Corporate Accounting - Assessment Task 2 on Orica Limited

This article discusses the cash flows statement, other comprehensive income statement, and accounting for corporate income tax of Orica Limited. It also highlights the trends and deviations in the financial statements.

CORPORATE ACCOUNTING
Assessment Task 2 – Orica Limited
STUDENT ID:
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The listed company that has been chosen for the given task is Orica Ltd.
CASH FLOWS STATEMENT
(i) The extracts from FY2017 annual report which pertains to cash flows statement are
illustrated below (Orica, 2017).
The two main drivers of the cash flow from operating activities are the customers’ receipts
along with the payments to manpower (employees) and suppliers. The above figures indicate
that there has been a drop in the customer receipts in FY2017 in comparison to FY2016.
However, the payments made to the employees and supplies increased marginally as
compared to the previous year. The net result was that there was a drop in the operational
cash flows generated in FY2017 compared to the previous year i.e. FY2016 (Orica, 2017).
The two main drivers of the cash flow from investing activities are the payments made for
acquisition of PP&E and those which are made for intangibles. Both these have shown a
jump in FY2017 as compared to the previous year and the net result is that the cash outflow
on account of investing activities has increased in FY2017 as compared to the previous year
i.e. FY2016 (Orica, 2017).

There are four significant items listed below. Two of these relate with inflow and outflow
related to the long term borrowings. In FY2017, it is apparent that both proceeds and
repayment of long term borrowings has shown a decline when compared with FY2016. Also,
the company seems to be phasing out the short term financing owing to constant reduction in
this regards in both FY2016 and FY2017. Also, another significant element is the dividend
money that has been actually paid to the shareholders. This has dipped in FY2017 owing to
the previous years which can be attributed to the slowdown in the business (Orica, 2017).
(ii) The relevant trends of the three significant cash flow components are highlighted
below.
The main trends that may be identified from the above are summarised below (Petty et. al,
2015).
 The operational cash flows show a significant dip in FY2017. This might be linked to
lower demand of explosives from the mining sector which is adversely impacting
demand.
 It seems that the company is in the process to ramp up investments as going ahead it
expects improvement in offtake especially by the mining sector aided by
improvement in prices of commodities.
 The company seems to be using the given opportunity of muted demand to deleverage
the balance sheet as it is focusing on debt reduction.
OTHER COMPREHENSIVE INCOME STATEMENT

(iii) The items that company has reported in the OCI statement are reflected below (Orica,
2017).
(iv) On the basis of the above OCI statement, the key gain/(loss) is arising from the
translation of currency on account of foreign operations. In this regards, it is noteworthy
that the company has foreign operations owing to which the revenue realised are in a
currency different from AUD which gives rise to possible gains/(losses) related to
currency conversion. Also, for managing the foreign currency exchange risk, the company
has put in place cash flow hedge and the fair price changes in this regards also lead to
potential gains/(losses) potentially on notional basis only (Orica, 2017).
(v) The reasons for non-reporting of the above items in P&L statements are as follows
(Deegan, 2014).
 This has been done in order to comply with the existing guidelines in relation to the
preparation and presentation of financial statements by the reporting entity. The
companies need to adhere to these regulations.
 Some of the gains/(losses) arising may be notional and hence may very well be
reversed in the future. Thus, it is different from P&L statement where reversal would
not happen and any profits or losses are real and not notional.

 Besides, P&L statement captures the profit or loss on operating activities. But this is
not true for items highlighted under OCI as the company does not expect to gain
income but these gains/(losses) are incidental to the business.
ACCOUNTING FOR CORPORATE INCOME TAX
(vi) In congruence with the FY2017 income statement for the company, it would be
appropriate to conclude that the tax expense for the company amounted to $ 164 million
(Orica, 2017).
(vii) The corporate tax rate applicable for the company is 30%. For FY2017, the before tax
accounting income was $ 563.4 million
Hence, expected tax expense = 0.3*563.4 = $ 169.02 million
However, the tax expense that has actually been reported in the income statement for
FY2017 is $164 million. This deviation can be accounted for on the reconciliation
adjustments required to accommodate the differences between the rules applicable for
computation of taxable income and those for accounting income. This can be better
highlighted through the following extract (Orica, 2017).
Thus, various aspects are considered for which adjustments ought to be made. Besides,
differences between the tax and accounting treatment, consideration needs to be made for
the tax paid to foreign authorities and the difference in tax treatment in terms of rate
applicable and the withholding tax.

(viii) The reported deferred tax assets as on June 30, 2017 are $ 323.1 million and have
witnessed a decline over the previous year when the corresponding figure was $408.3
million. The breakup of the deferred tax assets is indicated below (Orica, 2017).
The deferred tax assets highlighted above arise on account of the items indicated above and it
would be expected that on the basis of the above items, the company would experience a tax
inflow or tax benefit that would arise in the future but finds basis in the transactions taken
place in the reported financial year only (Petty et. al., 2015).
The reported deferred tax liabilities as on June 30, 2017 are $ 274.6 million and have
witnessed a decline over the previous year when the corresponding figure was $267.2
million. The breakup of the deferred tax liabilities is indicated below.
The deferred tax liabilities highlighted above arise on account of the items indicated above
and it would be expected that on the basis of the above items, the company would experience

a tax outflow or tax expense that would arise in the future but finds basis in the transactions
taken place in the reported financial year only.
(ix) The company has not reported any current tax assets or income tax payable for
FY2017. It might be possible that one of these may have clubbed under the category of
other assets and other liabilities. Owing to their current nature, these typically lead to
tax related inflow/(outflow) within a 1 year period (Orica, 2017).
The income tax payable typically reflects the income tax that still ought to be paid at
the end of the year after adjusting the amount of tax that has already been paid. Thus,
tax payable is derived by subtracting the tax actually paid from the income tax expense.
Considering that some of the current year tax would always be paid, hence usually the
income tax payable would differ from the income tax expense (Barkoczy, 2017).
(x) No, the tax expense (income statement) and tax paid (cash flow statement) do not
match for the given company’s FY2017 financial statements. This difference is because
the tax paid during the year is based on the estimated profits that the business would
typically generate. The tax expense is only determined after year closing and hence
there would always be a deviation in the actual tax paid from the income tax expense
(Gilders et. al., 2016).
(xi) One aspect which I found quite difficult to understand is the portion related to deferent
tax assets and corresponding liabilities. This difficulty was not limited to only the
underlying origination or creation of these but the actual manner in which they
subsequently lead to cash inflows/(outflows). A key insight was related to the
computation of tax expense and the reconciliation required.

References
Orica (2017) Orica Annual Report FY2017, [online] available at
http://www.orica.com/Investors/Annual-Report/downloads#.Wwiiqe6FPIU (Accessed May
25, 2018)
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.