Especificaciones de evaluación relacionadas con las dimensiones de la competencia profesional

Despite reasonable profitability figures, Comparator’s dividend yield is poor compared to the sector average. From the extracts of the changes in equity it can be seen that total dividends are $90,000 out of available profit for the year of only $96,000 (hence the very low dividend cover). It is worthy of note that the interim dividend was $60,000 and the final dividend only

$30,000. Perhaps this indicates a worsening performance during the year, as normally final dividends are higher than interim dividends. Considering these factors it is surprising the company’s share price is holding up so well.

Summary

The company compares favourably with the sector average figures for profitability, however the company’s liquidity and gearing position is quite poor and gives cause for concern. If it is to replace its old assets in the near future, it will need to raise further finance. With already high levels of borrowing and poor dividend yields, this may be a serious problem for Comparator.

Yours faithfully

5 (a) (i) An explanation of the origins of why deferred tax is provided for lies in understanding that accounting profit (as reported in a company’s financial statements) differs from the profit figure used by the tax authorities to calculate a company’s income tax liability for a given period. If deferred tax were ignored (flow through system), then a company’s tax charge for a particular period may bear very little resemblance to the reported profit. For example if a company makes a large profit in a particular period, but, perhaps because of high levels of capital expenditure, it is entitled to claim large tax allowances for that period, this would reduce the amount of tax it had to pay. The result of this would be that the company reported a large profit, but very little, if any, tax charge. This situation is usually ‘reversed’ in subsequent periods such that tax charges appear to be much higher than the reported profit would suggest that they should be.

Many commentators feel that such a reporting system is misleading in that the profit after tax, which is used for calculating the company’s earnings per share, may bear very little resemblance to the pre tax profit. This can mean that a government’s fiscal policy may distort a company’s profit trends. Providing for deferred tax goes some way towards relieving this anomaly, but it can never be entirely corrected due to items that may be included in the income statement, but will never be allowed for tax purposes (referred to as permanent differences in some jurisdictions). Where tax depreciation is different from the related accounting depreciation charges this leads to the tax base of an asset being different to its carrying value on the balance sheet (these differences are called temporary differences) and a provision for deferred tax is made. This ‘balance sheet liability’ approach is the general principle on which IAS 12 bases the calculation of deferred tax. The effect of this is that it usually brings the total tax charge (i.e. the provision for the current year’s income tax plus the deferred tax) in proportion to the profit reported to shareholders.

The main area of debate when providing for deferred tax is whether the provision meets the definition of a liability. If the provision is likely to crystallise, then it is a liability, however if it will not crystallise in the foreseeable future, then arguably, it is not a liability and should not be provided for. The IASB takes a prudent approach and IAS 12 does not accept the latter argument.

(ii) IAS 12 requires deferred tax to be calculated using the ‘balance sheet liability method’. This method requires the temporary difference to be calculated and the rate of income tax applied to this difference to give the deferred tax asset or liability. Temporary differences are the differences between the carrying amount of an asset and its tax base.

Carrying value at 30 September 2003 $000 $000

Cost of plant 2,000

Accumulated depreciation at 30 September 2003 (2,000 – 400)/8 years for 3 years (600) ––––––

Carrying value 1,400

––––––

Tax base at 30 September 2003

Initial tax base (original cost) 2,000

Tax depreciation

Year to 30 September 2001 (2,000 x 40%) 800

Year to 30 September 2002 (1,200 x 20%) 240

Year to 30 September 2003 (960 x 20%) 192 1,232

–––– ––––––

Tax base 30 September 2003 768

––––––

Temporary differences at 30 September 2003 (1,400 – 768) 632

Deferred tax liability at 30 September 2003 (632 x 25% tax rate) 158 Income statement credit – year to 30 September 2003 ((200 – 192) x 25%) 2

22

(b) $

Income statement extracts year to 30 September 2003

Depreciation of leased asset (w (i)) 10,400

Lease interest expense (w (ii)) 2,672

Balance sheet extracts as at 30 September 2003

Leased asset at cost 52,000

Accumulated depreciation (7,800 + 10,400 (w (i))) 18,200 –––––––

Net book value 33,800

–––––––

Current liabilities

Accrued lease interest (w (ii)) 1,872

Obligations under finance leases (w (ii)) 9,504

Non-current liabilities

Obligations under finance leases (w (ii)) 21,696

Workings

(i) Depreciation for the year ended 30 September 2002 would be $7,800 ($52,000 x 20% x 9/12) Depreciation for the year ended 30 September 2003 would be $10,400 ($52,000 x 20%) (ii) The lease obligations are calculated as follows:

Cash price/fair value 52,000

Rental 1 January 2002 (12,000)

––––––––

40,000 Interest to 30 September 2002 (40,000 x 8% x 9/12) 2,400

Interest to 1 January 2003 (40,000 x 8% x 3/12) 800

–––––––

43,200

Rental 1 January 2003 (12,000)

–––––––

Capital outstanding 1 January 2003 31,200

Interest to 30 September 2003 (31,200 x 8% x 9/12) 1,872

Interest to 1 January 2004 (31,200 x 8% x 3/12) 624

–––––––

33,696

Interest expense for the year to 30 September 2003 is $2,672 (800 + 1,872 from above), of which $1,872 is a current liability. The total capital amount outstanding at 30 September 2003 is $31,200 (the same as at 1 January 2003 as no further payments have been made). This must be split between current and non-current liabilities. Next year’s payment will be $12,000 of which $2,496 (1,872 + 624) is interest. Therefore capital repaid in the next year will be $9,504 (12,000 – 2,496). This leaves capital of $21,696 (31,200 – 9,504) as a non-current liability.

(c) (i) Most events occurring after the balance sheet date should be properly reflected in the following year’s financial statements. There are two circumstances where events occurring after the balance sheet date are relevant to the current year’s financial statements. The first category, known as adjusting events, provides additional evidence of conditions that existed at the balance sheet date. This usually means they help to determine the value of an item that may have been uncertain at the year-end. Common examples of this are post balance sheet receipts from accounts receivable and sales of inventory. These receipts help to confirm the bad debt and inventory write down provisions.

The second category is non-adjusting events. As the name suggests these do not affect the amounts contained in the financial statements, but are considered of such importance that unless they are disclosed, users of financial statements would not be properly able to assess the financial position of the company. Common examples of these would be the loss of a major asset (say due to a fire) after the balance sheet date or the sale of an investment (often a subsidiary) after the balance sheet date.

(ii) Inventory

Sales of goods after the balance sheet date are normally a reflection of circumstances that existed prior to the year end.

They are usually interpreted as a confirmation of the value of inventory as it existed at the year end, and are thus adjusting events. In this case the sale of the goods after the year-end confirmed that the value of the inventory was correctly stated as it was sold at a profit. Goods remaining unsold at the date the new legislation was enacted are worthless. Whilst this may imply that they should be written off in preparing the financial statements to 30 September 2003, this is not the case. What it is important to realise is that the event that caused the inventory to become worthless did not exist at the year end and its consequent losses should be reflected in the following accounting period. Thus there should be no adjustment to the value of inventory in the draft financial statements, but given that it is material, it should be disclosed as a non-adjusting event.

Construction contract

On first appearance this new legislation appears similar to the previous example, but there is a major difference. Profits on an uncompleted long term construction contract are based on assessment of the overall eventual profit that the contract is expected to make. This new legislation will mean the overall profit is $500,000 less than originally thought.

This information must be taken into account when calculating the profit at 30 September 2003. This is an adjusting event.

23

25