Corporate Accounting Report: An Analysis of Austal Ltd's Financials

This report provides a detailed corporate accounting analysis of Austal Ltd's financial statements. It examines various elements of equity, including contributed equity, reserves, and retained earnings, and discusses changes observed over the past year. The report identifies the firm's tax expense, differentiating between accounting income and taxable income, and elaborates on the reasons for any discrepancies. It further comments on deferred tax assets and liabilities, explaining their presence on the balance sheet. The analysis also covers current tax assets and the reasons why income tax payable differs from income tax expense. Finally, the report explores whether the income tax expense in the income statement matches the income tax paid in the cash flow statement, highlighting interesting or confusing aspects of the company's tax treatment and offering insights into corporate income tax accounting. Desklib offers a wide range of solved assignments and past papers for students.

Corporate Accounting
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Table of Contents
Introduction......................................................................................................................................3
(i)From your firm’s financial statement, list each item of equity and write your understanding of
each item. Discuss any changes in each item of equity for your firm over the past year
articulating the reasons for the change............................................................................................4
(ii) What is your firm’s tax expense in its latest financial statements?...........................................6
(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....................................................................................7
(iv)Comment on deferred tax assets/liabilities that are reported in the balance sheet articulating
the possible reasons why they have been recorded.........................................................................8
(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?............................................................10
(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?..............................................................11
(vii) What do you find interesting, confusing, surprising or difficult to understand about the
treatment of tax in your firm’s financial statements? What new insights, if any, have you gained
about how companies account for income tax as a result of examining your firm’s tax expense in
its account?....................................................................................................................................12
Conclusion.....................................................................................................................................13
References......................................................................................................................................14
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Introduction
Corporate accounting basically concerns itself with the accounts of one entity. It helps manage
and understand day to day function of the company. Large companies have quite a lot of
complication in their accounts. In order understand the tax structure and accounts of the
company one need to be very clear about the tax rules which the company adheres to and the tax
structures and rate applicable in that country. There are lot of differences between taxable
income and accounting income which lead to the differences in tax amounts. Study of finance
and accounting is very important for the company as well as the stakeholders.
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(i)From your firm’s financial statement, list each item of equity and write your
understanding of each item. Discuss any changes in each item of equity for your firm over
the past year articulating the reasons for the change.
The equity of the Austal Ltd consists of contributed equity, reserves and retained earnings.
Contributed Equity: - It is part of the share capital of the company. It can be presented as split up
of additional pay in capital and common stock. It is that amount of equity which the
shareholders have directly purchased from the Austal Ltd. The important element in this kind of
equity is that it does not include the securities which are purchased from the secondary market.
but the shares which are sold through the secondary market would be forming part of this capital
(Accounting Tools, 2017).
Reserves: - Reserves are basically the provision which is created by the company in order to
meet its future contingencies. They are also maintained in order to meet a particular need or an
expense. Expenses could be of any nature legal, general, operational and administrative etc.
Retained Earnings: - It is that portion of the income of the company. It is maintained in order to
purchase certain items of business requirement. It is amount which is left after distribution of
profits to preference shareholder and interest to the debenture holders. Retained earnings always
are the indicator of company’s quiddity position (Thirumalaisamy, 2013)
Changes in the items of equity
After observing the balance sheet of the company, it is seen that the there are changes in the
items of the equity.
Contributed Equity: - In 2016 it stood at $ 114,738, 000 and in FY 2017 it was recorded at $
116,384,000. The most possible reasons for the change might be due to issue of equity. Austal
Ltd would have issued equity in order to raise capital.
Reserves:- Austal Ltd maintains Reserves for Foreign currency translation reserve, Employee
benefits reserve, Cash flow hedge reserve, Common control reserve and Asset revaluation
reserve. In FY 2016 the amount stood at $ 100,672,000 in FY 2017 it has reduced to $
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91,637,000. It might have reduced due change in requirement of maintaining the reserves or at
decision of senior management.
Retained earnings:- retained earnings also remained same there is only little difference in the
amount. In FY 2016 it should at $ 242,142, 000 and in FY 2017 it is recorded at $ 248,893,000
(Austal Ltd, 2017).
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(ii) What is your firm’s tax expense in its latest financial statements?
An Austal Ltd tax expense consists of current tax and deferred tax. Current Tax is recorded at $
10,650,000 and deferred tax is recorded at (35,165,000). At the end of year the Tax expenses are
recorded at $ (24,515,000). Austal Ltd consolidates all its taxes of subsidiaries. Current tax
expenses are the one which Austal Ltd pays on its taxable profits. The tax rates which Austal Ltd
use are the rates at the end of financial year. In the FY 2017 Austal Ltd has charged tax at 30%
as maintained in the Balance sheet of the Company.
Deferred Income Tax is the tax which the Austal Ltd provides at Temporary basis. It is the tax
differences which arise in almost all the companies and give birth to deferred assets and
liabilities. Deferred income tax comprises of deferred income tax of previous year as well.
