Corporate Accounting Analysis of Santos Limited: Financial Report

This report provides a detailed analysis of the corporate accounting practices of Santos Limited. It begins with an examination of the cash flow statement, highlighting key items such as receipts from customers, payments to suppliers, and exploration expenses. The report then delves into the investing and financing cash flow activities, noting the company's investment in business assets and its debt reduction strategies. A three-year summary of the major cash flows reveals positive trends in operational cash generation and debt management. The report also explores the other comprehensive income (OCI) statement, detailing items like exchange gains/losses and foreign currency hedges, and explains why these items are presented in OCI rather than the profit and loss statement. Furthermore, the report analyzes the company's corporate income tax, including the tax benefit received, deferred tax assets and liabilities, and the difference between income tax expense and cash paid for taxes. The report concludes by emphasizing the practical complexities of taxation and the importance of understanding the differences between accounting and tax regulations. The report uses Santos Limited's 2016 and 2017 annual reports and relevant financial literature to support its analysis.

CORPORATE ACCOUNTING
SANTOS LIMITED
STUDENT ID:
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The company that has been selected for the given task is a company listed in the energy
vertical and named Santos Limited.
CASH FLOW STATEMENT
(i) The operating cash flow changes are highlighted as follows.
The various key items are as follows.
1) Receipts from Customers – This refers to the cash received from customers in the
form of business revenue.
2) Pipeline tariff and other receipts – The company has its own pipeline and usage of the
same results in tariff income for the company.
3) Payments to suppliers and employees – This is the amount that has actually been paid
to the suppliers and employees during the given financial year for offering of raw
materials and services respectively.
4) Exploration and seismic studies- These refer to the cash outflow actually incurred in
relation to the exploration activities undertaken by the company.
5) Borrowing cost paid – This refers to the actual interest that has been paid by the
company for the debts it has taken.
6) Income tax paid refers to the amount of money paid to the tax authorities or ATO.
The investing cash flow changes are highlighted as follows.

In this, the most significant component is the payment that the company has made to acquire
different types of assets which are necessary for the business operating of the company.
Further, the company has also disposed some fixed assets which has resulted in cash inflow
to the extent of US$ 145 million in 2917. From the above cash flow from investing, it is
apparent that the company is aggressively investing in procuring business assets so as to
ensure that future growth is secured (Santos, 2017; 2018).
The financing cash flow changes are highlighted as follows.
One of the items is dividends paid which reflects the dividends paid to shareholders during
the year. Besides, the two main items are drawdown of borrowing and repayment of
borrowings. Drawdown of borrowings refers to taking incremental debt while repayments
imply paying back of the outstanding debt. Further, through the issue of shares also,
financing needs can be taken care of which are reflected through net proceeds from ordinary
share issue. It is evident from the cash flow on account of financing activities that the
company is reducing its debt as a hefty repayment of US$ 2.4 billion has been made in 2017.
Also, there is intent to enhance the equity component owing to which in both 2016 and 2017,
incremental amount has been raised through equity (Santos, 2018).
ii) The broad summary of the three major cash flows is presented in the form of the following
three year summary.

Various encouraging trends are reflects in the above numbers. To begin with, there is a
constant increase in the cash generated from operational activities which highlights the
robustness of the underlying business. Also, it seems that the high investment in the business
has already been done by the company as apparent from the outflow of US$ 1.59 billion in
2015. The company is now in a position to leverage these assets for income generation.
Besides, a positive trend is visible whereby the company is taking effective steps to lower the
debt on the books (Northington, 2015).
OTHER COMPREHENSIVE INCOME STATEMENT
iii) The other comprehensive income for the company has the following items.

(iv) The description of various items highlighted in the OCI is indicated below (Santos,
2018).
1) “Exchange gain/(loss) on translation of foreign operations” – Owing to foreign operations
for the company, there is a difference between the functional currency and the currency in
which revenue is derived. As a result, translation risk comes into play which may lead to
slight gain or loss based on the currency fluctuation. Also, considering the loss or gains
realised, the appropriate tax effect also needs to be captured
2) “Foreign Currency loans related gain/(loss)” – In order to create a natural hedge for
foreign current exposure owing to operations abroad, foreign currency loans are assumed
by the company. These tend to act as hedge as the principal repayment along with interest
ought to be served in foreign currency only and thus to that extent can be served by the
cash flows generated from foreign operations. However, currency fluctuations would
occur which may produce a gain or loss which is reflected in association with the tax
effect.
3) “(Loss)/gain arising from foreign currency hedges” – For hedging he foreign current
exchange risk, the company also hedges the currency exposure to as limit any gains/losses
on account of currency fluctuations. However, these hedges tend to fluctuate in value
based on the underlying currency exchange rate for the underlying currency pair. At the
closing of the financial year, any changes in the market value of these hedges need to be
recorded in the OCI.
v) The above entries cannot be reflected in the profit and loss statement as the current
accounting norms does not permit the same and instead the presentation guidelines highlight
that these transactions besides being reflected in the equity must be represented under OCI
section. Further, it would be inappropriate to record some of the profit or losses as actual
income or loss since they are notional and therefore not realised in practice. This is
particularly true for financial instruments. In case of revaluation of assets, till the time the
assets are liquidated the notional gains or losses would not be realised. Further, it is possible
that the gains or losses made in a particular year may be undone the next year (Petty et. al.,
2015). However, despite that OCI does provide utility as it enables the user to understand
potential alteration in the value of the assets which is critical (Parrino and Kidwell, 2014).
ACCOUNTING FOR CORPORATE INCOME TAX

