Overview of Financial Reporting

Financial Reporting comprises disclosure of financial information to the various stakeholders relating to financial performance and financial position of the company over a specified time. Each part of the financial report, i.e. statement of profit and loss, statement of affairs of the company, statement of changes in equity and cash flow statement reveal significant information relating to the organization. The manner in which operations are being continued in the company can be revealed from same. The present report provides an assessment of equity, other comprehensive income, taxation and cash flow of Mayer Holding and Kathmandu Holding. Further, all these specified parts of the financial report of both the companies have been compared in order to provide an appropriate opinion.

Myer Holdings Limited (Myer) is a department store company situated in Australia. Its department store network comprises a trail of about 60 retail locations in Australia. The Myer retail deals with 11 different types of products such as Women’s wear, Menswear, Youth shop, Intimate wears, Cosmetics, perfumes, homewares, electrical appliances, toys, handbags, accessories along with general products. In addition to this, it also owns women wear fashion brand sass & bide, which is an Australian designer brand. The brand of the company comprises TOPSHOP TOPMAN, Seed, French Connection, Mimco, Veronika Mainr, Jack & Jones as well as Industrie. Moreover, its ancillary companies are Myer Pty Ltd, NB Elizabeth Pty, NB Russell Pty Ltd, Warehouse Solutions Pty Ltd, Myer Group Finance Ltd, Myer Group Pty Ltd and Myer Travel Pty Ltd. Apart from this, the company also undertakes activities outside the department store with its ancillaries sass & bide, FSS Retail Pty Ltd.

Kathmandu Holdings Ltd is a public company established in New Zealand dealing with design, marketing and retail sale of clothing as well as clothing and equipment for travel and outdoor use. Approximately1900 employees are employed in the company. It operates in New Zealand, Australia and UK. Further, it is administrated by its head office in Christchurch which is located in New Zealand. Currently, the company is functioning 163 stores including 47 in New Zealand, 115 in Australia and 1 in the UK. Apart from this, Kathmandu manufactures its house-branded items, along with its product variety comprising apparel such as waterproof jackets, down jackets, thermals, fleece jackets, shirts and pants, merino clothing and thermals as well as footwear, socks etc.

Myer Holdings Ltd

Kathmandu Holdings Ltd

Table 1: Equity assessment of Myer Ltd and Kathmandu Ltd

Equity Assessment of Myer and Kathmandu Holdings

Equity balance of an organization comprises issued capital, retained earnings, amount transferred to reserves. It can be referred to as ownership interest, i.e. funds contributed by owners as well as the real value of total stockholders. It can be assessed from the above figures that the company Myer Holdings Ltd has higher equity in comparison to the Kathmandu Holdings Ltd.  The dividend paid by the company was $49276 million in the year 2017and same have affected the retained earnings. From the above evaluation, it can be noticed that the reserves of both the companies are negative. In case of Myer Holdings Ltd the reason behind the same is that when the shareholders were entering in the contract that is at the time of acquirement, the Group held a call opportunity over the non-controlling shareholders. At the time of acquisition of leftover 35% of sass & bide, the cash payment of $33.4 million was accounted against present financial accountability, and non-controlling interest balances were accounted in other reserves. Kathmandu has issued capital of $18000 during the year 2017 (Kathmandu Annual Report, 2017).  Moreover, a decreasing trend in retained earning can be assessed in the case of Kathmandu.

Table 2: Statement representing debt-equity of both the companies

Debt to equity ratio refers to the financial ratio which indicates the relative proportion of shareholder’s equity and debt utilised to finance the assets of the company (Fitri, Supriyanto and Oemar 2016). Further, the debt to equity ratio of Kathmandu Ltd is low which shows that the proportion of debt is less in comparison to debt. The same implies that the company relies more on internal financing and is able to develop sufficient funds. On the other hand, Myer’s debt to equity ratio is higher which indicates that the company is relying more on debt in comparison to equity for financing.   

As per the study of Bauman & Shaw (2016) cash flow from operating activities represents the net cash inflow which is recorded in the primary section of the cash flow. Further, it considers the net inflows as well as outflows of cash relating to operating activities of the company (Cable, Healy, and Sun, 2018). According to Collins, Hribar and Tian (2014), investing activities of cash flow refers to an item of a cash flow statement which reports the aggregate change in the cash position of the company resulting from the gains and losses of the investment. Financing activities of cash flow refer to that category of cash flow statement which accounts external activities that enable a company to raise capital (Lee 2014).  Moreover, with accordance to Gitman, Juchau and Flanagan (2015), it also involves payment of dividend to investors, changing in loans or issuing more inventories.

Debt Equity Ratio of Myer and Kathmandu Holdings

Table 3: Statement representing variants of cash flow statement of Myer Holdings

(Amount in $000)

Table 4: Statement representing variants of cash flow statement of Kathmandu Holdings

(IV)

Table 5: Statement representing a comparative analysis of cash flow statement of Myer Holdings

Table 6: Statement representing a comparative analysis of cash flow statement of Kathmandu Holdings

After considering the cash flow statements of both the companies that Myer Holding is having enhanced cash outflow relating to investment activities as it has purchased property plant and equipment along with intangible asset, business combinations and another asset (Myer Holding Annual Report, 2017). However, more investment has been made by a company in the year 2017 in comparison to previous years. Even an increasing trend in dividend can be accessed from analysis of financing activities of three years.  In case of Kathmandu, Holding investment has been made in Plant property and equity and intangibles only. After analyzing three years, it can be concluded that major of the investment has been made in the year 2016 (Kathmandu Holdings Ltd Annual Report 2017).

