Understanding the Items Reported in the Cash Flow Statement
By evaluating the annual report of Qantas Airways in 2017, certain items are observed to be inherent in various sections of the cash flow statement of the airline. From the operating activities, the main items are cash payments to and receipts from the suppliers and customers respectively, interest earned and paid, dividend obtained and payment of income tax. The sales that are made on credit and the payments are collected later on could be termed as receipts from the customers (DeFusco et al. 2015). There is fall in this item from $17,320 million in 2016 to $16,947 million in 2017 due to the fact that it has extended additional time to the debtors. On the contrary, fall in supplier payments is inherent in 2017 as well, since Qantas has to clear its stocks from the last year for liquidating them into cash. Interest earned and paid could be defined as the amounts that Qantas has made from loans provided and loans undertaken. As a portion of the collected loans is repaid, interest paid is observed to increase over the year (Investor.qantas.com 2018). The short-term as well as long-term receipts are taken into account as interest received and this item has increased in 2017, as additional amounts are collected from the loans provided.
The main items classified under cash flows from investments include the amount incurred for purchasing property, plant and equipment and the amount earned for disposal of property, plant and equipment. On the contrary, these assets fetch economic advantages to the organisation, which are classified in the form of proceeds (Kroes and Manikas 2014). Another item listed under this section includes aircraft operating lease refinancing. This is a type of refinancing loan, which Qantas has used for minimising the monthly payment and rate of interest. This amount is observed to decrease from $778 million in 2016 to $651 million in 2017.
Certain items are deemed to be inherent in the cash flows from financing activities of Qantas Airways, as per its annual report in 2017. These items constitute of payments for buyback of shares, capital returns and treasury shares, proceeds from and repayments of borrowings and dividends paid to shareholders and non-controlling interests. The buyback of shares is an initiative, in which an organisation purchases its own shares from the market, as the management believes that the shares are undervalued (Bollerslev, Xu and Zhou 2015). A fall in this item could be identified from the latest annual report of Qantas from $500 million in 2016 to $366 million in 2017. The capital return denotes the principal payments back to the capital owners, which go beyond the growth of a business organisation. No such payments have been made by Qantas in the year 2017, while the capital return payments amounted to $505 million in 2016. Treasury stock is a type of stock kept aside for obtaining funds or paying for future investments (Robinson and Sensoy 2016). In case of Qantas, increase in this item could be observed from $75 million in 2016 to $198 million in 2017, as they would be issued for raising additional funds in future.
Comparative Analysis of the Company’s Three Categories of Cash Flows
The proceeds from borrowings have been $419 million in 2017, while no such payments were observed in 2016. On the other hand, the payment of borrowings has fallen from $807 million in 2016 to $453 million in 2017. This is because the airline has limited its loan payments and adequate amount has been received from the provided loans. Finally, it has been observed from the annual report of Qantas Airways that the organisation has made payments to the shareholders and other non-controlling interests in 2017, while no such payments are observed in 2016.
For conducting comparative assessment of the cash flow statement of Qantas Airways in 2017, the figure below is depicted:
From the above figure, increase in net cash flows from operations could be deemed to be observed as increased from $2,048 million in 2015 to $2,819 million in 2016; however, it has declined again to $2,704 million in 2017. This section is observed to be increased due to increase in customer receipts and dividend obtained.
For the investing cash flows of Qantas Airways, cash outflows have increased massively from $944 million in 2015 to $1,923 million in 2016 and the increase is inherent to $2,046 million in 2017. The reason is that additional investments are made for buying fixed assets like machinery and other equipment for carrying out the airline operations. On the other hand, lease refinancing could be identified as another reason due to which this section has been on the increasing scale over the years.
In relation to financing cash flows of Qantas Airways, increasing trend could be observed as well like that of investing cash flows from 2015 to 2016; however, declining trend could be observed in 2017. This is due to the fact that it has minimised its borrowing repayment in 2017 and no dividends have been incurred for non-controlling interests. All these causes are primarily responsible for decrease in financing cash outflows in the year 2017.
The main items that are included in this statement include foreign currency translation reserve, cash flow hedge reserve and income tax benefits.
With the help of foreign currency translation reserve, it becomes possible for Qantas Airways to exchange the currency used by the foreign subsidiary to the currency that is used by the parent subsidiary for the purpose of financial reporting (Brigham et al. 2016). The intention is to report profits or losses in the currency of the parent entity. Cash flow hedge reserve is used for reducing the exposure due to the considerable differences in the positions of assets and liabilities of Qantas Airways. Income tax benefits are obtained based on the consideration of the various items disclosed in the other comprehensive income statement (Lee 2014).
Items Reported in the Other Comprehensive Income Statement
There are various reasons that Qantas Airways prepare the other comprehensive income statement. One of them is that the users are provided with crucial information for various income aspects. Moreover, a holistic and fair overview of different items could be obtained from the other comprehensive income statement. Due to these causes, certain items are not disclosed in the income statement of Qantas Airways (Ramsey 2018).
