Analysis of Tax Treatment and Equity Structure of ClearView Wealth Ltd

This assignment delves into the tax treatment and equity structure of ClearView Wealth Ltd, exploring items in equity, tax expenses, deferred tax assets/liabilities, and differences between tax expense and tax paid. It analyzes the reasons behind recording deferred tax assets/liabilities and the impact on financial statements.

HI5020- Corporate Accounting
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Table of Contents
Introduction......................................................................................................................................3
(i)List out each item in equity and discuss them.............................................................................4
(ii) What is your firm’s tax expense in its latest financial statements?...........................................5
(iii)Is this figure the same as the company tax rate times your firm’s accounting income? Explain
why this is, or is not, the case for your firm....................................................................................6
(iv)Comment on deferred tax assets/liabilities that are reported in the balance sheet articulating
the possible reasons why they have been recorded.........................................................................7
(v)Is there any a current tax asset or income tax payable recorded by your company? Why is the
income tax payable not the same as income tax expense?..............................................................9
(vi)Is the income tax expense shown in the income statement same as the income tax paid shown
in the cash flow statement? If not why is the difference?..............................................................10
(vii) What do you find interesting, confusing, surprising or difficult to understand about the
treatment of tax in your firm’s financial statements?....................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13
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Introduction
This assignment will in light of the tax treatment and the tax structure of ClearView Wealth Ltd.
While doing this assignment we will learn about the various items in the equity of the company.
An assignment will investigate the tax expenses and the various elements of tax associated with
current tax expenses. Study will also focus on as to why the tax calculates as per tax is different
from that of the tax calculated as per the books of accounts. Assignment will also focus on the
factors that led to the differences in the tax amount reflected in profit and loss account and cash
flow. Assignment will help to learn analysis and interpretation of financials of any organization
at large.
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(i)List out each item in equity and discuss them.
In the financials of the Clearview wealth Ltd there exist five types of items in equity. They are
listed below:
Issued Capital:- It is that part of the authorized, capital which is issued to the public for
subscription. In case of Clear Wealth Ltd, the issued capital stands at $421,717,000 in 2017.
Whereas in the previous year it was $ 417,850,000. Reason for change in the issued capital is
that the company has issued shares for the amount $ 3,882,000. This issue has resulted in the
increase in equity (Kaur, 2015).
Retained Losses: - Such losses are recorded same as the retained earnings. They can also be
called as the negative retained earnings. It is caused mainly due to the revenue being lesser than
the expenses. Studying the financials of the ClearView Wealth Ltd it was analyzed that the
retained losses have gone up to $ 15,648,000 in the FY 2017. Reason for the same being
dividend paid during the year has gone up to $ 16,454,000 in 2017 from $ 12301,000 in 2016.
Executive Share Plan Reserve: - Executive share plan is an offer given by the ClearView
Wealth Ltd to its employees to participate in an offer where they are offered the shares at
Volume Weighted Average price for 3 months’ time to determine the market price of the shares.
Such shares are not issued to the employees who are holding more than 5% of the shares. This
reserve has gone up because the ClearView Wealth Ltd has recovered payments toward these
shares along with recovering loans on the same of $ 1,102,000 and $ 1,101,000 in 2017
(ClearView Wealth, 2017).
Profit Reserve: - They are the reserves that are maintained out of the profits of the company.
The Reserves for this year has been recorded at $ 25,635,000 as it includes the portion of profit
of $ 21,000 after deducting Dividends at $ 16,454,000.
General Reserve: - General reserves normally are maintained to meet the future contingencies.
ClearView Wealth General Reserve for the year 2017 is maintained to meet the contingencies
related to the acquisition of Matrix Planning solution. This year General Reserve consists of sale
proceed to form the Executive Share plan of $ 1,598,000. This is the reason for its increase into
the year 2017.
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(ii) What is your firm’s tax expense in its latest financial statements?
The tax expenses of the ClearView Wealth Ltd consist of Current Tax expenses and deferred tax
Expenses along with having adjustment for advance tax paid and underprovided tax for prior
period. Income tax expenses stated in Profit and loss account of the company stands at $
3,081,000 for the FY 2017. Current Tax is the tax belonging to the Current Year profit to be
charged at a corporate tax rate of 30% on the taxable profits after giving deduction to all the
expenses. Deferred Tax consists of deferred tax assets and deferred tax liability. Deferred Tax
Assets of the company in FY 2017 was $ 3, 10,000 and in FY 2016 it stood at $ 573,000.
Whereby comparing the financials of two years it can be recognized that the Deferred tax
Liability has been recorded at $ 5, 91,000 the same was nil in the FY 2016. Deferred Tax is the
difference between tax calculated on taxable income and the tax calculated on the book profits.
