Pivotal Aspects of Cash Flow

The ASX listed company that has been shortlisted is AUSDRILL.

• The requisite extracts of cash flow statement for the latest annual result are discussed below.

In the items highlighted above, the most pivotal as also highlighted by their respective values are receipts obtained from customers along with payments made to both employees and suppliers.  The above two aspects are critical for the normal functioning of the business since cash from clients must be obtained and then this cash needs to be paid to the suppliers and employees who play a crucial role in the value chain (Arnold, 2016). Additional items that are represented include interest receipts and related costs along with the paid income taxes. The income taxes paid refers to the cash that has been given to the tax authority to fulfil the tax requirements (AUSDRILL, 2017).

Three key aspects of the above cash flow are reflected below (McLaney, 2015):

• “Payments for PP&E”– This would refer to the cash spent by the company in the given year for the purchase of PP&E. For this company, this amount is quite significant which does not come as a surprise considering the business model.
• “Proceeds from sale of business” – The company also sells various businesses where it would consider appropriate to disinvest. The sales of these would fetch cash for the company.
• “Distributions received from Associates” – The company has made investment in various associates and hence would receive dividends and other forms of inflows from these which are cash inflows on account of investing related activity (Arnold, 2016).

Three key aspects of the above cash flow are reflected below (Bruner, 2013).

• “Repayment of secured borrowings”- Secured borrowings repayment would lead to cash outflow as has been highlighted in FY2016 above when $38.1 million repayment was done.
• “Dividends paid” – This refers to the monies that the company distributes to the shareholders in the form of dividend payment. Usually final dividend announced for a given year would be paid in the next year.
• “Proceeds/Repayment of unsecured borrowings” – The company also has exposure to unsecured borrowings and cash inflow or outflow is generated based on whether proceeds are received or repayment is made.

• The cash flow trends can be analysed based on the information available below (AUSDRILL, 2017).

The key trends are accounted for as highlighted below (McLaney, 2015).

• There has been a decrease in customer receipts in FY2016 which is responsible for the fall in the cash flow from operations. However, in FY2017, there is a slight jump which implies that there is no evident issue with the operational cashflows.
• The latest year i.e. FY2017 has seen significant uptick in cash outflow from investing activities primarily on account of jump in spending on PP&E coupled with lower cash inflows from business sale. FY2016 reported cash inflow on account of investing activities mainly because of huge inflows on sale of business.

• There is a deliberate attempt on the company to minimise the debt levels so that it can raise incremental debt as and when required. Also, increasingly unsecured borrowing is playing a more crucial role than secured borrowing.

• The relevant extract of OCI statement from FY2017 financial statement is given below (AUSDRILL, 2017).

• Prominent items having record in OCI statement are offered brief explanation below (AUSDRILL, 2017).

“Exchange (losses)/gains on translation of foreign operations”- The company is multinational with presence in a lot of foreign nations where revenue realisation is in foreign currency which ought to be translated into AUD (Arnold, 2016). The underlying gains/(losses) realised as part of this translation are captured here.

“Share of OCI from joint ventures” – The company acts as partners in various JV’s. The financial statements of these JV’s also has certain component of OCI which is reflected in the income statement of AUSDRILL in accordance with the respective equity share that the company has.

“Gain/(loss) on asset revaluation” –  The OCI statement also captures the gain or loss with regards to revaluation of assets such as land, buildings, financial assets (held for sale) and these are captured in the OCI.

• The requisite reasons for the separate treatment to these items are indicated as follows (McLaney, 2015).
• The framework related to preparation of financial statements mandates that certain transactions should be recording in the OCI owing to their specific nature and therefore reporting entities need to comply.
• Also, the nature of certain items such as financial instruments captured in the OCI is such that the loss or gain could be notional and easily susceptible to change the next year.
• Further, the company has no intention to earn any profit from these items as these are part of the business but not held to earn profits.

• Income tax expense (FY2017) is $ 13,885,000 in accordance with FY2017 profit and loss statement (AUSDRILL, 2017).

• The corporate tax rate is 30% and when this is multiple by the accounting income, the result is $ 13.598 million which is separate from the actual value of $ 13.885 million. This difference between the two amounts is because of the reconciliation of the accounting tax so as to obtain tax payable. This requirement arises as the rules governing the tax and accounting tend to differ. Thus, adjustments for these differences takes place in the reconciliation as indicated below (AUSDRILL, 2017).

• In accordance with the latest financial statements.

Deferred tax assets = $36.37 million.

Deferred tax liabilities = $ 22.1 million.

Deferred Tax Assets – These refer to future tax savings or tax related refunds that the company would reap owing to the transactions which have been already enacted. The prime reason that leads to creation of these assets at the first place is the existence of temporary difference on account of differential treatment by accounting and tax principles. For FY2017, the reported amounted has seen a decline as apparent from the schedule attached below (AUSDRILL, 2017).

Deferred Tax Liabilities – These refer to future tax expenses or tax related outflows that the company would bear owing to the transactions which have been already enacted. The prime reason that leads to creation of these liablities at the first place is the existence of temporary difference on account of differential treatment by accounting and tax principles (Coleman, 2014). For FY2017, the reported amounted has seen a decline as apparent from the schedule attached below (AUSDRILL, 2017).

• The company has reported current tax assets to the extent of $ 3.03 million in the latest financial statements available for FY2017. This amount is lesser when compared to the corresponding amount for FY2016 which was recorded as $4.80 million (AUSDRILL, 2017). These assets would allow the company to lower the tax outflow by the same amount during the twelve month period of FY2018 (Coleman, 2014).

The income tax to be paid for a financial year is captured by the income tax expense. However, income tax payable represents the outstanding tax for the year which additionally needs to be paid over and above the tax that has already been paid for the current year on an ongoing basis. Thus, tax payable reflects the part of the tax expense that has not been yet paid.

• As is apparent from the reported numbers for FY2017, the two figures i.e. income tax expense and the tax paid do not shoe congruence (AUSDRILL, 2017).  This is on account of the following two reasons.
• Income tax expense is finalised after a given year ends and therefore tax paid in the year is based on estimates.
• Also, tax paid in a given year can potentially have some component from the previous year in the form of current tax asset or liability which would influence the amount paid.

• One confusing aspect about the whole project was the continuation of two systems i.e. tax and accounting and how the firms actually reconciles between the two through mechanism such as deferred tax assets/(liabilities).  Also, one aspects which was an eye opener for me was the tax expense computation and the process of reconciliation based on differences in tax and accounting treatment (Coleman, 2014).

References

Arnold,G. (2016). Corporate Financial Management (3^rd ed.). Sydney: Finaicial Times Management.

AUSDRILL (2017), Annual Report FY2017, [Online] Available at https://www.ausdrill.com.au/images/ausdrill/files/20170823_AUSDRILL_ANNUAL_REPORT_2017.pdf (Accessed May 24, 2018)

Bruner, R. F., (2013). Case Studies in Finance (7^th ed.). New York City: McGraw-Hill Education.

Coleman, C. (2014). Australian Tax Analysis (4^th ed.). Sydney: Thomson Reuters (Professional) Australia.

McLaney, E.J., (2015). Business Finance – Theory and Practice (8^th ed.). New Jersey: Prentice Hall.