Equity items in Ooh Media Limited’s annual report
Based on the annual report of Ooh Media Limited in 2016, the main items of equity identified from the balance sheet statement include share capital, reserves and non-controlling interest. In addition, it has been compared with one of its competitors, HT Media Limited. The explanation of each of these items is described briefly as follows:
As commented by Atanasov and Black (2016), share capital comprises of all funds, which an organisation raises in exchange for shares of either preferred or common shares of stock. The amount of equity financing or share capital could change with the passage of time. An organisation planning to raise additional equity could seek authorisation in issuing and selling ordinary shares, which would increase its share capital. The share capital amount an organisation reports on its balance sheet accounts for the initial amount paid on the part of the shareholders.
It could be identified from the annual report that the overall share capital of the organisation has increased from $283,585,000 in 2015 to $349,510,000 in 2016. On the other hand, the annual report of HT Media Limited states that the total share capital of the organisation has remained fixed at $4,610.40 lacs both in 2015 and in 2016. Thus, it has maintained better equity level in contrast to Ooh Media Limited. The primary reason behind such change is the increase in certain items, which were nil in 2015 and these items include the following:
- Transaction cost arising from shares issued
- Deferred tax asset associated with transaction cost
- Issuance of performance rights – Tranche 2
- Capital raising – shares issued
- ECN acquisition – shares issued
- Share purchase plan
Reserve implies a provision for a particular purpose. There are many unknown expenses, which could take place in the existing year or in future. For meeting such kind of expenses, it is necessary for a business organisation to make reserves (Balakrishnan, Watts and Zuo 2016). By maintaining the reserves, the actual condition of the profit and loss of any fiscal year does not disturb. In case of Ooh Media Limited, the organisation has experienced a slight increase in reserves from $25,436,000 in 2015 to $25,763,000 in 2016. The main reasons behind such increase in reserve are increase in foreign currency translation reserve and share-based payments reserve along with fall in cash flow hedge reserve.
In the words of Bebbington, Unerman and O’Dwyer (2014), non-controlling interest is the part of equity ownership in a subsidiary, which could not be attributed to the parent organisation having a controlling interest more than 50% but below 100%. In addition, it consolidates the financial results of the subsidiary with its own. The non-controlling interest has fallen from $1,515,000 in 2015 to $1,378,000 in 2016. This is because of the positive balance in relation to acquisition of non-controlling interest.
Comparison of equity items in Ooh Media Limited and HT Media Limited
According to the annual report of Ooh Media Limited, the tax expense of the organisation has been $16,127,000 in 2016, which was $12,244,000 in 2015 (Annualreports.com 2017).
It has been found that the corporate tax rate in Australia is 30% (Damodaran 2016). The same rate is applied in case of Ooh Media Limited, as identified from the annual report of the organisation. In addition, it has been identified that the profit before income tax of the organisation has been $21,508,000 in 2016 (2015: $18,355,000). If the domestic tax rate has been applied to the organisation, the total tax expense would stand at $11,127,000 in 2016, which would have been $55,06,500 in 2015. However, the organisation has considered other items for computing its overall tax expense. These items include the following:
- Impact of tax rates in cross-border jurisdictions
- Non-deductible expenses
- Impact of share of profit (loss) of equity-accounted investees
- Existing year for which there is no recognition of deferred tax asset
- Under provision in previous years
Considering the above-stated items along with the domestic tax rate, Ooh Media Limited has reconciled its effective tax rate. This has lead to the difference in total tax expense of the organisation in contrast to the corporate tax rate times the accounting income of the organisation.
The following table depicts the recognised deferred tax assets and liabilities of Ooh Media Limited:
Based on the above table, it could be cited that the main deferred tax assets and liabilities recognised on the part of the organisation include plant and equipment, transaction costs of IPO, transaction costs associated with acquisitions, cash flow hedges, deductible capital costs, accrued expenses, provisions, employee benefits provision and carry forward tax loss. It has been observed that plant and equipment has been recognised in profit or loss and the situation is identical in case of transaction costs related to IPO and acquisitions as well (Cheng, Ioannou and Serafeim 2014).
The cash flow hedges are realised in other comprehensive income (OCI), while the deductible capital costs are realised in profit or loss and in equity directly. The accrued expenses, employee benefits provision and provisions are recognised both in profit and loss and acquisitions. The carry forward tax loss has been recognised in profit or loss; however, there is no recognition of such loss in 2016 and 2015.
In the words of Gippel, Smith and Zhu (2015), deferred tax assets and liabilities are realised for temporary differences at the rates of tax expected to apply at the time of asset recovery or settling of liabilities. In case of Ooh Media Limited, these depend on those rates of tax, which have been enacted substantially for each jurisdiction. The application of pertinent tax rates is made for the cumulative amounts of taxable and deductible temporary differences for gauging the deferred tax asset or liability.
