Corporate Accounting: Analysis of Orica Limited's Cash Flows, OCI Statement, and Corporate Income Tax

This article provides an analysis of Orica Limited's cash flows, OCI statement, and corporate income tax. It includes a discussion of the company's key operational and financing cash flows, trends in cash flow components, and deferred tax assets and liabilities.

CORPORATE ACCOUNTING
Assessment Task 2 – Orica Limited
STUDENT ID:
[Pick the date]

Company Selected – Orica Ltd.
Latest Financial Statements – FY2017 (Year ending June 30, 2017)
Main Business – Explosives
CASH FLOWS STATEMENT
(i) The requisite cash flow extract from the latest annual report in public domain is indicated
as follows (Orica, 2017).
The critical aspects in relation to operational cash flows are highlighted below.
 “Receipts from Customers” – This is the key operational source of finance for the
company and comprises of the money that the customers have paid for consumption
of products and services that the company provides. It is essential to make note that
revenues only highlight the sales in accrual manner while the given item highlights
the actual cash that customers have paid. In comparison with FY2016, the receipts
from customers in FY2017 have seen a significant decline which might be the result
of lower demand of explosives from the mining sector.
 “Payments to Suppliers and Employees”- Using the money received from customers,
the company pays not only the suppliers but also the employees. Both are key aspects
of the company’s value chain which eventually is able to provide the desired product
and services. In comparison with FY2016, the payments made to suppliers and
employees in FY2017 have seen a nominal increase.
Besides the above, the company also receives other operating income and also interest
income. Consequently, the cost involved in terms of borrowing has also been considered.

Additionally, another pivotal element is the amount of tax paid by the company on the
operational profits generated which has seen major jump in FY2017 to the extent of 40%
over FY2016.
With regards to cash flow arising from investing activities, there are three elements that need
to be discussed. The most pivotal is the payment that the company has done for acquiring
PP&E in a given year which has seen about 20% increase in FY2017 as compared to
FY2016. Another pivotal element is the amount that the company pays for acquisition of
intangible assets which has seen a 10% increase in FY2017 over the previous year. A key
cash inflow would comprise of the proceeds derived on sale of PP&E which has dipped in
FY2017 compared to FY2016 (Orica, 2017).
The critical aspects in relation to financing cash flows are highlighted below.
 “Proceeds from long term borrowings” – This points towards the cash inflow that the
company realises on account of higher assumption of long term borrowings. For
FY2017, there has been a reduction of about 45% in this regards as compared to
FY2016.
 “Repayment of long term borrowings” – This refers towards the cash outflow that the
company realises on repayment on the long term borrowings. For FY2017, this has
seen a decline in excess of 60% as compared to corresponding figure in FY2016.

 “Dividends paid” – This refers towards the cash outflow that the company realises on
the payment of dividends. For FY2017, there has been a dip in the dividend payment
compared to FY2016.
(ii) The trends in relation to the cash flow components are captured in a tabular form
indicated as follows.
The key observations which emerge from the table above are indicated as follows (Lasher,
2017)
 While the cash flow from operating activities for FY2015 and FY2016 highlight a
healthy trend but the same is interrupted by the significant fall in these cash flows in
FY2017. One of the contributory reasons could be the lower demand of explosives
from mining customers.
 Over the last three years, there has been an increase in the investing activities related
cash outflows. This probably hints that the company in the future expects the demand
would pick up and thereby is making requisite investment.
 The company has made dedicated effort in FY2015, FY2016 to reduce the debts on
the books so as to strengthen the balance sheet. This would also allow the company to
raise incremental debt in the future as and when required.
OTHER COMPREHENSIVE INCOME STATEMENT
(iii) The relevant extract containing the various OCI statement related items is shown below
(Orica, 2017).

(iv) The OCI statement extract highlighted above, the various gain or loss tends to arise on
the basis of company having foreign operations. This is because in these operations the
revenue realisation would take in a foreign currency which would require to be converted
into AUD and owing to time delays between receipt and conversion, possible gains or
losses can arise. Additionally, the company with the intention of limiting this risk of
adverse currency movements may initiate positions in financial instruments such as cash
flow hedge. The fair price of these financial instruments would change on a real time basis
and could lead to both notional and realised profit or losses which are realised in the OCI
statement (Northington, 2015).
(v) There are various reasons why the items discussed above merit a separate section. One of
the key reasons is the existing regulatory norms particularly in relation to preparation of
financial statements which need to be adhered to by all reporting entities. As part of these
regulations, there are certain transactions or items which ought to be reported under OCI.
Another reason is that the nature and characteristics of these items is fundamentally
different from that of the other items reflected in the P &L statement. One difference is
that for certain select items captured in P&L statement, the resultant profit or loss may be
notional and not real unlike items in the P & L account. Another difference is that the
items shown in P&L statement are linked to the operational activities of the company and
aimed to generate profit for the company. This is not the case with OCI activities as these
are meant for business purposes but the management does not intend to earn any income
from these items (Damodaran, 2015).

