Deferred Tax Assets and Liabilities – A Concept Overview
Deferred taxes are notional asset or liability gets recognized in the annual report due to timing differences of income or expense recognition among tax rules and accounting rules. The deferred tax assets get recognized in the financial statement of an entity when any income gets taxed prior to recognition of the same in the income statement as per accounting norms. In an opposite situation when any income gets recognized as per accounting norms though does not get taxed as per taxation rules deferred tax liabilities appear (Fajarwati, Tama & Putranto, 2020).
The Starbucks Corporation has reported net balance of deferred tax assets and deferred tax liabilities in the financial statements for the financial year end 2021 and 2020. The Starbucks Corporation has reported $ 1726.30 million and $ 1631.80 million net deferred tax assets in the financial year end 2021 and 2020 respectively. In details of the same, Starbucks Corporation has provided information about the foreign investments made by the entity. Earnings from these foreign subsidiaries are subjected to foreign withholding and United States federal or state taxes. This has caused the timing differences and recognition of deferred taxes (Starbucks Corporation, 2021).
Temporary differences give rise to deferred tax assets or liabilities. Temporary differences only get recognized in deferred tax assets or liabilities. The permanent differences will never get eliminated so the same does not get recognized in deferred taxes. Starbucks Corporation has reported net balance of deferred tax assets in 2021 and 2020. In 2021 Starbucks Corporation has reported a total deferred tax asset of $ 4758 million and $ 3031.70 million deferred tax liabilities. In 2020 Starbucks Corporation has reported $ 4555.20 million deferred tax assets and $ 2923.40 million deferred tax liabilities. Only the temporary differences have been recognized in deferred tax items by the entity.
The effective tax rates applicable for Starbucks Corporation in 2020 was 20.60% and the same gets increased to 21.60% in 2021. This has resulted into permanent tax differences and the same has not get accounted by Starbucks Corporation in its annual accounts. Though, the same has been provided in notes to accounts by the entity. Further, timing difference in operating lease liability recognition, intangible assets and other similar items have given rise to deferred tax assets in 2021 and Operating lease assets, property, plant and equipment and other similar items have given rise to deferred tax liabilities for the entity (Starbucks Corporation, 2021).
The income tax expenses of Starbucks Corporation for the financial year end 2021 was $ 1156.60 million and income tax expenses of Starbucks Corporation for financial year end 2020 was $ 239.70 million. In the notes to accounts, Starbucks Corporation has provided details of tax expenses for 2021 and 2020 as taxes charged on net operating income before taxes. Income tax expenses charged in the consolidated statement of Starbucks Corporation for 2021 and 2020 also includes the tax expenses for incomes earned by foreign subsidiaries in foreign economies.
The carryforward and carryback period of operating tax losses applicable to Starbucks Corporation is time bound. In the financial year end 2021, Starbucks Corporation has reported net operating loss carryforward of $ 109.70 million and the same will start to expire from fiscal year 2024. In addition to the same, in the financial year end 2021, Starbucks Corporation has $ 70.80 million net operating loss carryforwards with indefinite carryforward period. Hence, the carryforward losses of Starbucks Corporation includes both time bound and infinite period items (Starbucks Corporation, 2021).
Deferred Taxation Reporting – A Case Study Analysis of Starbucks Corporation
The defined benefit plan secures a certain income after retirement for employees. In contrary defined contribution plan depends upon the contribution made by the employee in the employment tenure. Under defined contribution plan employee and employer make equal amount of contribution to funds for benefits of the employee after the employment tenure (Henretta, 2018). Starbucks Corporation does not hold any defined benefit plan in its annual accounts reported for financial years 2021 and 2020. Though, the entity holds defined contribution fund under a plan named MDCP (Management Deferred Compensation Plan) in the annual accounts reported for the years. The reported liability of Starbucks Corporation for defined contribution plan for the financial year 2021 and 2020 were $ 105.20 million and $ 91.40 million respectively. Eligible employees of Starbucks Corporation contribute in the plan and the entity as well contributes in the plan in equal percentage. Though, the contribution percentage in any of the financial year did not exceed the limit set by applicable laws. The changes occurred in the value of the plan due to changes in unrealized holding gains and losses were immaterial in both financial years. Hence, the same has been ignored in valuation of the MDCP plan (Starbucks Corporation, 2021).
Starbucks Corporation categorize leases either as operating lease or finance lease at the commencement time of the lease. Starbucks Corporation does not consider leases in the consolidated financial statement if the lease tenure remains lower than 12 months. Finance lease assets of Starbucks Corporation get recoded in the property, plant and equipment head after netting with corresponding lease liability. Finance leases reported in the consolidated financial statement of Starbucks Corporation are passed through ownership transfer test of property after lease period, the underlying purchase option test, lease term test, lease payment test and specialized nature of leased asset test (Giner & Pardo, 2018). Only after complying with these tests in the required manner the finance lease gets identified in the consolidated financial statement of the entity.
Total operating lease obligation of Starbucks Corporation in the financial year end 2021 was $ 33651.30 million, comprises of principal payment debt obligation of $ 14713.80 million, interest payment debt obligation of $ 6639 million, purchase obligation of $ 1800.20 million and other obligation of $ 368.40 million (Starbucks Corporation, 2021).