Deferred Income Tax consists of Deferred Assets and Liabilities. Other taxes which are
recognized in the Austal Ltd are GST. The net amount of GST either payable or receivable
which are payable or receivable to the tax authority are recorded in the statement of financial
position. (Austal Ltd, 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 tax which is paid by the Austal Ltd is the corporate tax at 30% as per the countries legal
compliance. Tax is calculated on two incomes one is the Accounting Income which is calculated
as per the books of accounts and other is the taxable income. Taxable income is the adjusted
income after taking all the tax rules and implication into consideration. From the book profits we
deduct the expenses which are either completely disallowed and partly allowed and disallowed.
And only those revenues and expenses are allowed which are directly associated with the
business. For the purpose of tax Austal Ltd considers only the taxable income which is reflected
in the Profit and loss account. Most of the times, the accounting tax is more than the tax as per
the Taxable income because of the above-stated reasons.
The taxable expenses of the Austal Ltd include provisions of the tax, deferred tax and current
along with other material facts related to the taxes like GST. Hence the Tax as per the company
tax rate which is 30% flat on the taxable income is not the same as accounting income. Austal
tax many times includes the taxes related to the equity shares but such taxes are recognised in the
equity, not in the comprehensive statement (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: Austal Ltd records assets and liabilities for the current or future periods. This
gives them the amount which is either to be paid or to be recovered from the tax authority. Such
measurements result in the deferred tax assets and liabilities. The Austal Ltd always adopts the
tax at rate which is applicable to the financial year ending. Deferred taxes are always provided
on temporary basis by the Austal Ltd. Deferred tax is the difference between the tax which is to
be paid on taxable income as per the tax law and tax calculated as per books of accounts.
Deferred taxes arise due to differences in inventory, depreciation, restructuring charges, and
allowance for bad debts. Deferred taxes can be understood better by classifying it into two parts
one is short term and long term and another being assets and liabilities (CA ClubIndia, 2017).
Deferred Tax Assets: Deferred Tax Assets arise when the tax as per the books are more than
taxes as per the income tax. Tax assets will increase when the expenses as per the tax books in
comparisons to the accounts books and vice versa.
Deferred Tax Liability: Deferred Tax Liabilities arise when the tax as per the books are less
than taxes as per the income tax. The liabilities will increase when the expenses on the tax books
are more the expenses on the accounts books. It decreases when the expenses are more on tax
books than on the accounts books.
Deferred tax assets and liabilities arise due to various reasons:-
 Unearned revenue: - it is that revenue which has been earned and received but not being
recorded in the books of accounts.
 Accrued expenses: - expenses which are recorded and accounted in the books of accounts
but same not have been taken for tax purpose.
 Depreciation: - Most the time's companies tend to charge depreciation on straight line
method in the books of accounts and diminishing is considered for the tax purpose.
 Expenditure for the prepaid expenses:- prepaid expenses are completely taken for tax in
the FY but the same has been written off gradually in the years to come (Anjum, 2014).
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Reasons for the Records of Deferred Tax Assets and Liabilities:-
 For proper remittances of tax by the Austal Ltd to the Tax Authority.
 To avail the benefit in the case of Deferred Tax Assets.
 To adhere to the Tax laws of the land.
 To avoid legal constraint in case of non-payment of tax.
 To clearly present the financial statement in order to avoid any kind of confusion.
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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?
Yes, there exist current tax assets which can also be called an income tax receivable. Current tax
assets for the Austal Ltd stand at $ 706000. Current tax assets are the tax receivables which the
Austal Ltd can take credit of. Current tax assets are created one when the company pays tax in
advance or in excess of payable. Austal Ltd can take the credit of excess amount of tax deposited
in the subsequent year. As per the accounting rule when a liability is paid in advance it is to be
treated as assets. In case of advance tax payment are usually paid on the previous quarter
revenue. It is just the approximate amount (Infinite accounting, 2015).
Income Tax Payable: - It is the reserve that is created by the company every year, in order to
meet its tax expenses. It is shown on the liability side in balance sheet under reserves and taken
an adjustment in the profit and loss account. It is not kept constant because of the tax liability
changes as per the revenue decrease and increases. The income tax payable should not be
misunderstood with deferred tax. Income tax payable does not exist on the balance sheet of
Austal Ltd.
No, income tax payable is not same as income tax expenses. Income tax expense stands at $
24,515,000.Income tax payable is the provision which is to be paid by the Austal Ltd while the
income tax expenses are paid. Income tax payable is the item of balance sheet whereas the
income tax expenses are the item of P&L account of Austal Ltd. Payable to be paid by the Austal
within 12 months. The payable cannot be carried forward over the years. Income Tax expense
consists of Deferred Assets and Liabilities and provisions (Austal Ltd, 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?
