Corporate Accounting: Cash Flows, OCI Statement, and Tax Treatment of JB Hi-Fi

This article provides an analysis of the cash flows, other comprehensive income statement, and tax treatment of JB Hi-Fi, a firm listed on ASX. It includes key extracts from the company's latest cash flow statement, trends in operational and investing cash flows, and deferred tax assets and liabilities. The article also explains the need for a separate OCI statement and the difference between income tax expense and tax payable. The article is relevant for students studying corporate accounting and related courses.

CORPORATE ACCOUNTING
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The firm listed on ASX which has been selected for this activity is JB HI-FI.
CASH FLOWS STATEMENT
(i) The key extracts from the company’s latest cash flow statement have been pasted below
(JB Hi-Fi, 2017).
The key items indicated above are captured as indicated below (JB Hi-Fi, 2017).
 “Receipts from customers”– This indicates the cash that is received from the
customers on account of the various products offered. The revenue recording is on
accrual basis but receipts from customers refer to the actual cash inflows. This has
seen a significant jump to the tune of 40% primarily because in FY2017, company has
done a new acquisition.
 “Payments to suppliers and employees”– The company needs to pay the suppliers that
provide the requisite goods to the company which can be then sold to the customers.
Also, in the whole value chain, a critical role is played by the employees and hence
they are paid to keep the business ongoing. These also have shown a proportional
jump over the last year i.e. FY2016.
The key items indicated above are captured as indicated below (JB Hi-Fi, 2017).
 “Payment for business combination” – As the name highlights, this refers to the cash
that during the year company has spent on acquiring businesses. Unlike FY2016 when

this was nil, in FY2017, the company has a significant outflow of cash to the extent of
$ 836.6 million in this regards.
 “Payments for plant and equipment” – The Company also acquires plant and property
and the money paid in this regards is represented here. The figures for FY2016 and
FY2017 are not very different in this regards.
 “Proceeds from sale of plant and equipment” – The company also realises cash inflow
on the basis of fixed asset liquidation. This item owing to the negligible amount is not
very significant.
The key items indicated above are captured as indicated below (JB Hi-Fi, 2017).
 “Proceeds from issues of shares” – This would highlight the amount of cash that the
company obtains by issuing shares. In FY2017, the company issued shares worth
$395.9 million which is a significant jump from the previous year amount ($6
million).
 “Proceeds/(repayment) of borrowings” – This refers to the increase or decrease in
borrowing which is accomplished through enhancing proceeds or repayment
respectively. FY2017 saw these borrowings increase by $ 450 million for funding the
acquisition.
(ii) The recent cash flow related trends for the company are summarised below (JB Hi-Fi,
2017).
The key observations are summarised below.

 Operational cashflows are showing steady improvement on a y-o-y basis which
highlights that the business is stable.
 Investing cashflows saw a significant jump in FY2017 owing to the acquisition.
 The company had been focusing on deleveraging the balance sheet but had to raise
incremental debt in FY2017 owing to the acquisition. However, positive aspect is the
amount of equity raised by the company in FY2017.
OTHER COMPREHENSIVE INCOME STATEMENT
(iii) OCI Statement (FY2017)
(iv) Explanation of key elements is offered below.
 “Changes in the fair value of cash flow (hedges) net of tax” – Since the company has
presence abroad, hence the company has exposure to foreign currency related
exchange risk. To hedge this, cash flow hedges would be entered into by the
company. Any change in the fair value of these financial instruments need to be
captured even though it may be notional.
 “Exchange differences on translation of foreign operations” – The revenues earned in
foreign currency would be required to be translated into the functional currency or
AUD and in this process there may be certain differences due to exchange rate
fluctuations which are captured as this item.
(v) Reasons for a separate OCI statement are highlighted below (Deegan, 2014).
 The current regulatory requirement pertaining to presentation and preparation of
financial statements tend to demand this representation where an OCI statement is
considered necessary.