As identified after critical evaluation of the annual report of Qantas Airways in 2017, the airline has been obliged highly in carrying out its tax accounting policies, as laid down in the Australian taxation law. The prevailing corporate rate of tax in Australia has been 30% over the years. It has been identified from the income statement of the airline that the taxation expense has been $1,424 million in 2017 and $789 million in 2016.
The tax accounting policy that Qantas Airways follows discloses the difference between the reported tax expense and the tax expense that would have been incurred by following the standard tax rate for the airline. Certain causes are deemed to be inherent that they do not resemble each other. The part of net income received from the joint venture agreements is the major influential dynamic, as the excess payment of tax is attuned to the real tax expenses (Guay, Samuels and Taylor 2016). The non-taxable income associated with the disposal of property is a primary cause because of this difference due to which additional tax payment has been made in both the years. The underpayment and overpayment of corporate tax in 2016 and 2017 is another cause behind the difference, as Qantas Airways is required to spend the deficit corporate tax payment; however, it would be possible to earn benefits from excess payment of corporate tax (Robinson et al. 2015).
In compliance with the annual report of Qantas Airways in 2017, sufficient disclosures are carried out in relation to deferred tax assets and deferred tax liabilities. For the airline, deferred tax assets are deemed to decline considerably from $333 million in 2016 to $39 million in 2017. However, it has not reported any deferred tax liability in both the years 2016 and 2017. There are many reasons to include deferred tax assets, as their disclosures are considered relevant for the users of the financial statements of a business organisation (Woellner et al. 2016). For Qantas, the reporting of these assets is made, as it has incurred taxes in advances more than the amount to be incurred actually and these prepaid tax payments are taken into account as assets. Moreover, Qantas has minimised its depreciation expense due to the differences in the policies that are needed for developing the profit and loss statement of the airline. Therefore, the depreciation amount falling short is considered as liability (Freebairn 2015).
Explanation of Items Reported in the Other Comprehensive Income Statement
After evaluating the latest annual report of Qantas Airways, the airline has mentioned about income tax payable or current tax assets in the same. It has mentioned about the current tax liabilities in its annual report as well. However, no realisation in terms of monetary value has been made by Qantas Airways for current tax assets and current tax liabilities in both the years 2016 and 2017. Hence, there is no similarity that could be identified between the tax paid and tax payable, as per the latest annual report of the airline. This is because it has not considered a number of items in current tax assets, which are taken into account in order to arrive at the overall income tax expense. They are current tax assets, current tax liabilities and deferred tax expense (Bennedsen and Zeume 2017). Thus, deferred tax expense occupies a certain part of the income tax expense of the airline or the case might be that it has not spent the overall expenses in adherence to the income tax regulation. Thus, considerable reasons could be held responsible that income tax expense and income tax payable do not match with each other (Taylor, Richardson and Taplin 2015).
It has already been evaluated that the Qantas Airways has reported income tax expense of $1,424 million in 2017 and $789 million in 2016. On the other hand, the reported income tax expense in the cash flow statement has been nil in both the years. This implies clearly the variation between the two disclosed amounts. In such instance, it is to be mentioned that the amount of corporate tax disclosed in the profit and loss statement is the sum of money spent in the present accounting year of the airline and the payment needs to be cleared in the future year (Graetz and Warren 2016). On the other hand, the income tax payment in the cash flow statement comprises of the statement of the past year and tax payments made in advance. By taking into account all these reasons, there is significant difference observed in income tax expense in the cash flow statement and profit and loss statement of Qantas Airways (Wilde and Wilson 2017).
In accordance with the evaluation of the revealed financial information, there is absence of surprising or confusing components could be inherent in the tax treatment of Qantas Airways. The reason is that the airline has delivered all essential clarifications and descriptions regarding tax expense in the form of financial notes disclosed in the annual report. Moreover, the financial statement users would not face issues in obtaining an overview of the taxation policies of Qantas Airways, as it has conformed to the prevailing rules and standards laid out in the Australian taxation law. The organisation has to spend lower amount of depreciation, since the rules are varied while developing the income statement. Hence, the amount of depreciation, which is short, is considered as the form of liability. Lastly, it becomes possible for the users in forming a critical overview of deferred tax assets and deferred tax liabilities and income tax treatment after critical interpretation of the tax operations of the airline.
References:
Investor.qantas.com., 2018. Qantas | 2017 Annual Report. [online] Available at: https://investor.qantas.com/annual-report-2017/ [Accessed 31 May 2018].
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.
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Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
Freebairn, J., 2015. Who Pays the Australian Corporate Income Tax?. Australian Economic Review, 48(4), pp.357-368.
Bennedsen, M. and Zeume, S., 2017. Corporate tax havens and transparency. The Review of Financial Studies, 31(4), pp.1221-1264.
Taylor, G., Richardson, G. and Taplin, R., 2015. Determinants of tax haven utilization: evidence from Australian firms. Accounting & Finance, 55(2), pp.545-574.
Graetz, M.J. and Warren, A.C., 2016. Integration of corporate and shareholder taxes.
Wilde, J.H. and Wilson, R.J., 2017. Perspectives on Corporate Tax Avoidance: Observations from the Past Decade.
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