other individual  insignificant balances	41	59
	Deferred Tax Liabilities	673	722
	Net Deferred Tax Assets	692	971

Deferred Income Tax  ( PL)
In $ Mio
Sl No	Particulars	2018	2017
1	Provisions	-17	-20
2	Depreciation, Amortisation and Impairment	10	-23
3	Other individual  insignificant balances	-22	36
4	Deferred Tax expense	-29	-7

ANZ  Limited
For the year ended 30 June, 2017
In $ Mio
Sl No	Particulars	2017	2016
1	Profit before Income Tax	9627	8178
2	Tax Expense	-3206	-2458
3	Profit from Continuing operations	6421	5720
4	Effective Tax Rate	33.30%	30.06%

In $ Mio
Sl No	Particulars	2017	2016
1	Tax effect	-20	0

In $ Mio
Sl No	Particulars	2017	2016
1	Current Year Tax Expense
	-Current Year	3094	2738
	-Adjustment for prior years	-19	-23
2	Deferred Income Tax Expense
	-Temporary Differences	131	-257
	-Adjustment for prior years
3	Income Tax Reported in Profit and Loss Account	3206	2458

Deferred Income Tax  ( BS)
In $ Mio
Sl No	Particulars	2017	2016
1	Deferred Tax Assets	675	623
2	Deferred Tax Liabilities	257	227
3	Net Deferred Tax Assets	418	396

References

Defmacro Software Pvt. Ltd., 2018. Deferred Tax Asset and Deferred Tax Liability. 

AccountingCoach, 2018. What is an impairment.