Tax expense in Ooh Media Limited’s annual report
According to the balance sheet statement of Ooh Media Limited in 2016, the income tax payable has been recorded under the current liabilities section. It has been identified that the income tax payable of the organisation has been $14,965,000 in 2016, which was $9,073,000 in 2015. On the other hand, the income tax expense of the organisation, as per its income statement, has been $16,127,000 in 2016, which was $12,244,000 in 2015. However, there are certain differences between income tax expense and income tax payable in an organisation (Graham, Harvey and Puri 2013).
Income tax expense is an account of income statement, which Ooh Media Limited uses for recording state and federal costs of income tax. The accrual accounting method needs an organisation for depicting tax expenses in the period that the expense is incurred, instead of the period in which the expense is paid. Hence, despite the payment of annual tax, the organisation makes an adjusting entry during every period for which an income statement is prepared (Hillier et al. 2013). The entry to income tax expense would be debit, since the expense account is increased. Thus, the income tax expense is represented right after the overall income before tax and just before net profit or loss.
Income tax payable is a liability account, which is represented on the balance sheet statement of the organisation (Liu et al. 2016). It is used for recording any amount of income tax, which Ooh Media Limited owes; however, the payment is not made yet to the appropriate taxing authority. At the time of making adjustment entry for each period and debiting income tax expense, the income tax payable would be credited. After payment of the income tax liability, the income tax payable would be debited and cash would be credited. However, there are some situations, when the reported net profit, as per IFRS, does not match with the taxable income reported on the tax return of the organisation (Melé, Rosanas and Fontrodona 2017). From the general perspective, this is a temporary condition, which evens out with the passage of time. Until that period, Ooh Media Limited records such differences to an asset or liability account called deferred tax.
According to the income statement of the organisation, the income tax expense has been $21,508,000 in 2016 (2015: $18,355,000). As per the cash flow statement of the organisation, the income tax paid has been $9,835,000 in 2016 (2015: $1,052,000). The tax-related cash outflows primarily result at the time an organisation has taxable income in income tax return (Qamar, Khalil and Akhtar 2016). Ooh Media Limited has tax-related cash inflows at the time it is able to carry back current tax losses back along with eliminating past taxable income. The retroactive eradication of past taxable income eradicates previous taxes, which lead to tax recovery paid in the past.
Comparison of income tax rate and tax expense in Ooh Media Limited
In other cases, the organisation carries forward the loss and it is utilised to eradicate the future taxable earnings. In such cases, the tax-related cash outflows might be eliminated fully or partially depending on the loss size carried forward. The cash flows are benefitted; however, in the form of minimised tax cash outflow against the cash inflow (Ramanna 2014). The confinement of income tax cash flows to the operating segment of the cash flow statement is viewed as improper at the time such cash flows are the outcome of financing and investing transactions. In addition, the non-recurring cash flows might overstate or understate the sustainable cash inflows. In the absence of adjustment, cash flow projection developed in part on current would be understated or overstated. On the other hand, an understatement might arise, if the current results have included non-recurring tax cash outflows.
Income tax expense is an account of income statement, which Ooh Media Limited uses for recording state and federal costs of income tax. The accrual accounting method needs an organisation for depicting tax expenses in the period that the expense is incurred, instead of the period in which the expense is paid. Hence, despite the payment of annual tax, the organisation makes an adjusting entry during every period for which an income statement is prepared.
There are certain complications faced while evaluating the tax treatment of Ooh Media Limited, which are discussed as follows:
Too many deductions:
Tax deduction is an expenditure, which Ooh Media Limited is deducted from its adjusted gross profit at the time of computing taxable income. It has been identified that such credits enable organisations to avoid the payment of taxes on money utilised for operating expenses like capital expenditures and others. The prevailing legislation in Australia has certain rules regarding the type of expenditure and percentage of that deductible expenditure. For instance, if the business owner of Ooh Media Limited is on vacation with family, the person might aim to subtract the associated expenditures like hotel and airfare for business taxes (Schaltegger, Etxeberria and Ortas 2017). On the other hand, the prevailing law would categorise the trip as non-deductible, since the main goal was not business during the trip. Hence, the validity of such deduction needs to be proved, which is a major issue for the organisation by taking into account the tax treatment.
Not tracking deductible expenditure:
Another difficulty faced during the evaluation of tax treatment is the inability to track deductible expenditure. For instance, the business owner of Ooh Media Limited might use personal credit card or liquid cash for business purposes. Such actions would cost more than the actual realisation, since the organisation has missed available tax deductions (Renner 2013). In order to assure the maximisation of such opportunities, the organisation is needed to keep each receipt, which would enable the business in reimbursing personal expenses. After that, the organisation might subtract valid expenditures on its tax return.
References:
Annualreports.com. (2017). [online] Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_OML_2016.pdf [Accessed 19 Dec. 2017].
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