 There may be some items on financial instruments such as hedging related cash flow
whose value changes in real time and this gives rise to notional profits and losses
which may not be actually realised.
 The items represented here are not meant for producing income but are rather
consequences of the normal business operations.
ACCOUNTING FOR CORPORATE INCOME TAX
(vi) The company has recorded a tax expense of $ 86.8 million for the latest year i.e.
FY2017 which is about 30% higher than the corresponding figure in FY2016 (JB Hi-Fi,
2017).
(vii) Expected tax expense = Pre-tax income * Corporate tax rate = 259.2 *(30/100) =
$77.8 million
It would be expected that the above would be the value of tax expense but the actual value
has been recorded higher at $ 86.8 million. The difference between the two is explained
with the help of the following schedule (JB Hi-Fi, 2017).
There are adjustments made to the theoretical tax expense which tend to arise on the basis
of reconciliation of accounting tax expense in order to determine the tax payable. The need
for reconciliation between the two arises on account of difference between the rules
prescribed be relevant tax statutes and accounting principles (Barkoczy, 2017).

(viii) Deferred Tax Assets
These refer to tax related assets which in future would lead to tax benefit for the firm and
these benefits would arise on the basis of transactions in the presence. In FY2017, the
company has witnessed a significant jump in deferred tax assets by about five times and this
would lead to tax savings in the future. The various contributory items to deferred tax asset
on company’s behalf are given as follows (JB Hi-Fi, 2017).
The temporary differences caused due to different tax and accounting rules applicable lead to
deferred asset creation. This is indicated in the table above where temporary difference
related to deferred revenue is responsible for the jump in deferred tax assets.
Deferred Tax Liabilities
These refer to tax related liabilities which in future would lead to ta outflows for the firm and
these costs would arise on the basis of transactions in the presence. The various contributory
items to deferred tax liabilities on company’s behalf are given as follows (JB Hi-Fi, 2017).
The temporary differences caused due to different tax and accounting rules applicable lead to
deferred asset creation. The deferred tax liabilities have shown a significant jump from $ 19.1
million in FY2016 to $ 113.2 in FY2017 (JB Hi-Fi, 2017).

(ix) In accordance with the balance sheet of the company for FY2017, the current tax
liabilities stand at $ 11.8 million. In comparison to the corresponding current tax
liabilities for FY2016 were marginally lower at $ 10.9 million. The tax outflow on
account of these would occur during the 12 months of the next financial year in which
they are recorded.
The income tax expense and income tax payable do not show convergence. The
concept of income tax expense captures the tax amount that the company would be
expected to pay for the financial year under consideration. But, only after the financial
year is over is the tax expense amount can be computed. However, on an ongoing basis,
the company keeps on paying some tax to the relevant tax authorities. Thus, based on
the amount of money which has actually been paid, the tax payable may be positive or
negative. A positive tax payable leads to creation of current tax liability. However, a
negative tax payable leads to creation of current tax asset (Petty et. al., 2015)
(x) There is no convergence between the figures corresponding to income tax expense and
the tax paid. This is because the tax expense computation is completed after the closing
of the financial year. As a result, since the tax expense is not known during the given
year with certainty, hence tax paid is driven by estimates which would tend to deviate
positively or negatively. As a result, tax paid for a given year may be more or less than
the tax expense. Further, the tax paid in a given year may have some share of the
pending tax payable for the previous year which puts off the tax paid from the tax
expense (Gilders et. al., 2016).
(xi) With regards to the tax treatment, without doubt the most confusing aspect related to
the temporary differences in carrying value of various items which then brought into
picture the deferred tax assets/liabilities which had potential future implications and it
is this intermingling which complicated the whole computations. A key insight related
to the tax expense recorded in the income statement and the underlying computation
particularly related to the reconciliation of accounting income to arrive at the taxable
income and tax payable.

References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University
Press.
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation
law 2016, 9th ed. Sydney: LexisNexis/Butterworths.
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2012)
Financial Management, Principles and Applications. 6th ed. NSW: Pearson Education, French
Forest Australia.
JB HI-FI (2017) Annual Report 2017 [online] Available at
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf (Accessed on May 25,
2018)