Cash Flow Statement
Discuss about the Conceptual Framework For Financial Accounting.
The current report is based on the understanding of the corporate reporting environment of BHP Billiton. The report would be carefully analysing the financial statements of BHP Billiton over the period of three years. Initially a cash flow statement analysis will be conducted where each items reported in the cash flow statement of the BHP Billiton reported in the cash flow statement would be discussed along with the depiction of changes in the items of cash flow statement. A comparative analysis of operating investing and financing activities would be conducted for a period of three years.
An analysis of items reported by BHP Billiton in the other comprehensive income statement would be discussed and the reason for not including the items in the profit and loss statement. The report would be placing emphasis on the accounting for corporate income tax by understanding the BHP Billiton tax expenditure, deferred tax assets, current tax assets and income tax expenditure along with the differences in figures reported.
As evident from the cash flow statement under the operating activities BHP Billiton reported profit before tax originating from continuous operations (Scott, 2015). The profit before taxation represents the profitability measures that considers the profit of BHP Billiton prior to the payment of any corporate income taxes by subtracting all the expenditure from the revenues along with the interest expenditure and operating expenditure except the income tax (BHP Billiton, 2018). The continuing operations for BHP Billiton represents the net income class in the profit and loss statement that amounts to BHP Billiton daily business activities.
Under the operating activities BHP Billiton reported certain adjustment prior to taxation. This includes the non-cash items of exceptional nature, expenditure related to depreciation and amortization, impairments conducted on PPE, intangible and the financial assets (Schaltegger & Burritt, (2017). Further expenditure include net finance costs and share relating to operating profit of equity accounted investments. BHP Billiton reported a changes in the assets and liabilities under the operating activities (BHP Billiton, 2018). The changes included in the areas of trade and other receivables, inventories, trade and other payables along with the provision on assets and liabilities.
Cash flow from the investing activities represents the items on the statement of cash flow that reports the aggregate changes in the company’s position of cash originating from the gains made from investment in the monetary markets together with operating subsidiaries and changes that results from the sum spend on capital assets investments (Williams, 2014). The investing activities of BHP Billiton included the purchase of PPE, expenditure on exploration, the expense of exploration spending that is included in the operating cash flow. The items listed in the investing activities also included net investment in the accounted investments along with the proceeds from assets, divestment of subsidiaries and joint operations (BHP Billiton, 2018). Under the investing activities, BHP Billiton reported net investing cash flows from the discontinued operations.
List of Each Items reported in Statement of Cash Flow
The cash flow from the financing activities includes the cash flow from the organizations cash flow statement that amounts to external activities that enables a company to raise capital (Warren & Jones, 2018). Apart from raising capital the financing activities also comprises of the repayment of investors, adding or changing loans or issue of stocks. BHP Billiton cash flow from financing activities include the proceeds that are derive from the interest bearing liabilities. It also includes proceeds originating from debt instrument, repayment of the interest bearing loans, proceeds originated from the ordinary shares, contributions made to the non-controlling interest and the purchase of employee stock option plans (Henderson et al., 2015). The financing activities of BHP Billiton included the payment of dividend to both the shareholders and to non-controlling interest as well.
The three board categories of cash flow statement constitutes cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. BHP Billiton net cash flow from the operating activities for the financial year of 2015 stood $19,296 million. However, in the following year of 2016 the net cash flow from the operating activities declined to $10,625 million (BHP Billiton, 2018). In the recently concluded financial year of 2017 the cash flow from operating activities increased to stand at $16,804 million. The primary reason for the declined in cash flow from operations was that BHP Billiton incurred significant amount of expenses on the payment of net income tax and royalty related tax that alone accounted for $2,286.
