Assessment task
After evaluating the annual report of Freedom Insurance Group Limited, it is analysed that equity capital of company is accompanied by mainly three parts (Freedom Insurance Group Limited, 2017).
- Contributed equity of business
- Reserve
- Distributable profit of business.
It is observed that contributed capital is the paid up capital which divulges which stakeholders had given to company. Retained earnings or reserve is kept to strengthen the financial position of business (McLaren, Appleyard and Mitchell, 2016).
Retained earnings of company has gone down by AUD $ 923 million as it has invested its reserve in its business with a view to diversify its business. It is evaluated that company has also retained earning with a view to increase the business efficiency.
Answer to question-2The total amount of tax expenses of Freedom Insurance Group Limited in 2016 is AUD $ 2086 million which is 62% higher as compared to last year tax payment. This tax expenses has increased due to the increase in its overall turnover and profit of company.However, Freedom Insurance Group Limited has increased the tax deducabile expenses such as increase in its overall interest expense. It will help Freedom Insurance Group Limited to reduce its tax payment eventually.
Answer to question no-3After evaluating the annual report of company, it is considered that tax expenses shown in the income statement is not the same amount of tax rate times. Freedom Insurance Group Limited has paid AUD $ 2086 million tax in 2016 which covers the entire deferred tax amount and other tax implications. On the other hand, tax rate times of Freedom Insurance Group Limited is calculated by using accounting income *30% tax rate, i.e. AUD $ 5125 million*30%. This amount would be AUD$ 15375.
However, there are following reasons for the differences in tax recording of tax in income statement and computing of the tax amount by using tax rate times.
- The treatment for computation of the tax payment in financial statement is based ont the tax rules and regulations while, tax rate times is computed on the net profit calculated on the basis of accounting rules and regulations.
- It is evaluated that the main reason for the differences in tax computation is related to recording of revenue and expenses in profit and loss account which are deductible for as per the tax rules and regulations. Deprecation accounting and recording of donation and recording of bed debts amount in financial statement differ as per the accounting an income tax rules AASB-112 (Alesina and Passarelli, 2014).
Answer to question no-4After evaluating the annual report of Freedom Insurance Group Limited, it is considered that deferred tax liabilities of company in 2016 is AUD $ 4475 which is 63% higher as compared to last year data.
This deferred tax amount should be recognized and carried forward to the limit that it is reasonably sufficient for its future taxable income against which deferred tax assets would be realised (Freedom Insurance Group Limited, 2017).It is evaluated that accounting and taxable income are not same which resulted to recording of deferred tax assets and liabilities in the books of account of company.
It is analysed that if company finds that due to difference between accounting and taxation rules and regulations, it has charged higher tax then the excess tax payment in its financial statement will be recorded as deferred tax assets. On the other side, if lower tax has been charged as per the accounting rules while comparing with the taxation rules then that lower amount would be shown in the deferred tax liabilities of the company (Morgan, 2016).Freedom Insurance Group Limited has reflected that company has deferred tax liabilities which reflect that company might pay more tax to government (Mills and Woodford, 2015).
Answer to question no-5Current tax assets and other income tax payable by companyIt is analysed that current tax payable by company is AUD $ 16 in 2016. The income tax payable is recorded on the liabilities side of company which shows tax amount would be paid as per the tax rules and regulation given under AASB-112 (Freedom Insurance Group Limited, 2017).Why income tax expenses is not same as the income tax payableThe main reason is based on the charges of income tax on the profit of the current year. On the other hand, income tax payable is the accumulation of the outstanding tax which company will pay in future and shown in the liabilities side (Bodie, Kane and Marcus, 2014).
Equity capital of Freedom Insurance Group Limited
Answer to question no-6Is the income tax expense shown in the income statement same as the income tax paid shown in the cash flow statement? If notIt is analysed that cash flow statement is accompanied by the cash details or cash inflow and outflow in the current year. The cash flow of income tax in current year is the tax payment in the current year irrespective of the fact that whether it is related to current year or previous year. In addition to this, income tax payment shown in the income statement of company is based on the tax charged on the current year profit as per the AASB -122.