Deferred Tax Assets will arise when the tax amount paid as per the Books of accounts are more
than the tax payable as per the Income Tax and vice versa for the Deferred Tax Liability (Green
Traders, 2017).
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(iii)Is this figure the same as the company tax rate times your firm’s accounting income?
Explain why this is, or is not, the case for your firm.
The ClearView wealth Ltd Tax expenses are calculated at net profits as shown in the profit and
loss accounts. The taxable income in the profit and loss account is calculated after considering all
the tax norms. Hence the tax calculated as per the tax rate cannot be same as that of tax
calculated on the accounting income. Accounting Income is the book profits calculated as per the
company’s books of accounts. Most of the times, it has to undergo the scrutiny as per the tax
law. This results in deferred tax. There are many expenses which the company tends to include
in the profit and loss account but the same is disallowed wholly or partly by the Income Tax
Department. Taxable income consists of only those expenses and revenue that are directly
associated with the business. In Australia, corporate tax rate is 30% on the taxable Income. Tax
expenses of ClearView Wealth Ltd include Current Tax, Provisions, Advance tax paid,
Underpayment of Taxes and other adjustment.
Hence the tax amounts as per the Accounting Income and Taxable Income in majority of the
cases are different. Taxable income is charged to tax at the rate prevailing on the date of
preparation of the financials (Surbhi, 2015).
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(iv)Comment on deferred tax assets/liabilities that are reported on the balance sheet
articulating the possible reasons why they have been recorded.
Deferred Tax arises due to the differences in taxable income and book profits. Only the
temporary differences can be the result of deferred tax. If the temporary difference is positive
deferred tax liability will arise and if it’s negative deferred tax assets will arise. Clear View
Wealth Ltd Tax Expenses consists of both deferred tax assets and deferred tax liability. Deferred
Tax arises due to various reasons. If the disallowed expenses are recorded or allowable revenues
are not considered in the books of accounts this situation can give rise to deferred tax. Deferred
Tax can also be the reason for differences in method of charging depreciation. Other reasons
that can give rise to the deferred tax are prepaid expenses. Prepaid expenses are considered for
the purpose of tax in the financial years but written off over the period of time. Deferred tax can
only be adjusted for 12 months from the time they arise (Qurashi, 2016).
Deferred Tax Liability: - This Term Refers to the situation when the organization has underpaid
the taxes. These taxes create liability for the company. It will arise when the company’s actual
tax payments are less than what the company calculates on the basis of financial statement. In
other words, it is the difference between accounting standards and tax rules. ClearView Wealth
Ltd financials depict the deferred tax liability at $ 5, 91,000 in FY 2017.
Deferred Tax Assets: - This term refers to the situation where ClearView Wealth Ltd has
overpaid tax or paid in advance. These taxes are returned back to the business in forms of tax
relief and as we have learned in accounting any expense paid in advance is an asset to the
company. ClearView Wealth Ltd Recorded Deferred Tax assets at $ 3, 10,000. Organization can
take the credit for the excess paid in subsequent year.
It is analyzed from the financials of the ClearView Wealth Ltd that the companies Deferred
income tax are identified for the tax losses carried forward to the extent of amount that
realization of concerned tax benefits through future taxable profits is probable.
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Why should they be recorded?
 Deferred Tax is recorded in order to provide clear bifurcation of the tax expenses in the
concerned financial year.
 They are to be recorded in order to calculate the exact and correct amount of tax payable
or receivable.
 It is also important to record the deferred tax assets so that the ClearView Wealth Ltd can
take the benefit of the same and to avoid unnecessary losses.
 They are also recorded in order to adhere to the tax norms and guidelines (Merritt, 2018).
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(v)Is there any a current tax asset or income tax payable recorded by your company? Why
is the income tax payable not the same as income tax expense?
From the Financials of the ClearView Wealth Ltd, it can be observed that there are overpaid
expenses of previous years. Any expenses paid in advance become the assets for the current year.
The overpaid tax expenses of the ClearView Wealth Ltd for FY 2017 stood at $ 2,860,000.
Company has taken credit of same in the current year. Other than this there is no current tax asset
which is recorded. And there is no income tax payable as well. Current tax Assets are the
receivables that occur due to overpayment of tax or advance payment. Payable are the provisions
that are created by the company every year based on the previous revenue in order to meet any
kind of contingencies. There exists current tax liability at $ 5, 23,000 in the FY 2017 in
consolidated balance sheet of the company (Codjia, 2017).
Income tax expenses are $ 3,081,000 for the FY 2017 as stated in the profit and loss account.
This amount comprises of provisions, adjustment for payables and receivable along with current
year tax liability. Income Tax expenses cannot be same as Income tax provision because
provision is part of it. Income Tax provision is created to meet the tax liability for the current
year. Provision is shown as liability on the balance sheet whereas the Income Tax expenses are
taken in Profit and loss account and affect the profits of the company.
