Corporate Accounting: Analysis of Cash Flows, OCI Statement, and Income Tax Expense of JB Hi-Fi

This article provides an analysis of the cash flows, OCI statement, and income tax expense of JB Hi-Fi, a company listed on ASX. It includes key items and trends, deferred tax assets and liabilities, and the computation of income tax expense.

CORPORATE ACCOUNTING
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The company listed on ASX chosen for this particular task is JB HI-FI. The latest annual
report and corresponding financial statements are available for the year ending on June 30,
2017.
CASH FLOWS STATEMENT
(i) The relevant extracts pertaining to the cash flow from operations for the company are
highlighted as shown below (JB Hi-Fi, 2017).
Based on the above extract, the key items have been described as follows (JB Hi-Fi, 2017).
 “Receipts are customers”– This would indicate the monies that have been received
from the consumers during the year by selling the underlying products. It is essential
to differentiate between revenue and the customer receipts since the former is accrual
in nature and identified in the income statement unlike the latter which is based on
cash and hence represented in the cash flow statement. Considering the company has
acquired a business, hence the operational cash flows have enhanced in excess of 40%
in FY2017 over the previous year.
 “Payments to suppliers and employees” – The company in order to continue with the
business needs support from suppliers and employees. This item captures the cash
amount that is paid to the suppliers and employees during the given year. Any future
provisions with regards to employee benefit would not be visible here. The
acquisition of the new business has led to significant increase not only in customer
receipts but also corresponding payments.
The relevant extracts pertaining to the cash flow from investment for the company are
highlighted as shown below (JB Hi-Fi, 2017).

Based on the above extract, the key items have been described as follows (JB Hi-Fi, 2017).
 “Payment for business combination” – This amount in cash has been spent by the
company for business acquisition. In case of the most recent year i.e. FY2017,
business has been acquired by the company for a consideration amount of $ 836.6
million.
 “Payments for plant and equipment” – This amount in cash has been spent by the
company for plant and equipment acquisition. In case of the most recent year i.e.
FY2017, plant and equipment has been acquired by the company for a consideration
amount of $ 49.1 million which does not indicate a major change over the previous
year.
 “Proceeds from sale of plant and equipment” – This amount in cash has been obtained
by the company for plant and equipment disposal. In case of the most recent year i.e.
FY2017, this amount is $0.2 million which is quite nominal in comparison to the size
of the total cash flows from investment.
The relevant extracts pertaining to the cash flow from financing for the company are
highlighted as shown below (JB Hi-Fi, 2017).
Based on the above extract, the key items have been described as follows (JB Hi-Fi, 2017).
 “Proceeds from issues of shares” – This amount in cash has been received from the
issue of shares for the given year. In case of the most recent year i.e. FY2017, this
amount is $ 395.9 million which is significant higher than the corresponding amount
for FY2016 that stood at $ 6 million.

 “Proceeds/(repayment) of borrowings” – This amount in cash highlights the amount
of borrowings taken or repaid depending on whether there is a cash inflow or outflow
respectively. In the most recent year i.e. FY2017, the borrowing level has increased
which is not surprising considering the acquisition completed by the company.
(ii) The cash flow trends to JB Hi-Fi are captured below (JB Hi-Fi, 2017).
With regards to cash flow on account of operating activities, there is a positive trend
considering that this amount is increasing on a y-o-y basis albeit by a small amount only. The
cash outflow on account of investing activities was quite mild for FY2016, FY2015 but then
there is a surge in the cash outflow in FY2017 which is fuelled by the acquisition by the
company which accounts for more than 95% of the total outflow witnessed. The cash outflow
on account of financing activities is proof of the conscious effort by the company to limit the
debt levels and provide balance sheet some strength. Equity capital has also been raised in
order to improve the leverage ratios. However, the trend has reversed in FY2017 when owing
to the huge acquisition in excess of $ 800 million, company had to increase the debt but a
good aspects for the stakeholders is that this has been supplemented with equity financing so
that balance sheet does not become over-leveraged (Damodaran, 2015).
OTHER COMPREHENSIVE INCOME STATEMENT
(iii) OCI Statement
(iv) Key items are described below.