The cash flow statement covers all Cash flow statement reflects the cash outflow and inflow of money in the current years. The cash flow of income tax in current year is $98.5 million which covers all the tax payment by the company in current year. It may include tax for present and future period. On the other hand, tax payment shown in the profit and loss account is charged for the current year profit as per the taxation rules of AASB122. The cash flow statement reflects all the tax payment either related to current, previous and future year. On the other hand, tax charged in the income statement, is charged on the current year profit of company.
Therefore, due to the different amount of tax recording in both statements, there is difference in tax payment (Ajello, 2016).Answer to question no-7Treatment of tax in your firm’s financial statementsInteresting thing about the recorded its entire tax amountThe main interesting thing about the recording of income tax and deferred tax is related to difference in accounting and income tax provisions.
The recording of income tax in financial statement is done as per the AASB-112 accounting and taxations rules (Dwenger and Steiner, 2014).Surprising thing about the recorded its entire tax amountThe most surprising thing about the recording of entire tax amount is related to implication of taxations rules and how it overrides the accounting rules and regulations in recording of tax in the income statement of company.
In addition to this, it is found that company cannot have deferred tax and deferred liabilities at the same time in its balance sheet (Dyreng and Markle, 2016).Confusing thing in recording of income tax amount The main confusing thing arise when company record all of its tax payment as per the AASB-112 which become cumbersome if tax computation as per the accounting rules differ from the taxations rules (Brigham and Ehrhardt, 2013).
Difficulty in recorded the entire tax amountFreedom Insurance Group Limited has recorded its entire deferred tax amount in its current tax liabilities. However, company could have only deferred tax assets or liabilities in its books of account.Insight companies account for income tax as a result of examining your firm’s tax expense in its accountsThe main insight which I have gained in this corporate accounting is related to identifying the expenses which are eligible for the tax deduction.
These tax deductible and non-tax deductible expenses are the reason for the difference in tax payment as per the income tax rules and regulations and tax computation as per the accounting rules and regulation.
|
Equity (Amount in million) |
2015 |
2016 |
|
Contributed equity |
8416 |
810 |
|
Reserve |
688 |
500 |
|
Retained earning |
7791 |
4769 |
|
Total equity |
16895 |
6079 |
|
Particular(AUD $ in million) |
2016 |
2017 |
|
Income tax expenses |
2086 |
1314 |
|
Particular (AUD $ million) |
2016 |
2015 |
|
Deferred tax liabilities |
4475 |
2220 |
|
Particular(AUD $ in million) |
2016 |
2017 |
|
Income tax payable |
16 |
– |
References
Ajello, A., 2016. Financial intermediation, investment dynamics, and business cycle fluctuations. The American Economic Review, 106(8), pp.2256-2303.
Alesina, A. and Passarelli, F., 2014. Regulation versus taxation. Journal of Public Economics, 110, pp.147-156.
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Dwenger, N. and Steiner, V., 2014. Financial leverage and corporate taxation: Evidence from German corporate tax return data. International tax and public finance, 21(1), pp.1-28.
Dyreng, S.D. and Markle, K.S., 2016. The effect of financial constraints on income shifting by US multinationals. The Accounting Review, 91(6), pp.1601-1627.
Freedom Insurance Group Limited, 2017, annual report, Retrieved on 29th November, 2017.
McLaren, J., Appleyard, T. and Mitchell, F., 2016. The rise and fall of management accounting systems: A case study investigation of EVA™. The British Accounting Review, 48(3), pp.341-358.
Mills, A. and Woodford, W., 2015. Company Accounting. Pearson Higher Education AU
Morgan, J., 2016. Corporation tax as a problem of MNC organisational circuits: The case for unitary taxation. The British Journal of Politics and International Relations, 18(2), pp.463-481.
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