Equity in Financial Statements

The term equity in the financial statements refers to the funds of the company which belong to the owners. Therefore, in finance equity is also termed as shareholder’s fund. The position of equity as per the annual report for the year 2016 of Ridley Corporation Limited is given as under:

Item	Amount (2016’000)	Amount (2015’000)
Share Capital Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	214,445	214,445
Reserves	2,170	853
Retained earnings	31,269	14,536
Total	247,884	229,834

It could be observed that the equity of Ridley comprises of three items namely share capital, reserves, and retained earnings. The share capital depicts the amount paid on the common stock issued by the company (Wahlen, Jones, and Pagach, 2015). Further, it is to be noted that the share capital only contains the nominal value paid on the shares issued by the company. The excess money received by the company on share issue is transferred to paid in capital account. The ending balance of share capital account is determined by adding nominal value received on the new share issue and deducting the nominal value on shares bought back from the opening balance (Weygandt, Kimmel, and Kieso, 2015).

The amount of share capital in the year 2016 is same as that of 2015, which indicates that the company has not issued any common stock in the year 2016. Further, the next item in the company’s equity is reserves. The reserves indicate the amount set aside by the company for future. These are the savings accumulated by the company by transferring amount from its yearly earnings. The company transfers certain percentage of the profits each year to the reserves so that money for expansion and future investment could be accumulated. The amount in reserves has increased from $853 thousands to $2,170 thousands in the year 2016 (Ridley, 2016). The information gathered from the notes to account depicts that the increase in reserves has been mainly due to increase in the written back from share and performance rights expense account. Further, the most crucial item of equity is the retained earnings. Retained earnings show the accumulated amount of profits of the company. The retained earnings of Ridley reduced from $815 thousands in 2015 to $99 thousands in 2016 (Ridley, 2016).   

The tax expense as given in the statement of consolidated income is found to be $15,307 thousands for the year 2016 (Ridley, 2016). The information gathered from the notes to accounts depicts that this figure comprises of current tax, deferred tax, and prior period adjustments. The current tax accounts for $14,633 thousands and deferred tax accounts for a sum of $221 thousands whereas a sum of $453 was for under provision of last year (Ridley, 2016). The prior period adjustment comprises the tax expense on the mistakes in recoding the income items in the previous financial years. The current tax is the amount of tax calculated on the assessed income as per income tax rules.

Understanding Share Capital

The company pays tax at the rate of 30%. The accounting income of the company before income tax is $40,315 thousands. Thus, the amount of income tax as arrived by multiplying the accounting income before tax to the rate of tax is $12,094.50 thousands (Ridley, 2016). The amount of income tax expense charged in the statement of profit and loss and as discussed in the requirement-2 above is $15,307 thousands. Thus, the amount arrived at by multiplying the company’s tax rate to the accounting income is not same as the tax expense charged in the statement of profit and loss.

The amount of tax expense charged in the statement of profit and loss comprises three amounts such as current tax expense, deferred tax expense, and prior period adjustments. The current tax expense is calculated applying the tax rate on the income computed as per the income tax rules (AASB 112, 2013). Further, the deferred tax expense is computed applying the tax rate on the deductible/recoverable differences in the accounting income and income computed as per income tax rules. However, in computing deferred tax, the non-deductible/non-recoverable items are disregarded and this is main reason that the two amounts discussed here can not be same (AASB 112, 2013). Further, the differences in the two amounts are also due to prior period adjustments. The prior period adjustments are referred to as the adjustments in the items of financial statements in the current financial year which arise due to mistakes in the prior years.

The deferred tax asset as recorded in the balance sheet of 2016 of Ridley Corporation Limited is $7,443 thousands. The AASB 112 calls for recording the deferred tax asset/liability in order to fill up the gap between the accounting income and taxation income. The deferred tax assets is recorded when the company has deductible items that are expected to provide tax savings in future. Further, the deferred tax liability is recorded when the company has recoverable items that are expected to increase the tax expense in future. In the case of Ridley, it has been observed that the company has recorded deferred tax assets to the tune of $7,443 thousands (Ridley, 2016). This amount has been recorded by applying the tax rate on the temporary deductible expenses which the company apprehends to provide tax savings in coming years (Dagwell, Wines, and Lambert, 2015). It is important to note here that the company should apply the accounting concept of prudence while recognizing the deferred tax. The concept of prudence states that all future incomes should be ignored while all future expenses and losses should be recognized in full in the financial statements. Therefore, while recognizing the deferred tax asset, it should be ensured that future income will available to realize that assets.        

