Requirement (i):
By evaluating the cash flow statements of the business organisations, it becomes easier to gain an understanding of their inflows as well as outflows of cash (Robinson et al., 2015). For this paper, CSR Limited is chosen and each item of its cash flow statement is analysed critically as follows:
As per the latest annual report of CSR Limited in 2017, the organisation has reported five significant items in this section of the cash flow statement. These items include the following:
From the sales made in credit, CSR Limited received money from the customers (DeFusco et al., 2015). Increase in this item is evident from its cash flow statement from $2,499.50 million in 2016 to $2,726 million in 2017 (Csr.com.au, 2018). The receipts made from the last year’s credit sales are the primary reason behind this increase. The materials bought from the suppliers indicate the money paid to them. There is rise in cash outflow of this item in 2017 to $2,424.60 million from $2,246.40 million in 2016. This is because CSR Limited has made additional purchases for coping up with the rising consumer demand. The third item is the dividend amount earned because it has invested in its other subsidiaries. Increase could be observed in this item as well from $11.20 million in 2016 to $14.20 million in 2017. However, interest receipt is observed to decline from $2.50 million in 2016 to $1.90 million in 2017 due to the lower amount of investments made. In addition to this, massive increase could be identified in its income tax payment to $52.70 million in 2017 as opposed to $14.60 million in 2016.
Cash flows from investing activities:
In this section, CSR Limited has reported five significant items. These comprise of purchase of and proceeds from plant and equipment, purchase of controlled entities or businesses, costs of acquisition, repayment of receivables and loans obtained in advance (Gordon et al., 2017). It could be identified from the cash flow statement of CSR Limited that reduction is made in investments related to purchase of plant and equipment and other assets in 2017 compared to 2016, which have been $92.20 million as opposed to $120 million in 2016. As the organisation has adequate asset base available, it has significantly minimised its purchase. On the contrary, decline could be observed in the proceeds from these assets from $71.20 million in 2016 to $44.7 million in 2017. No business acquisitions have been made in 2017 due to which significant fall in these expenses could be observed from $12.80 million in 2016 to $3.50 million in 2017. As the acquisition amount has fallen, acquisition cost has fallen drastically from $12.8 million in 2016 to ($3.4 million) in 2017. Along with this, CSR Limited has largely repaid its prepaid loans from $0.10 million in 2016 to ($5.30 million) in 2017.
Cash flows from financing activities:
In this section, CSR Limited has disclosed important items like share repurchase, share acquisition, interest payment, finance cost and transactions with non-controlling interests (Harris, 2016).
Share repurchase denotes the procedure of buying back the shares. The cash flow statement of CSR Limited in 2017 denotes that the organisation has raised the share buyback in 2017 in contrast to the previous year, which has been ($4.30 million) in 2017 and ($1.1 million) in 2016. In 2017, CSR Limited has raised the borrowing drawdown from borrowing payment in 2016; which has been ($28.30 million) in 2017 as opposed to ($10.40 million) in 2016. As the profit level has risen, dividend payments of the organisation have increased from $144.90 million in 2016 opposed to $146.70 million in 2017. In relation to share acquisition, decline in the amount could be observed in 2017 to $5.40 million from $7.1 million in 2016. Slight rise in interest payment and other costs could be observed from $3.20 million in 2016 to $3.40 million in 2017. Finally, it has been identified from the annual report of CSR Limited that the organisation had paid for the transactions related to non-controlling interest amounting to $126.40 million, while no such payments are made in the year 2017.
In order to carry out the comparative analysis of the cash flow statement of CSR Limited in 2017, the following figure is represented:
The above figure denotes continual rise in cash flows from operating activities in the context of CSR Limited from $234.30 million in 2015 to $252.20 million in 2016 and to $264.80 million in 2017. The primary cause for rise in this section is the increase in amounts from the customers. In addition to this, rise in receipt of interest and dividend could be held accountable for this rise.
In relation to cash flows from investing activities, increase in cash outflows could be observed in 2016 as opposed to 2015 from $45.40 million in 2015 to $80.80 million in 2016. This is because additional investments are made in order to purchase cash and cash equivalents. However, in 2017, decrease in cash outflows could be identified, which have been to $80.80 million in 2016 to $60.70 million in 2017. This is because investment amounts have been reduced for purchasing plant and equipment (Jagannathan et al., 2017).