The cash flow from the investing activities for BHP Billiton stood highest in the financial year of 2015 as it stood 13,154 which also included net investing cash flow from the discontinued business operations (Macve, 2015). The net amount of cash flow from the investing activities in 2016 stood $7,245 million while in the subsequent year of 2017 the cash flow from investing activities stood $4,161. The discontinued operations included the BHP Billiton demerger from the aluminium business, manganese, nickel and silver lead zinc.
The cash flow from the financing activities for BHP Billiton in the financial year of 2015 stood $8,073 million while in 2016 the cash flow from financing activities stood $284 million (Maynard, 2017). In the recently concluded financial year of 2017 the net cash flow from the financing activities accounted for $9,133 million (BHP Billiton, 2018). Evidently there was a stark decrease in cash flow in 2015 as BHP Billiton reported net decrease in cash flow of $1,781 million. However, the cash and cash equivalent for the financial year of 2016 and 2017 stood 10,276 and 14,108 million respectively.
Comparative analysis of cash flow categories
The items reported by BHP Billiton in the other comprehensive income statement included items that might be subsequently reclassified to the income statement (Hoyle et al., 2015). This included items that were available for sale investments such as net valuation of losses or gains taken to the equity and net amount of valuations of losses or gains that were transferred to the income statement. There were cash flow hedges relating to gains or loss from equity or the gains and losses that were transferred to the equity statement (Watson, 2018). BHP Billiton reported exchange variations on transactions of foreign operations that were taken to equity and items that were transferred to income statement. BHP Billiton recognized tax within the comprehensive income statement.
There were items under the other comprehensive income statement that were not to be classified into the income statement. This included the re-measurement of the gains and losses on the pension and medical arrangements.
An understanding can be gained for BHP Billiton items available for sale investment represents the equity shares that were bought with the intention of selling prior to it reaching maturity or holding the same for a long period given that it does not have the maturity date (BHP Billiton, 2018). The accounting standards requires the companies to reclassify any form of investment or debt equity securities when they are bought or held for selling purpose.
BHP Billiton also reported cash flow hedges. A cash flow hedge is better understood as the hedge of the exposure relating to the variability of the cash flow which is attributable to certain risks related with the identified assets and liabilities.
The objective of other comprehensive statement and profit and loss statement is provide users with the better understanding of the BHP Billiton financial position which may enable the users to evaluate the future cash inflow and outflow of BHP Billiton (Johnston & Kutcher, 2015). The IFRS requires BHP Billiton to present the income statement as combined statement of profit and loss. BHP Billiton is under obligation of the IFRS to separately present the other comprehensive income statement that would reclassify the profit or loss along with those items that would never be reclassified to statement of profit and loss (Morris, 2017). The associated tax impacts is necessarily required to be allocated to these sections.
Income tax expenditure relates to the amount of expenditure that a business identifies during the account period associated to its taxable profits for the government tax. As identified in the annual report of BHP Billiton the tax expense for the company during the financial year of 2017 stood $4,100 billion (BHP Billiton, 2018).
Analysis of Other Comprehensive Income Statement
The effective tax rate for the BHP Billiton during the financial year of 2017 stood 39.7 per cent this is because the financial year of 2017 tax expenditure of BHP Billiton reflected a higher profits. The tax rate for BHP Billiton is not same based on the times of the company’s accounting income (BHP Billiton, 2018). The financial year of 2016 reflected a taxation benefit that was mainly because of the operating losses originating from the recording of impairments.
The deferred tax assets for BHP Billiton during the financial year of 2017 stood $5,788 million. Whereas the deferred tax liabilities provided by BHP Billiton in the balance sheet for the year 2017 stood $3,765 million (BHP Billiton, 2018). The deferred tax by BHP Billiton is provided in full and temporary differences that originates between the tax bases for the assets and liabilities along with their carrying amount in the financial statements.