Entities often include items in financial statement separately to draw attention of the users of financial statement. Some elements in the financial statement carries certain significance which requires special attention of the users of financial statements. This items with significant relevance get included in the separately reported items (Manes-Rossi et al, 2018). For the financial year end 2021 and 2020, Starbucks Corporation has prepared consolidated statement of other comprehensive income and has reported $ 4711.10 million income. Further, Consolidated statement of other comprehensive income include $ 1062.20 million income attributable to equity holders of Starbucks Corporation in the financial year end 2020. Starbucks Corporation has identified unrealized holding gains on available for sale securities, unrealized gains on cash flow hedging instruments, Unrealized gains on net investment hedging instruments and translation adjustments as items with significant relevance. Further, fair valuation of short-term sale securities has been the reason for the item to get identified as item with significant relevance (Starbucks Corporation, 2021).
Types of Temporary Differences and their Recognition in Financial Statements
Subsequent events occur after the financial statement date but before the issue date of the financial statements. Though, all subsequent events do not get adjusted in the financial statements. Events having indications of occurrence on the financial statement date and occur after financial statement date but before issue date get adjusted in the financial statement (Robinson, 2020). Though, Starbucks Corporation has not reported any subsequent event in the financial years 2021 and 2020.
Errors and irregularities are reported in audit opinion attached to the annual report published by an entity. The management is primarily responsible for implementing internal control mechanism in an entity. The basic need of internal control mechanism is to prevent errors and irregularities. Hence, the management is primarily responsible for preventing errors and irregularities. Further, any event of error or irregularity get identified by the management should be included in the management responsibility statement. Independent auditors should also check for events of errors and irregularities. Where any such instance gets identified by the auditor, the auditor should communicate the same to the management for compensation and the same should be reported by the auditor in the annual report. Starbucks Corporation’s management report or audit opinion statement does not include any events of errors or irregularities in the financial year 2020 or 2021.
Cash flow statement is an important financial statement, provides information on cash generated by an entity during any financial period. Income statement and statement of financial position are prepared based on accrual method of accounting. Under accrual method, income or expenses are included irrespective of corresponding cash receipt or payment for the same. Hence, actual cash used or generated under each activity is required to be analyzed and the same is done through cash flow statement. Starbucks Corporation has prepared its annual cash flow statement for 2020 and 2021 using indirect method of cash flow statement preparation (Starbucks Corporation, 2021). Under indirect method of cash flow statement, reconciliation among net income to cash provided by operating activities are done. On the other hand, direct method of cash flow statement reports all cash receipts and cash payments from operating activities (Güleç & Bekta?, 2019). The other financial statements consider the accrual accounting method in preparation. Hence, the payments made in cash or receipts of cash does not get considered in the preparation of the same. Cash flow statement reconciles this accrual accounting used in other financial statements and cash generation under those heads.
Investing activities include cash activities related to non-current assets. Where a non-current asset gets sold or new non-current asset gets acquired by an entity, the same get included under investing activities. Further, non-current liabilities are included under financing activities. In other words, where an entity redeems any long-term obligation or raise funds through long-term liability terms, the same get included under cash flow from financing activities (Ni et al, 2019).
Starbucks Corporation has used net cash of $ 319.50 million in investing activities during the financial year 2021 and the same was $ 1711.50 million in 2020. Starbucks Corporation has used $ 432 million and $ 1470 million for purchase of investments and properties respectively in 2021. Further, the entity has cash realization of $ 345.50 million and $ 1175 million by selling of investments and business operations respectively during the year 2021 (Starbucks Corporation, 2021).
Some other examples of financing activities that are not in cash flow statement of Starbucks Corporation can be issuance or buy-back of equity shares. In addition to the same, acquisition of equities in other business entities can be an example of investing activities which has not been reported by Starbucks Corporation.
Non-cash transaction can be an event that get recorded in the annual accounts, though no actual cash payment or receipt gets occurred for the same. Items of non-cash expenses that get reported by Starbucks Corporation are $ 1524.10 million for depreciation and amortization, $ 1248.60 million for non-cash lease cost and $ 226.20 million for loss on retirement and impairment of assets (Starbucks Corporation, 2021). Some other examples of non-cash transactions that has not been reported by Starbucks Corporation are stock-based compensation, unrealized gains or losses, goodwill impairment and assets downward revaluation.
References
Fajarwati, D., Tama, A. I., & Putranto, I. E. (2020). The Effect of Deferred Tax Assets, Current Tax Expenses and Leverage on Profit Management. International Journal of Economics, Business and Accounting Research (IJEBAR), 4(4).
Giner, B., & Pardo, F. (2018). The value relevance of operating lease liabilities: Economic effects of IFRS 16. Australian accounting review, 28(4), 496-511.
Güleç, Ö. F., & Bekta?, T. (2019). Cash flow ratio analysis: The case of Turkey. Muhasebe ve Finansman Dergisi.
Henretta, J. C. (2018). The life-course perspective on work and retirement. In Invitation to the life course: Toward new understandings of later life (pp. 85-105). Routledge.
Manes-Rossi, F., Tiron-Tudor, A., Nicolò, G., & Zanellato, G. (2018). Ensuring more sustainable reporting in Europe using non-financial disclosure—De facto and de jure evidence. Sustainability, 10(4), 1162.
Ni, Y., Huang, P., Chiang, P., & Liao, Y. (2019). Cash flow statements and firm value: Evidence from Taiwan. The Quarterly Review of Economics and Finance, 71, 280-290.
Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.
Starbucks Corporation. (2021). Fiscal 2021 Annual Report. Retrieved 17 March 2022, from https://s22.q4cdn.com/869488222/files/doc_financials/2021/ar/Starbucks-Fiscal-2021-Annual-Report.pdf
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