ACCOUNTING FOR CORPORATE INCOME TAX
(vi) The latest financial statements for the company are available for the year ending on
June 30, 2017. In accordance with the income statement for this period, the company has
reported a tax expense of $ 164 million (Orica, 2017).
(vii) As per the given question, tax expense expected would be the corporate tax rate (0.3)
multiplied by the pre-tax income ($563.4 million). This yields a theoretical value of $ 169
million which does not match with the actual reported value of $ 164 million as there is a
deviation of $ 5 million.
The above deviation is on the basis of the reconciliation that has been performed so that
using the accounting pre-tax income as the base the computation for the tax payable in
accordance with the income tax provisions can be performed. The following note to
account highlights the same (Orica, 2017).
It is apparent from the above notes to account that requisite adjustments have been made
to highlight the differences in provisions related to tax and also accounting income. Also,
certain adjustments are also prompted owing to tax being paid abroad owing to foreign
operations where the tax rate is different from that prevalent in Australia. Also, some
portion of the tax may have been held as part of the withholding tax.
(viii) Deferred Tax Assets (FY2017) = $ 323.1 million

Compared to the previous year i.e. FY2016, the deferred tax assets have witnessed a decline
as the corresponding level that existed as on June 30, 2016 was $408.3 million. Further, the
different components of deferred tax assets coupled with changes in this regards are
summarised below (Orica, 2017).
Based on the above, it is apparent that these assets tend to attribute their existence to the
temporary differences that tend to arise for the above items. Further, the implication of a
deferred tax asset is that in the future owing to the present transaction, the company would
save taxes or experience a tax refund (Petty et. al., 2015).
Deferred Tax Liabilities (FY2017) = $ 274.6 million
Compared to the previous year i.e. FY2016, the deferred tax liabilities have witnessed a
increase as the corresponding level that existed as on June 30, 2016 was $267.2 million.
Further, the different components of deferred tax liabilities coupled with changes in this
regards are summarised below (Orica, 2017).

Based on the above, it is apparent that these liabilities tend to attribute their existence to the
temporary differences that tend to arise for the above items. Further, the implication of a
deferred tax liability is that in the future owing to the present transaction, the company would
pay more taxes or experience a tax outflow (Petty et. al., 2015).
(ix) In the balance sheet, there is no mention of any current tax assets or liabilities for the
year ending on June 30, 2017. However, there is a possibility that either of these may
have been concealed as other current assets or other current liabilities. As these are
current in their underlying nature, hence the impact is materialised during the following
12 month period (Orica, 2017).
The payable income tax highlights the amount of income tax for a given period which
has not been still paid based on essentially two parameters i.e. the tax paid and the tax
expense. Considering that tax expense highlights the total amount that the company
ought to pay the tax authorities for the given year, the tax payable would be derived by
subtracting the tax paid from the tax expense. Further, it is unlikely that the tax payable
and tax expense would be the same since some portion of current year tax expense
would already have been paid (Parrino and Kidwell, 2014).
(x) For the given company, it is apparent that for the year ending on June 30, 2017, the two
values i.e. tax paid and tax expense do not match. The tax expense for the full financial
year can be reliably estimated only after the year has ended and hence it would be
unreasonable to expect that the company would pay a tax amount which matches the
actual tax expense. This is because by the time the year ends, the tax expense for the
year is not known with certainty and thereby the company cannot pay the precise
amount even if wants to (Brealet, Myers and Allen, 2014).

(xi) A key aspect which was quite tough for me to interpret was the concept of deferred tax
assets and related liabilities. This had various aspects such as the underlying origin on
account of temporary differences which I felt was quite onerous to compute even
though the underlying concept is relatively clear. A useful insight that emerged from
the task was related to tax expense which unlike theoretical understanding is based on
reconciliation owing to the difference in provisions related to tax from accounting
principles.

References
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.
Lasher, W. R., (2017) Practical Financial Management 5th ed. London: South- Western
College Publisher.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Orica (2017) Orica Annual Report FY2017, [online] available at
http://www.orica.com/Investors/Annual-Report/downloads#.Wwiiqe6FPIU (Accessed May
25, 2018)