For cash flows from financing activities, rising trend is observed in terms of outflows from 2015 to 2017 from $126.80 million in 2015 to $166.70 million in 2016 and to $257.90 million in 2017. This is because additional dividend payments are made over the years coupled with the borrowing repayments. All these reasons could be held accountable for rise in cash outflows from financing activities (Wahlen, Baginski & Bradshaw, 2014).
Requirement (iii):
Certain significant items are reported under the comprehensive income statement in the annual report of CSR Limited in 2017. These items take into account hedge loss or profit in equity, hedge profit transfer to the financial performance statement, difference in exchange in the translations related to foreign operations, variation in the fair value associated with cash flow hedge reserve and benefits obtained from income tax of these items.
Requirement (iv):
In order to gain an in-depth understanding of the above-stated items reported in the other comprehensive income statement of CSR Limited in 2017, the following discussion is made:
Foreign currency translation reserve:
The intention of using this specific item is to convert the outcomes of the cross-border subsidiaries of the parent organisation to the reporting currency where financial reporting is conducted. This is a significant aspect in the consolidation procedure where the ascertainment of the cross-border currency of the foreign subsidiary is made in the currency for conducting financial reporting process (Bratten, Causholli & Khan, 2016). The next procedure constitutes of gauging the foreign currency again to the reporting currency. The primary cause is to record earnings or loses in the reporting currency.
Cash flow hedge reserve:
With the help of this particular item, the exposure formed could be minimised or removed because of the significant variations in asset and liability positions of the corporate entities. Certain risk variations are the primary reasons behind the occurrence of this item such as interest related to debt risk, risk related to interest rate and others (Huang, Lin & Raghunandan, 2015).
Income tax benefits:
It is noteworthy to mention that the organisations need to charge tax on the above-depicted factors in the other comprehensive income statement. With the help of these aspects, it becomes possible for the business organisations to obtain tax benefits (Nejad, Ahmad & Embong, 2018).
Requirement (v):
With the help of other comprehensive income statement, it is possible to obtain extended outlook of the business profitability. The primary intention of CSR Limited in forming the other comprehensive income statement delivers the users with the essential information in relation to the above-mentioned aspects. Thus, this statement provides an overview of transparent and holistic approach of such items. Such causes are not engaged directly in order to derive income. By combining all these causes, it is not possible for CSR Limited to report these items in the statement of comprehensive income.
Requirement (vi):
CSR Limited is obliged to conduct its tax accounting in accordance with the norms of the Australian taxation law. In the years 2016 and 2017, the tax rate that could be applied to the organisation is 30%. Based on the statement of financial performance in 2017, the income tax expense reported has been $61.70 million in 2017 and $64.40 million in 2016.
Requirement (vii):
The evaluation of tax-related accounting of CSR Limited reveals the variation between the disclosed income tax expense and the income tax expense to be actually incurred for the organisation. There are certain reasons due to which such difference has taken place. The portion of net income obtained from the joint venture firms is the primary factor, since the additional tax payment has been adjusted with the actual tax expenses (Graham & Lin, 2018). The non-taxable income on the property disposal is a significant reason due to this variation, as the excess tax payment on sale has been adjusted with the real tax expense. The overpayment as well as underpayment of income tax in the years 2016 and 2017 could be cited as another reason for variation, since CSR Limited needs to incur the deficit income tax payment while the benefits could be derived from additional income tax payment (Bennedsen & Zeume, 2017).
