The two main drivers of the cash flow from operating activities are the customers’ receipts along with the payments to manpower (employees) and suppliers. The above figures indicate that there has been a drop in the customer receipts in FY2017 in comparison to FY2016. However, the payments made to the employees and supplies increased marginally as compared to the previous year. The net result was that there was a drop in the operational cash flows generated in FY2017 compared to the previous year i.e. FY2016 (Orica, 2017).
The two main drivers of the cash flow from investing activities are the payments made for acquisition of PP&E and those which are made for intangibles. Both these have shown a jump in FY2017 as compared to the previous year and the net result is that the cash outflow on account of investing activities has increased in FY2017 as compared to the previous year i.e. FY2016 (Orica, 2017).
There are four significant items listed below. Two of these relate with inflow and outflow related to the long term borrowings. In FY2017, it is apparent that both proceeds and repayment of long term borrowings has shown a decline when compared with FY2016. Also, the company seems to be phasing out the short term financing owing to constant reduction in this regards in both FY2016 and FY2017. Also, another significant element is the dividend money that has been actually paid to the shareholders. This has dipped in FY2017 owing to the previous years which can be attributed to the slowdown in the business (Orica, 2017).
The main trends that may be identified from the above are summarised below (Petty et. al, 2015).
Hence, expected tax expense = 0.3*563.4 = $ 169.02 million
However, the tax expense that has actually been reported in the income statement for FY2017 is $164 million. This deviation can be accounted for on the reconciliation adjustments required to accommodate the differences between the rules applicable for computation of taxable income and those for accounting income. This can be better highlighted through the following extract (Orica, 2017).
Thus, various aspects are considered for which adjustments ought to be made. Besides, differences between the tax and accounting treatment, consideration needs to be made for the tax paid to foreign authorities and the difference in tax treatment in terms of rate applicable and the withholding tax.
The reported deferred tax assets as on June 30, 2017 are $ 323.1 million and have witnessed a decline over the previous year when the corresponding figure was $408.3 million. The breakup of the deferred tax assets is indicated below (Orica, 2017).
The deferred tax assets highlighted above arise on account of the items indicated above and it would be expected that on the basis of the above items, the company would experience a tax inflow or tax benefit that would arise in the future but finds basis in the transactions taken place in the reported financial year only (Petty et. al., 2015).
The reported deferred tax liabilities as on June 30, 2017 are $ 274.6 million and have witnessed a decline over the previous year when the corresponding figure was $267.2 million. The breakup of the deferred tax liabilities is indicated below.
The deferred tax liabilities highlighted above arise on account of the items indicated above and it would be expected that on the basis of the above items, the company would experience a tax outflow or tax expense that would arise in the future but finds basis in the transactions taken place in the reported financial year only.
The company has not reported any current tax assets or income tax payable for FY2017. It might be possible that one of these may have clubbed under the category of other assets and other liabilities. Owing to their current nature, these typically lead to tax related inflow/(outflow) within a 1 year period (Orica, 2017).
The income tax payable typically reflects the income tax that still ought to be paid at the end of the year after adjusting the amount of tax that has already been paid. Thus, tax payable is derived by subtracting the tax actually paid from the income tax expense. Considering that some of the current year tax would always be paid, hence usually the income tax payable would differ from the income tax expense (Barkoczy, 2017).
No, the tax expense (income statement) and tax paid (cash flow statement) do not match for the given company’s FY2017 financial statements. This difference is because the tax paid during the year is based on the estimated profits that the business would typically generate. The tax expense is only determined after year closing and hence there would always be a deviation in the actual tax paid from the income tax expense (Gilders et. al., 2016).
One aspect which I found quite difficult to understand is the portion related to deferent tax assets and corresponding liabilities. This difficulty was not limited to only the underlying origination or creation of these but the actual manner in which they subsequently lead to cash inflows/(outflows). A key insight was related to the computation of tax expense and the reconciliation required.
References
Orica (2017) Orica Annual Report FY2017, [online] available at https://www.orica.com/Investors/Annual-Report/downloads#.Wwiiqe6FPIU (Accessed May 25, 2018)
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th 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, 9th 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.
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