07.12.2020 in Exploratory
Income Tax

Executive summary

The report is analysing notes of Woolworth Group related to income tax disclosures as required by AASB 112 and Australian Framework. On overall, the analysis reveals that the group provides very comprehensive disclosures on income taxes both current and deferred. Besides, the notes on income tax incorporate detailed description of relevant accounting policy used by the corporation. Also, the report reviews whether the companys notes on income tax fully satisfy general objective and qualitative characteristics of financial information. For better understanding of importance of this analysis, a brief discussion of the Framework and qualitative characteristics is provided at the beginning of the report along with a short presentation on the company analysed.

Introduction and purpose of the report

Woolworth Group is one of the largest corporations traded in ASX 200. Being originated in 1924, today it is a leading retail stores network in the Australian market place possessing over three thousand stores that serve around 29 million customers a week. In the financial year 2016 the corporation generated over h$ 58 billion in sales revenues from continuing operations that include such segments as Australian food and petrol, New Zealand food, Endeavour drinks group, BIGW, and hotels. Still, the company suffered notable losses from discontinued operations that negatively impacted its share price. Woolworth Group is traded as WOW and its share price declined from the highest $ 37.53 on May 30, 2014 to $24.31 as of today. This report provides analysis of the corporations annual report in part of income tax disclosures. The latest report published by Woolworths Group covers financial year ended June 26, 2016 and comparative information for the financial year ended June 28, 2015.

General purpose and qualitative characteristics of financial information

Financial reports published by a company needs to be useful for the users. This requirement is stated in a very detailed way in the first chapter of Australian Framework. In particular, the Framework requires that the financial data revealed by a firm would be useful for its investors and creditors. Respectively, the financial information should assist in making decisions on whether increase, hold or decrease investment in equity and bonds of a company as well as to whether provide a company with loans and supplies on account. The information published also expected to be useful in deciding on the required rate of return on equity investments, projecting dividends expectations and capital gains, and evaluating the appropriate principal amount to be credited and the related interest rate.

It is believed that financial reports ensure achievement of the general objective if they comply with the fundamental and enhancing qualitative characteristics discussed in chapter three of the framework. These characteristics include relevance and faithful presentation as fundamental features and comparability, timeliness, verifiability and understandability as enhancing ones. Basically, following the relevance principle a company needs to disclose only those data that can alter the business decisions based on the published financial reports. At the same time, the organization should be very accurate in generalizing, aggregating or omitting some information especially based on the quantitative materiality criterion. The Framework explicitly states that all material information is relevant for the financial reports and in deciding on materiality the management should not only use quantitative tools but rather assess the importance of information qualitatively. Also, financial reports are assumed to be presented faithfully if they are neutral, complete and accurate. Enhancing principle of comparability requires presenting comparable information for the previous year that is composed based on the consistent accounting rules and standards as well as management judgments. Also, financial information needs to be presented timely that means as soon as possible for the investors and creditors. This principle along with the concept of cost constraint allows companies to provide information in aggregated manner when possible and use estimations and judgments in order to shorten the time and cost of preparing absolutely accurate financial data. Finally, one can have a chance to verify information on her own (for instance, tax rates used to calculate income tax expense) or by relying on the supporting audit opinion and to understand the presented data and reports.

Analysis of Woolworths Group disclosures on income taxes and AASB 112

Woolworths Group provides a very comprehensive disclosure on income tax expenses and deferred tax assets and liabilities in note 14 to the annual report for the financial year 2016. Part A of the note provides detailed decomposition of the companys current tax expense and adjustments in relation of the previous year. Also, it contains information on the tax expense related to the continuing and discontinued operations in compliance with clause 81h of AASB 112. Further, part B of the note contains full reconciliation of the accounting profit and income tax base as required by clause 81c. At the same time, there is no calculation of the effective tax rate of the corporation. In particular, the reconciliation contains information of dividend income exempt from taxation, non-deductible expenses, expiration amounts of the deferred tax assets, and impact of differences in the tax rates in offshore markets. Part C leads the users to detailed representation of income tax (both current and deferred) related to the other comprehensive income of Woolworths Group. This part is fully in compliance with the requirement of clause 81ab of the standard. Further, the note provides deferred tax balances on both assets and liabilities for the years 2016 and 2015 in part D. The note discloses opening balance, changes in the balance credited to profit and loss or other comprehensive income, deferred tax accrued in respect of acquisitions and assets held for sale, and closing balance pre each component of assets and liabilities impacting the deferred tax amounts. At the same time, the disclosure does not provide supporting evidence for recognition of the deferred tax assets even though the company has realized net loss after recording losses from discontinued operations in 2016 and presenting such evidence with required by clause 82b of AASB 112. Besides, no expiration dates or expected realization terms are mentioned for recognized deferred tax assets of the company.

Analysis of Woolworths Group disclosures on income tax and qualitative characteristics

For the most part, note 14 on income tax of Woolworths Group provides achievement of fundamental and enhancing qualitative characteristics of financial information. All the information provided on income tax expense and deferred tax assets and liabilities is relevant for the decision making purposes. However, the relevance aspect could be improved by adding the calculation of effective tax rate to the disclosure. Faithful presentation is fully covered by complete information provided in the note. Additionally, the companys financial statements and notes to them (including that on income taxes) were approved by unqualified opinion of Deloitte Touche Tohmatsu that is the groups independent auditor. Consequently, one can rely on the presented data as it is accurate and neutral providing faithful presentation quality. Further, one can consider the financial data contained in the note and report as a whole timely as it was made public in September 2016, one two months after the financial year end of the corporation. Comparability of the financial information is assured by disclosed accounting policies, changes in the standards applied by the group and management judgments made to compile the data while presenting both information on income taxes for the financial years 2016 and 2015. Additionally, understandability of the financial information on income taxes further enhanced by the company by providing quantitative data and disclosures on the applied accounting policies in one note to the financial statements.

Satisfying to the general purpo se of financial information

Financial information contained in the note 14 on income taxes of the Woolworths annual report is very useful in attaining the general objective of financial data published by the company. In particular, investors and creditor can assess impact of dividend income exempt from taxation, effect of offshore business on income tax expense, tax benefits of the losses from discontinued operations, and value of future tax deductions from the deferred tax assets expected to be utilized by Woolworth Group. Thus, an informed decision on investing in the company or providing it with a debt financing can effectively utilize the note on income taxes and provided disclosures in the companys annual report.

Conclusions and recommendations

To sum up, the company provides comprehensive and very useful disclosures on income taxes including the amounts of income tax expense, tax effects of other comprehensive income, losses from discontinued operations and dividend payments, and deferred tax assets and liabilities. Besides, one can deeply analyse reliability and decomposition of the current tax expense by reconciliation schedule provided to convert accounting profits reported by the group into taxable profit. Still, the company could slightly improve usefulness of the note on income taxes by adding a calculation of the effective tax rate and disclosing information on the supporting evidence to accrued deferred tax assets while net loss for the year 2016 was realized due to discontinued operations.

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