Reserves and Retained Earnings

In the Ridley’s 2016 annual report, there is income tax payable amounting to $8,260 thousands (Ridley, 2016). The amount of income tax payable is different from the income tax expense charged in the profit and loss account. The amount of income tax payable depicts the amount due for payment against income tax authorities. This is the amount remaining unpaid at the end of the year out of the total income tax expense. Thus, the amount of income tax liability is an only portion of income tax expense (Weil, Schipper, and Francis, 2013). Therefore, the amount of income tax expense and the income tax labiality can not be the same except in a situation when entire income tax expense is outstanding. Further, it is to be noted that the current tax asset can only be there in the financial statements only when the company has paid more than the tax expense in the form of advance tax (CPA Australia, 2017).      

The income tax expense and income tax paid are two different terms. The former relates to actual tax expense incurred while the later relates to the part of former paid out in cash. The income tax expense shown in the statement of profit and loss is $15,307 thousands for the year 2016. However, the income tax paid as shown under the operating activities in the statement of cash flows is $13,972 thousands (Ridley, 2016). It is clear that the amount of tax expense as shown in the statement of profit and loss is not the same as that shown in the statement of cash flows. This is because the amount shown in the statement of cash flows depicts the paid out taxes that is the taxes paid by the company to the income tax authorities. This amount may not relate to the current accounting year. However, the amount charged in the statement of profit and loss pertains the current accounting year only. Thus, the different between these two amounts are bound to arise. Further, the amount of tax expense in profit and loss statement includes the amount of deferred tax which is not required to be paid out in cash by the company. The amount of deferred tax is adjusted against the future tax commitments by the company. Hence, the amount shown as paid towards income tax in the cash flow statement can not be same as the income tax expense shown in profit and loss statement (Loughran, 2012).    

Income Taxes in Financial Statements

As a result of examining the tax expense recorded in the financial statements of Ridley, I learned an important aspect of corporate tax accounting and that is recognition of deferred tax. The corporations are required to account for taxes in accordance with the rules framed under the AASB 112. The AASB 112 requires the corporations to recognize the tax expense for the differences between the accounting income and taxation income and this also ensures compliance with the matching concept of accounting (AASB 112, 2013). While analyzing, I realized that the determination of deferred tax amount is difficult. One is required to have knowledge of taxation laws along with accounting rules and norms to determine the amount of deferred correctly, which makes it a difficult exercise. Further, the interesting thing that I found was that one can reconcile the amount of taxes by analyzing the financial statements of a company. The amount of tax expense, tax liability, and taxes paid taken from income statement, balance sheet, and the cash flow statement respectively could be reconciled. This reconciliation can help to ensure that the figures have been recorded correctly.   

Ridley Corporation Limited has recorded and disclosed the tax amount in fair manner. The study of company’s income tax shows that huge sum of money has been paid to the government in the current year. Further, it also came to the notice that the accounting concepts like the concept of prudence and the concept of matching have also been followed by the company properly. It is quite crucial to follow these concepts of accounting in order to achieve fair presentation and preparation of the financial statements. It appears that Ridley Corporations Limited has presented the financial statements in a fair manner as depicted from the clean report of auditors.

References

AASB 112. 2013. AASB 112 Income Taxes. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf [Accessed on: 30 December 2017].

CPA Australia. 2017. Advance taxation. [Online]. Available at: https://www.cpaaustralia.com.au/cpa-program/cpa-program-candidates/your-enrolment/advanced-taxation [Accessed on: 28 January 2017].

Dagwell, R., Wines, G., Lambert, C. 2015. Corporate Accounting in Australia. Pearson Higher Education AU.

Loughran, M. 2012. Intermediate Accounting For Dummies. John Wiley & Sons.

Ridley. 2016. Annual report of Ridley Corporation Limited of 2016. [Online]. Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_RIC_2016.pdf [Accessed on: 30 December 2017].

Wahlen, J.M., Jones, J.P., and Pagach, D. 2015. Intermediate Accounting: Reporting and Analysis. Cengage Learning.

Weil, R.L., Schipper, K., and Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.

Weygandt, J.J., Kimmel, P.D., and Kieso, D.E. 2015. Financial & Managerial Accounting. John Wiley & Sons.