Requirement (viii):
As per the latest annual report of CSR Limited in 2017, it could be found that adequate disclosures have been made regarding deferred tax assets and deferred tax liabilities. Deferred tax assets have been observed to be $201.20 million in 2017, which were $239.30 million in 2016. In 2016, deferred tax liabilities were reported to be $20.90 million, while no such liabilities are realised in the year 2017. The primary reason that deferred tax assets are disclosed in the annual report is the advance tax payment on the part of the organisation. This is because excess tax payments are made in contrast to the real taxation expenses and such prepaid tax payments are considered in the form of assets (Taylor & Richardson, 2014). On the contrary, CSR Limited needs to incur lower depreciation amount because of the variations in the norms of preparing the income statement. Hence, the deficit depreciation amount is taken into account in the form of liability (Richardson, Taylor & Lanis, 2015)
Requirement (ix):
In accordance with the annual report of CSR Limited in 2017, the organisation has reported current tax assets or income tax payable of $0.50 million and this is exactly the amount in 2016. On the contrary, it has reported current tax liabilities as well, which has amounted to $10.30 million in 2017 and $38.10 million in 2016. Therefore, variation could be observed in relation to income tax expenses and income tax payable. Based on the detailed evaluation, it could be cited that CSR Limited has included certain items for calculating its overall income tax expense. These items constitute of deferred tax expense, current tax assets and current tax liabilities (Dyreng, Hoopes & Wilde, 2016). Hence, one of the significant portions of the income tax expense of the organisation constitutes of income tax payable and it might occur that the organisation might not incur the total expenses in accordance with income tax. This could be identified as the significant reason behind such difference (Grubert & Altshuler, 2016).
Requirement (x):
According to the latest annual report of CSR Limited, the income tax expense of the organisation has been $61.70 million in 2017, which was $64.40 million in 2016. On the contrary, the disclosed income tax expense in the cash flow statement has been $52.70 million in 2017 as opposed to $14.60 million in 2016. This clearly signifies the difference between the two reported amounts. In this case, it is worth mentioning that the income tax expense recorded in the income statement is the amount incurred in the current taxation year of the organisation and the payment is required to be made in the upcoming year (Chen, 2017). However, the payment of income tax in the cash flow statement constitutes of the previous year payment as well as prepaid tax payment. Due to these reasons, the two taxation figures disclosed in the income statement and cash flow statement do not resemble each other (Dowling, 2014).
Requirement (xi):
Based on the analysis of all the disclosed financial information, no surprising or confusing elements could be observed in the tax-related treatment of CSR Limited. This is because the organisation has supplied the necessary justifications and clarifications of the taxation treatment as footnotes in the financial report. In addition, the users of the financial statements do not encounter complexities to gain an insight of the tax-related treatment of CSR Limited due to the fact that it has adhered to all the norms and legislations as laid down in the taxation law of Australia. CSR Limited needs to incur lower depreciation amount because of the variations in the norms of preparing the income statement. Hence, the deficit depreciation amount is taken into account in the form of liability. Finally, it becomes possible for the individuals to develop a thorough insight related to deferred tax assets and deferred tax liabilities coupled with the treatment of income tax payable after careful observation of the taxation operations of the organisation.
References:
Bennedsen, M., & Zeume, S. (2017). Corporate tax havens and transparency. The Review of Financial Studies, 31(4), 1221-1264.
Bratten, B., Causholli, M., & Khan, U. (2016). Usefulness of fair values for predicting banks’ future earnings: evidence from other comprehensive income and its components. Review of Accounting Studies, 21(1), 280-315.
Chen, S. (2017). Do Investors Value Corporate Tax Return Information? Evidence from Australia.
Csr.com.au. (2018). Retrieved 22 May 2018, from https://www.csr.com.au/-/media/corporate/files/annual-reports/2017_annual_report_for_31_march_2017.pdf
DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E. (2015). Quantitative investment analysis. John Wiley & Sons.
Dowling, G. R. (2014). The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), 173-184.
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Graham, R. C., & Lin, K. C. (2018). The influence of other comprehensive income on discretionary expenditures. Journal of Business Finance & Accounting, 45(1-2), 72-91.
Grubert, H., & Altshuler, R. (2016). Shifting the burden of taxation from the corporate to the personal level and getting the corporate tax rate down to 15 percent.
Harris, P. (2016). A case study of the cash flow statement: US GAAP conversion to IFRS. Journal of Business Case Studies (Online), 12(1), 1.
Huang, H. W., Lin, S., & Raghunandan, K. (2015). The volatility of other comprehensive income and audit fees. Accounting Horizons, 30(2), 195-210.
Jagannathan, R., Matsa, D. A., Meier, I., & Tarhan, V. (2017). Search in. CFA Digest, 47(4).
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Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.
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