 “Changes in the fair value of cash flow (hedges) net of tax” – Owing to foreign
presence of company, it earns revenue in foreign currency which would eventually be
converted into AUD. As a result, there is a currency exchange rate risk which crops
up and in order to minimise the same, cash flow hedges are put in place as risk
management tools. However, these are financial instruments which exhibit daily
fluctuations in accordance with the currency exchange rate. As a result, their fair
value keeps on changing and the difference between the fair value at the year
beginning and year ending is recorded under OCI statement (Petty et. al., 2015).
 Exchange differences on translation of foreign operations” – Owing to foreign
presence of company, it earns revenue in foreign currency which would eventually be
converted into AUD. But there is a time delay in this conversion which leads to
realisation of possible gains and losses recorded under OCI statement (Arnold, 2015).
(v) The requisite reasons for separation of OCI statement from the traditional income
statements find mention below (Brealey, Myers and Allen, 2014).
 The financial reporting norms require that certain items are recorded under OCI
statement and hence reporting entities have to comply with the same.
 Unlike P&L statement entries which result in actual gains or losses, in case of OCI
certain items recorded do not have actually realised any profit or loss but are
highlighting notional quantities which are liable to change in the future.
 The role of these items is not to directly lead to any income for the firm but rather
these are essentially assets for the company or risk management tools and the value
changes are typically recorded under OCI statement
ACCOUNTING FOR CORPORATE INCOME TAX
(vi) For the year ending on June 30, 2017, the tax expense for the company has been
reported in the income statement as $ 86.8 million (JB Hi-Fi, 2017).
(vii) For FY2017, the tax before profit has been reported at $ 259.2 million. If this
multiplied by 30% which happens to be the corporate tax rate at the time, then the tax
expense should be $ 77.8 million which does not match with the actual tax expense
reported. The actual tax expense is about $ 10 million greater. This deviation can be
answered taking assistance from the following extract (JB Hi-Fi, 2017).

It is evident that while the actual tax expense uses the computation the theoretical tax
expense as the key initiating point and further makes reconciliation adjustments which
become a necessity since the rules relating to tax and accounting income tend to differ.
The income tax expense which was computed earlier is in accordance with the accounting
concepts but eventually since tax paid is linked to total income tax payable, it is essential
that the tax expense should reflect the income tax rules applicable which has been done
here (JB Hi-Fi, 2017).
(viii) Deferred Tax Assets
These would capture those long term tax assets whose origin is attributed to the current
transactions and in future would lead to tax savings. As on June 30, 2017, about $ 105 million
of deferred tax assets have been reported by the company with the following split. Also, it is
noticeable from the breakup that the deferred tax assets have shown significant increase in
FY2017 owing to deferred revenue based temporary difference (JB Hi-Fi, 2017). These assets
tend to arise because deviation in tax and accounting rules lead to temporary differences
between created in the carrying value of various items.

Deferred Tax Liabilities
These would capture those long term tax liabilities whose origin is attributed to the current
transactions and in future would lead to tax outflow. As on June 30, 2017, about $ 113.2
million of deferred tax liabilities have been reported by the company with the following split.
Also, it is noticeable from the breakup that the deferred tax liabilities have shown significant
increase in FY2017 owing to brand name based temporary difference (JB Hi-Fi, 2017). These
liabilities tend to arise because deviation in tax and accounting rules lead to temporary
differences between created in the carrying value of various items.
(ix) In accordance with the balance sheet of the company for FY2017, it is apparent that on
the last day i.e. June 30, 2017, the company had current tax liability of about $ 11.8
million. The same figure for the previous year stood at a lower amount i.e. $ 10.9
million. As this item is realised under current liability, thus the tax outflow on account
of this would occur before June 30, 2018.
The income tax expense and income tax payable tend to show deviations. This typically
happens because of the difference in underlying definition of these two integral
concepts. The income tax expense as reported in the income statement would refer to
the tax for the whole year that the reporting entity ought to pay the ATO. However, it is

essential to note that over the year through way of advance tax, a significant portion of
the tax expense has already been given to the tax expense and at times this could be
more than 100% of the tax expense. Tax payable on the other hand essentially refers to
the tax for the given year that still is pending and hence payable to the tax department
or ATO. Thus, tax payable = Tax expense – Tax paid (Parrino and Kidwell, 2014).
(x) The income tax expense (i.e. $ 86.8 million) and income tax paid ($96.8 million) do not
match for FY2017. Two main reasons are attributed for the above difference as
highlighted below (Damodaran, 2015).
 Some amount of tax paid in FY2017 may be on account of tax payable which was
pending at the end of FY2016 and thus only a part of the total tax paid has been made
for FY2017.
 Further, since tax expense computation is performed only after the year ends, hence
during the year the management cannot possibly accurate pre-empt the tax expense
and cannot ensure that tax paid and tax expense for a year are same.
(xi) One aspect that caught a lot of attention from my end was the schedule regarding
income tax expense computation as the divergence of the theoretical income tax
expense and the actual income tax expense came as a big surprise for me. The need for
reconciliation can be understood concerning the divergence in rules applicable for tax
income and accounting income. Also, the role played by deferred assets and liabilities
was a major take away for the analysis of the given company.

References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management.
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New
York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
JB HI-FI (2017) Annual Report 2017 [online] Available at
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia.