Financial Analysis Of Estia Health Limited: Taxation And Equity
Taxation Analysis
The present study is based on the financial analysis of Estia Health Limited. The report analysis the taxation practices of the Company along with the statement of the equity of the Company. Estia health is one of the leading providers of aged care services in Australia in the private sector. The Company is committed to improving their operational performance expanding their refurbishment plans for which continues to be a major source of earnings growth (Estia Health, 2017). The report highlights the composition of equity, deferred tax assets and liabilities; a comparison has also been derived with the past figures. The study also depicts the taxation practices with regards to the income tax payable, the taxation expenses and its compliance with the Tax laws of the country. The income tax payables as per cash flow statement and as per the income statement are compared for any variations and the underlying reason behind the same. A conclusion is made regarding the financial disclosure of the company.
After looking at the capital and funding structure of the Company that majorly comprises of RADs, borrowings by equity, we can conclude that the Company is in a strong position (Dagwell, Wines and Lambert, 2015). The capital management of the Group includes issued capital and all other reserves of equity that is attributable to the parent company’s equity holders. The primary objective of any company’s capital management is to maximise the shareholder value. The total quoted equity securities of the Company as on year ending 2017 were $260,150,443 (Estia Health, 2017). The total equity of the Company includes deferred payments to senior executives which are given in the form of shares. The equity also delivers LTIP which includes the interests of the executive which have led to increasing in shareholder’s wealth in the long-term. The profit attributable to the equity shareholders for the year 2016 and 2017 are as follows-
Table 1: profit attributable to Equity shareholders
(Source: Annual Report of Estia Health. 2017)
|
2017 $m |
2016 $m |
|
|
Basic profit for the year attributable to ordinary equity holders of the Parent |
18.2 |
15.1 |
|
Diluted, profit for the year attributable to ordinary equity holders of the Parent |
18.0 |
15.1 |
Table 2: The equity structure of the Company in the current and the past year
(Source: Annual Report of Estia Health. 2017)
|
Equity |
2017 $m |
2016 $m |
|
Issued Capital |
801830 |
649163 |
|
Shared-Based Payment Reserve |
673 |
515 |
|
Accumulated Losses |
(41384) |
(57997) |
|
Total equity |
761116 |
591681 |
Issued capital of a Company represents the total amount out of the share capital that has been issued to investors or to the KMPs of the Company as part of their remuneration plan. According to Warren and Jones (2018), the rise in issued share capital implies that the Company has issued more shares to finance its capital expenditures like research and development of new health care services.
Equity Analysis
The equity also contains current income tax which is recognized directly in equity and not in the consolidated statement of profit or loss. As per Uyar (2016), the transactions which are settled through equity are determined at fair value on the date of the grant through an appropriate valuation model.
According to the words of Gitman, Juchau and Flanagan (2015), the cost of equity is driven from the anticipated return which the investors of the Group expect from their investment in the equity of the Company.
The reserve of share-based payments is employed to recognize the worth of share-based payments settled through equity which is offered to the staff working in the Company comprising of the KMPs as a part of their remuneration plan. The accounting for share-based payment reserve is done as per the AASB 2. As per the words of Taylor and Richardson (2014), the rise in shared-based payment reserve can be attributed to the acquiring of non-financial assets.
According to the views of Alstadsæter and et al. (2016), shared Based payment method is referred to an agreement between two entities to receive cash or other assets for share-based payments or purchasing equity instruments of other entity. In the case of Estia limited, the share-based payment reserve is created majorly for issuing shares to executives as part of their remuneration plan.
At the times when the Company grants MEP shares, recourse loans are provided to them that assist them to purchase shares which are also recognized in equity amount. As per the views of Markle and Shackelford (2014), the MEP and limited recourse loans are set against each other in equity.
Thus it can be concluded from analyzing the items of equity that there is a substantial rise in the total equity of the company due to the issuance of new shares.
As part of the annual accounting process, the income and expense of the corporation are moved from the statement of income to the balance sheet under the head “retained earnings.” The capital structure of Estia reflects retained earnings up to $673m in 2017 which
The fall in an accumulated loss in the equity structure has resulted in resulting in an increase in shareholders’ equity.
For the year 2017, the statutory profit of the Group after deducting income tax was $40.698 million. The same was $27.6m in 2016 which implies that there is an increase in NPAT by 47%. The cost of tax compliance services of the Company accounted for an amount of $176,000 (Estia Health, 2017). The income tax expenses for two years are as follows-
Conclusion
Table 3: Tax expenses of Estia Health Limited
(Source: Annual Report of Estia Health. 2017)
|
Tax Expense |
2017 |
2016 |
|
Current Income Tax Expense |
16415 |
18306 |
|
Add Relating to income tax of previous year |
895 |
134 |
|
Deferred Income Tax |
||
|
Relating to temporary differences |
968 |
715 |
|
Income tax for previous year |
78 |
(210) |
|
Income tax as per statement of Income |
18,356 |
18,981 |
There has been fall in the tax expenses of the Company from past year. The company adjust current tax asset against current tax liabilities only if same are legally enforceable. In case of deferred tax asset or liability; the same is adjusted if the income tax is levied by one tax authority in both the cases. In present year the company has made a retrospective change in accordance with AASB 108 accounting policies relating to the accounting treatment of intangible assets, i.e. treating them as having an indefinite useful life for the purpose of evaluation of deferred tax (Estia Health, 2017). Prior to this company followed the policy of for calculating deferred tax on temporary difference raised due to an indefinite life of intangible assets based on tax which would result in future same. However, now the company evaluates deferred tax on the basis of the fact that tax which will arise due to the consequence of the use of the intangible asset.
The tax expense of Estia Health Ltd. is same as the company rate tax applicable to accounting income. The reason behind same is that the total accountable income is taxable in the hands of company only; that is income relating to present as well as the previous year. According to the opinion of Larrimore, Burkhauser, and Armour (2015), the difference in rate occurs only if taxation on the part of income is paid by other person or entity. However, in case of Estia Health Ltd, the tax liability of total income is to be paid by itself only. The company has appropriately applied provisions of AASB 112 Income Taxes in an appropriate manner. The tax rates and laws that are used for calculating the amount are the ones that are enacted by the provisions of the reporting date.
The deferred tax liability of the Company for the year 2017 was $ 64,482, and the same was $30,538 in 2016 (Estia Health, 2017). The Company provides the deferred tax by employing the liability method which is based on the variation between the tax rates of assets and liabilities and their carrying amount. As per the opinion of Dagwell Wines and Lambert, (2015), the liabilities for deferred income tax are recognized on the basis of these differences except the following cases-
- Asset or liability that does not account for any profit or loss at the time of the transaction and is not a part of the business combination.
- In cases of investment in the joint venture and subsidiaries and associates.
- In cases where the reversal of temporary difference is controllable, and the Company is certain that the reversal will not occur in new future.
In accordance with Warren and Jones (2018), the current assets related to deferring taxes are also recognized at temporary differences and the unused tax credits are carrying forwarded along with any losses in the same. The Deferred tax assets are recognized to the limit where it is possible that the taxable profit will will be sufficient to set off against the temporary difference. The deferred tax assets’ carrying amount is reviewed every year, and changes are reflected if required. The deferred tax assets are measured at tax rates prevailing in the year in which the asset or liability is settled.
References
Table 4: Income tax payable for two consecutive years
(Source: Annual Report of Estia Health. 2017)
|
Amount in $m |
2017 |
2016 |
|
28595 |
6662 |
The substantial rise in income tax of the Company can be traced to the changes in accounting policy as per AASB 112 (Income Taxes). In the past years, the Group measured their deferred taxes on the basis of temporary differences that arise from intangible assets’ indefinite life that is based upon the tax resulting from the future sale. Thus an accounting policy has been adopted by the Group that measures deferred taxes on the basis of temporary differences in the indefinite useful life of intangible assets based upon the consequences of tax payable that arises through their use. In accordance with the words of Uyar (2016), the assets and liabilities related to current assets are valued at an amount which is expected to be recovered from the taxation authorities. The current income tax is recognized directly in the equity and not in the P&L account. The management regularly reviews the applicable tax regulations to ensure that the accounting is done as per the norms.
Income tax expense for the year 2017 as per statement of comprehensive statement is $18356000, and as per cash flow statement, it is $28595000 (Estia Health, 2017). Thus, it can be accessed that the amount in both the statement is different. In income statement the amount of income tax payable for the current year is accounted; however, income tax paid for the current year is accounted in cash flow statement. In accordance with the views of Gitman, Juchau and Flanagan (2015), the liability of income tax is ascertained after giving the effect of current tax as well as deferred tax asset or liability and amount which has been still unpaid and will be paid in next year. The amount which is shown in cash flow statement represents the amount paid in present year; whether it is related to present year or any other year.
Current income tax asset and liabilities are evaluated for the current period, and the same amount is expected to be paid to taxation authorities. Accounting of income tax is detail and interesting processing. While analysis the present books of accounts; I analyzed that it is not an easy procedure as it comprises various elements such as income tax expense; current tax asset and liabilities and deferred tax assets and liabilities. These three are part of income tax and are required to be dealt in appropriate manner to ascertain correct income tax liability of an organization. During the study, I learned about the impact on books of account due to change in accounting policy followed by an organization. I learned about the reason of the difference between income tax expense which is accounted in the income statement and the amount which is recorded in cash flow statement. Above, study depicts that appropriate provisions relating to AASB 112 ‘Accounting of Income Tax ‘ have been complied by the company.
References
Books and Journal
Dagwell, R., Wines, G. and Lambert, C. 2015. Corporate accounting in Australia. Pearson Higher Education AU.
Warren, C.S. and Jones, J 2018. Corporate financial accounting. Cengage Learning.
Uyar, A. 2016. Evolution of corporate reporting and emerging trends. Journal of Corporate Accounting & Finance. 27(4), Pp.27-30.
Gitman, L.J., Juchau, R. and Flanagan, J. 2015. Principles of managerial finance. Pearson Higher Education AU.
Taylor, G. and Richardson, G. 2014. Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics. 10(1), Pp.1-15.
Alstadsæter, A., Jacob, M., Kopczuk, W. and Telle, K. 2016. Accounting for business income in measuring top income shares: Integrated accrual approach using individual and firm data from Norway (No. w22888). National Bureau of Economic Research.
Markle, K.S. and Shackelford, D.A. 2014. The impact of headquarter and subsidiary locations on multinationals’ effective tax rates. Tax Policy and the Economy, 28(1), Pp.33-62.
Larrimore, J., Burkhauser, R.V. and Armour, P. 2015. Accounting for income changes over the great recession relative to previous recessions: the impact of taxes and transfers. National Tax Journal. 68(2), P.281.
Online
Annual Report of Estia Health. 2017. Retrieved on 24th January 2018, from < https://www.estiahealth.com.au/assets/media/files/Estia%20Health%20Annual%20Report%20FY17.pdf>
Estia Health, 2017. Retrieved on 24th January 2018, from < https://www.estiahealth.com.au/ >