Income Tax provision need not be confused with deferred tax as deferred tax is the difference of
tax amount of Taxable income and book profits. Income Tax Payable is adjusted on yearly basis
by the ClearView Wealth Ltd as they cannot be carried forward. They are reduced form the
income tax expenses (Codjia, 2017).
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(vi)Is the income tax expense shown in the income statement same as the income tax paid
shown in the cash flow statement? If not why is the difference?
No the income tax paid as per the cash flow statement is not same as the Income-tax paid as per
the income statement. The reason for this difference in ClearView Wealth Ltd is highlighted
below. Income tax paid as per the cash flow statement is $ 5,350,000 and tax paid as per the
profit and loss account is $ 3,081,000.
One of the biggest reasons for the difference is the provision which is included in the current tax
expenses recorded in the Profit and loss account. Cash flow statement does not include the
element of provision in Tax Paid.
Another reason being the deferred tax assets and deferred tax liabilities can also be the reason for
change in both the amounts.
Cash flow takes only the actual amount paid into consideration not any kind of adjustment
related to that. There are chances of difference because of revenues which are accrued but not
recorded the books of accounts and also possible due to recording of expenses which are not
concerned with business (Wellforgs, 2015).
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(vii) What do you find interesting, confusing, surprising or difficult to understand about
the treatment of tax in your firm’s financial statements?
It was very interesting to learn about the various accounting policies which the organization
takes into consideration. Studying the financials of the company has given us insight into various
kinds of accounts which the company maintains like Executive Share Plan and Executive share
plan reserve. It was interesting to learn how the company under executive share plan offers
shares to its employees. Studies also focused on the retained losses as majority of the
organizations maintain retained profit account. Retained loss concept was little new to learn. It
was very meaningful to know about the tax treatment of various types of taxes. Learning about
tax structure had proven to be little difficult but it was very informative. While learning about the
tax it was interesting to know why there are differences in the tax amount of cash flow and
Income statement. It was little confusing as to how the ClearView Wealth Ltd uses its unused tax
losses for which no deferred tax assets have been recognized. Along with learning as for why
they are attributed to the tax losses. Study also allowed learning how each element associated
with tax is recorded on the books of accounts. As well as knowing what impact this tax element
would have on the profits available to the shareholder.
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Conclusion
This assignment mainly focuses on the tax structure of ClearView Wealth Ltd at specific and tax
structure norms in general. Through this study, we have learned about the tax treatment of
provisions of tax, deferred tax assets and liability. This study has been of great help to know the
difference between book profit and taxable income along with knowing their impact on the tax
structure. Analyzing the financials of the company has helped us to compare two years financial
data and interpret the same. It was also nice to learn how the company consolidates its accounts
of different branches. Through the financial, we also learned about the risk management and
accounting standard which the company adheres to.
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References
 ClearView Wealth Ltd, 2017. Annual Statement and Reports. About Us. ClearView
Wealth [Online] Available at : https://www.clearview.com.au/superannuation-
investments-retirement/Annual-Statements-and-Reports .[Accessed on 25 January 2018].
 Codjia, M., 2017. Provision Expense Definition. . [Online] bizfluent. Available at
https://bizfluent.com/facts-6801166-provision-expense-definition.html [Accessed: 25
January 2017].
 Green Traders, 2018 Green Traders, Business expense treatment. [online] Available at:
https://greentradertax.com/trader-tax-center/trader-tax-status/business-expenses/
[Accessed on 25 January 2017].
 Kaur, S., 2015. Share Capital. International Journal of Business and Management
Invention, Volume 4 Issue 1, pp. 60.
 Merritt, C., 2018. Tax Payable vs. Deferred Income Tax Liability. [Online]. Available
at: http://smallbusiness.chron.com/tax-payable-vs-deferred-income-tax-liability-
48704.html [Accessed on 25 January 2018].
 Qurashi, R., 2016. What is/are the difference(s) between deferred tax asset and deferred
tax liability and how it can be treated for financial reporting purposes? [ online].
Available at: https://www.bayt.com/en/specialties/q/252684/what-is-are-the-difference-s-
between-deferred-tax-asset-and-deferred-tax-liability [Accessed on 25 January 2018].
 Surbhi, S., 2015. Difference between Accounting Profit and Taxable Profit. [Online]
Available at https://keydifferences.com/difference-between-accounting-profit-and-
taxable-profit.html Available html [Accessed: 25 January 2017].
 Wellforgs, 2015. Understanding income statements and cash flow statements.
[Online]. Wellforgs Available
at: https://wellsfargoworks.com/management/article/understanding-income-statements-
and-cash-flow-statements [Accessed on 25 January 2018].
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