(vi) As obtained from the profit and loss statement of the firm for FY2017, the company had
posted a pre-tax loss and hence the company had a tax benefit of US$ 225 million for 2017.
(Santos, 2018).
(vii) The before tax income in accordance with accounting principles came out as -$585
million for the year FY2017. Taking into consideration the losses made by firm, it was
obvious that there would not be any tax expense and instead tax benefit would arise. This is
quite substantial and has arisen on the back of temporary differences as is apparent from the
screenshot attached below (Santos, 2018).
The above screenshot clearly reflects that in 2017, the company has reaped tax benefit of US$
350 million which has primarily arisen on the back of deferred tax benefits. A large majority
of these could be attributed to the reversals in relation with temporary differences. The prime
cause of temporary differences is the difference in regulations pertaining to tax and
accounting which is quite stark in case of depreciation when the divergence is significant. As
a result, there emerges the issue of different carrying values of underlying assets based on the
permissible depreciation that can be charged under accounting regulations as against the tax
norms (Damodaran, 2015).
(viii) In order to highlight the underlying deferred tax asset or liabilities, it is essential to
consider the latest balance sheet i.e. for 2017. The company has deferred tax assets of US $
1,419 million as on December 31. 2017. These are reflective of lower tax outflow in the
future since there are certain losses or higher outflow of tax that are carried forward and
would lead to tax savings in the future (Santos, 2018).

The above data clearly highlights that majority deferred tax assets are arising due to losses
that the company has made in the recent years which would be carried forward to lower the
tax liability going ahead. Besides, there could have been losses on wake of disposal of key
assets which would lead to drop in tax outflow going ahead and thereby lead to creation of
deferred tax assets. Further, there is an increase in deferred tax assets in FY2017 as compared
to the previous year primarily on account of losses being carried forwarded (Northington,
2015).
The company for the year ending on December 31, 2017 has deferred tax liabilities of US$
240 million. This has also increased marginally from the comparable previous year deferred
tax liability of US$ 221 million. The presence of deferred tax liabilities implies that in the
future there would be higher tax liability owing to transactions in the present. These may
realise on account of gains in revaluation of various assets thus leading to potential higher tax
outgo in the future (Parrino and Kidwell, 2014).
(ix) The current tax liabilities for the company at the ending of FY2017 stood at US$ 17
million. This would imply that this much amount of tax would have to be paid by the
company in FY2018 for the transactions taken place in FY2017 (Santos, 2018). The
difference in the income tax payable and income tax expense arises because of regulation
difference between tax and accounting norms. The accounting regulations and norms lead to
determination of profit before tax which then is used for determination of income tax
expense. On the other hand, for the determination of taxable income, the appropriate tax

statutes tend to apply and finally based on this the income tax payable would be highlighted.
Since, the taxable income and the pre-tax profit differ, hence this is passed on the tax expense
and payable tax also (Petty et. al., 2015).
(x) From the given financial statements, it is apparent that the income tax benefit as shown in
the profit and loss account does not match with the corresponding figure highlighted in the
cash flow statement. One reason contributing to this difference is that the basis of preparation
of income statement and cash flow statement differs. The former is based on accrual basis
while the latter is prepared on cash basis. Additionally, income tax expense is related to the
accounting pre-tax income determined using accounting principles. On the contrary, the cash
flow statement related tax paid is linked to the actual tax payable determined through the
application of tax rules (Brealey, Myers and Allen, 2014).tha
(xi) A key learning which was derived through the given task is that taxation theoretically
seems straight forward but in practical it is quite complex. This complexity is further
enhanced on account of different regulations for accounting and tax computation which leads
to temporary difference in the asset carrying values which require adjust and reconciliation
on an annual basis. This is quite interesting but at the same time poses a challenge. However,
an an exercise, this was quite useful as it enables improvement in conceptual knowledge
particularly in relation to the actual representation of tax related payments and expenses for a
company.
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References
Brealey, R. A., Myers, S. C., and 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.
Northington, S. (2015) Finance, (4th ed.) New York: Ferguson
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., and Nguyen, H.
(2015). Financial Management, Principles and Applications (6th ed.) NSW: Pearson
Education, French Forest Australia.
Santos (2017) Annual Report 2016, Retrieved from
https://www.santos.com/media/3525/san675_annualreport2016_fa3_low-res_.pdf
Santos (2018) Annual Report 2017, Retrieved from
https://www.santos.com/media/4319/2017-annual-report.pdf