The reason for recognizing the deferred tax asset in the balance sheet is that it is possible that the taxable profits in the future would be available against which the provisional differences can be put into use (Gao et al., 2015). The deferred tax for BHP Billiton is measured based on the rate of tax that are anticipated to be applied upon realising an asset or when there is a settlement of liability. Necessary judgements are made to sum of deferred tax assets is identified based on the probable future assessable profits. On the other hand the primary reason for identifying the deferred tax liabilities is because of the differences that are temporary in nature relating to investments caused largely by retained earnings held in the overseas tax jurisdictions.
BHP Billiton recorded a current tax assets of $195 US$M for the financial year of 2017. The company also reported income tax payable of $2,119 US$M for the financial year of 2017 (BHP Billiton, 2018). The income tax payable is not as same as the income tax expense because the income tax expenses is what BHP Billiton owns in tax based on the standard accounting rules whereas the income tax payable represents the actual amount of the taxes that is owned by the BHP Billiton based on the tax code rules (Gao et al., 2015). The current amount of tax represents the anticipated amount of tax on the assessable income during the year based on the tax rates and the laws adopted during the reporting data whereas any form of adjustment to the tax payable for BHP Billiton is in respect of the previous years.
Items reported in other comprehensive income statement
The income tax expenses reported in the income statement is different from the income tax paid on the statement of cash flow (Wang et al., 2015). The income tax reported in the income statement for the year 2017 stood $4,100 US$M while the income tax paid in cash flow stood $2,585 US$M (BHP Billiton, 2018). The differences is primarily because of the income tax effects on the certain gains and losses that relates to the investing and financing activities. Another reason for differences in the income tax paid and income tax payable is because there are certain accounting transactions that has originated in the ordinary business courses as a results of this the final amount of tax determination remains uncertain (Rathke, 2016,).
The overall understanding of the firm’s financial statement provides an interest fact that the company recognizes the tax that is payable by using the tax rates and the substantially adopted laws on the reporting data. The financial reports provides an understanding of the taxes that are payable is based on the adjustments made in respect of the previous years. An interesting fact has been learned that BHP Billiton reports deferred tax assets based on the temporary differences of the assets and liabilities. Although it was confusing to understand how the taxes payable in the income statement and taxes paid on the cash flow were different but an interesting fact of uncertain assumptions disclosed by BHP Billiton provides a lucid understanding of tax treatment.
Conclusion:
On a conclusive note, the report provided interesting understanding of the treatment of the current items that was reported in the other comprehensive income statement. The report evidently discloses that the IFRS requires BHP Billiton to present the income statement as combined statement of profit and loss.
Reference List:
BHP Billiton. (2018). Financial results and operational reviews. [online] Available at: https://www.bhp.com/investor-centre/financial-results-and-operational-reviews [Accessed 11 May 2018].
Gao, Z., Givoly, D., & Laux, R. (2015). Assessing the Relation between Taxes and Stock Returns: The Critical Role of Choosing the Tax Variable.
Gao, Z., Givoly, D., & Laux, R. (2015). On the valuation of tax expense.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.
Johnston, D., & Kutcher, L. (2015). Do stock-based compensation deferred tax assets provide incremental information about future tax payments?. The Journal of the American Taxation Association, 38(1), 79-102.
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Maynard, J. (2017). Financial Accounting, Reporting, and Analysis. Oxford University Press.
Morris, J. L. (2017). Classification of Deferred Tax Assets and Deferred Tax Liabilities: An Evaluation of FASB’s Attempt at Standards Simplication. Journal of Accounting and Finance, 17(8), 198-208.
Rathke, A. (2016, December). The Effects of Inter-temporal Tax Allocation on Current Tax Expenses. In III Workshop de Contabilidade e Tributação (Vol. 1, No. 1).
Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts and practice. Routledge.
Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Wang, Y., Butterfield, S., & Campbell, M. (2016). Deferred tax items as earnings management indicators. International Management Review, 12(2), 37.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Watson, L. (2018). The Deferred Tax Asset Valuation Allowance and Firm Creditworthiness. The Journal of the American Taxation Association, 40(1), 81-85.
Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.
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