Income tax expenses which are shown in the income statement are $24,515,000. Whereas the
income tax refund which is shown on the balance sheet of Austal Ltd is $ 12,198,000.
Reasons for differences in the tax expenses are:-
 Provisions: - As the tax provisions are different every year and it is not mandatory that
provisions of tax and expenses coincide. This could result in hike of tax expense in income
statement as compared to the expenses reflected in the income statement.
 In case of Austal Ltd we have refund it means that the company has used its prior period tax
amount which might have been paid in excess of tax liability of year. As we know the company
can avail tax credit facility in case of advance paid or excess paid. Difference can also arise when
the company is in position to meet its tax liability using its previous funds.
 Deferred tax and liabilities in case of Austal Ltd where existence of both the concept is there.
This might have led to the difference which arises the tax amount. In profit and loss account it
shows expenses but in cash flow, it shows refund. Austal Ltd has Net Deferred tax at $ 5, 630,
00. This would have been the most important reason for the difference (CA ClubIndia, 2017)
 Another major reason for differences in both the amounts is treatment of expenses. Cash flow
reflects the actual amount of tax to be paid or received as in the case of Austal Ltd it is the tax
refund. Income statement reflects not only the current tax expenses but also the provision,
deferred tax as well.
 Method of Depreciation: - As per the accounting and company standards Austal might follow the
straight-line method. But when the tax is to be calculated as per the income tax provisions
diminishing method of depreciation is adopted (Codjia, 2017).
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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? What new insights, if any, have
you gained about how companies account for income tax as a result of examining your
firm’s tax expense in its account?
Studying the financial of Austal Ltd has helped in getting insight into various taxes and
accounting reforms. It has been interesting to know a how the deferred tax and liability can
impact tax expenses of the Austal Ltd. Even the various kinds of reserves which the Austal Ltd
maintains have been of interest during the assignment. It was very informative to learn about the
two types of income i.e. accounting income and taxable income. Learning about the calculation
of tax as per the tax laws and guidelines have also been of great interest.
We learned how the companies consolidate its accounts of all the branches into the accounts of
main office. We also got insight into the financial statement preparation and what are the items
in income statement and balance sheet. It was nice to know about the kinds of depreciation that
used in bookkeeping and accounting.
Learning about the calculation of tax and its compliance has been little difficult. Because tax
expenses include various items like provision for tax, previous year and current year adjustment
of advance tax and tax credits along with deferred tax assets and liabilities. It was nice to learn
which all items fall under deferred tax assets and liabilities. It was interesting to know about tax
structure and corporate tax at which the Austal Ltd pays tax. While analysing the tax schedule it
was observed that there exist a tax called income tax related to equity item. This kind of tax
relates to the items directly recognized with the equity of Austal Ltd. It has been very
informative to know about the tax treatment of tax in Austal Ltd (Austal Ltd, 2017).
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Conclusion
Tax expenses consist of many adjustments relating to the provision which is created during the
current year. Writing off of the tax refunds available along with adjusting deferred tax assets and
deferred tax liability relating to the previous year as it has to be written off with 12 months. One
also need to also understand the difference the expenses which the company has to ensure and
provisions which are created. In order to understand the tax structure of an organization we need
to even pay attention toward the tax reforms of land in which the organization operates along
with the companies guidelines.
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References
 Accounting tools, 2017. Contributed capital. About us. [Online] Accounting tools. Available
at: https://www.accountingtools.com/articles/what-is-contributed-capital.html [Accessed: 22
January 2017].
 Anjum, K., 2014. Explain the reason of creation of deferred tax asset and liability? [Online]bayt.
Available at https://www.bayt.com/en/specialties/q/80018/explain-the-reason-of-creation-of-
deferred-tax-asset-and-liability/ [Accessed: 22 January 2017].
 Austal Ltd, 2017. About us Austal Ltd. [Online] Available
at: http://investor.austal.com/phoenix.zhtml?c=159601&p=irol-IRHome [Accessed: 22 January
2017].
 CA ClubIndia, 2017 Meaning of Deferred tax liability and Assets in simple words. About us.
[Online.] CA ClubIndia Available at: https://www.caclubindia.com/articles/meaning-of-deferred-
tax-liability-asset-in-simple-words-13385.asp [Accessed: 22 January 2017].
 Codjia, M., 2017. Provision Expense Definition. . [Online] bizfluent. Available at
https://bizfluent.com/facts-6801166-provision-expense-definition.html [Accessed: 22 January
2017].
 Infinite accounting, 2015. Accounts Payable vs Accounts Receivable: What’s the Difference?
[Online] Infinite accounting. Available at: http://www.infinitaccounting.com/blog/accounts-
payable-vs-accounts-receivable-whats-the-difference [Accessed: 22 January 2017].
 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: 22 January 2017].
 Thirumalaisamy, R., 2013. Firm Growth and Retained Earnings Behavior – A Study on Indian
Firms. European Journal of Business and Management, Vol.5, No.27.
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