(V)

Table 7: Comparative Analysis of Cash Flow of Myer Holding and Kathmandu Holding

(Amount in $000)

It can be evaluated by the comparative analysis of both the companies for that the Myer Holdings Ltd has made a higher investment in comparison to Kathmandu Holding. The same represents that Myer Holding has stronger asset and equity position. Due to the same reason net decrease in cash held is higher for Myer Holding in comparison to Kathmandu Holding. The enhanced operating cash inflow of Myer Holding represent that company is running its operating activities on a wide scale comparatively.

(VI) 

The items which are included by Myer Holdings Ltd in the other comprehensive income statement are cash flow hedges and exchange differences on translation of foreign reserves. Further, the amounts recognized in the profit and loss statement when the related hedged transaction influences profit or loss (Myer Holdings Ltd Annual Report 2017).

(VII)

Other comprehensive income includes profits, expenditures, gains and losses which cannot be part of net income in Profit and Loss statement in accordance with GAAP and IFRS. (Hanlon, Navissi and Soepriyanto 2014). Further, other comprehensive income cannot be accounted as a part of the organization’s net profits and is excluded from the income statement, accounting standards. Alternatively, the numbers are accounted as accumulated other comprehensive income in shareholder’s equity of the balance sheet. With accordance to Nejad, Ahmad and Embong (2018), it is to be considered that in the other comprehensive income the items which are unrealized can only be recognized.

Cash Flow Statement Assessment of Myer and Kathmandu Holdings

Table 8 Elements of Other Comprehensive Income of Myer Holding

Table 9: Elements of Other Comprehensive Income of Kathmandu Holding

There will be no impact on shareholders as the profit attributable to shareholder comprises other comprehensive income.

No, other comprehensive income should not be involved while the assessment is being done by the company regarding the performance of executives. Since variants of specified income are more unstable in comparison to operating income; therefore it is reasonable for executives to consider that more salient reporting of comprehensive income will result in users to consider the performance of the company as more unstable (Black, 2016). Further, according to the Hirshleifer & Teoh model due to this limitation investor will evaluate the performance which will be less prominent. Moreover, as per the study of Khan& Bradbury (2014), due to these cognitive drawbacks, investors will find pertinent less prominent result in comparison to the actual result. The reason behind same is that comprehensive income is more unstable than operating income, Even Hirshleifer and Teoh model signifies that if the comprehensive income is reported in performance statement of a manager than it will lead to users recognizing that the performance of the company is unstable. Hence, it will be accurate for the company not to involve other comprehensive income while assessing the performance of executives.

Table 10: Statement presenting income tax expense of Myer Holding and Kathmandu Holding

 Effective tax rate = Current Income tax Expense/ Earnings before tax

(Amount in $000)

Myer Holdings Ltd = 23925/30213

= 0.79

Kathmandu Holdings Ltd = 16829/54974

= 0.31

After calculating the tax rate of both the companies it can be assessed that the tax rate of Kathmandu Ltd is lower, i.e. 0.31 than the Myer Ltd.

According to Edwards (2017), deferred tax asset can be defined as the asset of a firm’s balance sheet which might be utilised in order to decrease taxable income. Further, it arises when the income tax payable is more than the income tax paid to the government. Deferred tax liability refers to the tax which is due for the current year but has not paid by the company.

Table 11: Statement representing deferred tax asset and deferred tax liabilities

Moreover, with accordance to Morris (2017), deferred tax assets and liabilities are recorded by Myer Ltd for the provisional differences at the rates likely to be applied when the assets are recovered or liabilities are paid out, relying on those tax rates or substantively ratified. Kathmandu has recognised the deferred tax and liabilities by reassessing the expected way of recovery relating to the carrying amount of imprecise life Kathmandu brand and decided to recognise the deferred tax liability.

Comparative Analysis of Cash Flow of Myer and Kathmandu Holdings

In case of Myer Holdings, deferred tax asset in the year 2017 was $43432000, and same have been adjusted against deferred tax liabilities amounting $128006000. The same adjustment has reduced the deferred tax liabilities to $84574000, and it has been presented as deferred tax liability in the liability side of the balance sheet. In case of Kathmandu holdings the balance of deferred tax liability has been changed due to the temporary difference in taxation of following items:

• Property plant and equipment
• Employee benefit accrual
• Kathmandu Brand
• Unrealised foreign exchange on an intercompany loan
• Inventory provisioning
• Realized gain or loss on foreign exchange contract not yet provided in comprehensive income.

The main change has been due to change in accounting treatment of Brand as it was previously recognised as indefinite life brand when acquired in the year 2006. But now the company follows IFRS interpretation relating to recovery of the intangible asset with indefinite life for the purpose of evaluating deferred tax as per IAS 12 Income Taxes. As a result, company has recognized additional goodwill, deferred tax liability and retained earnings by giving the effect of same.

Cash tax expense for

Kathmandu holding for the year 2017:

Book-Tax  $15393000

Deferred Tax Adjustment $80000

Cash Tax  $16935000

Myer Holdings for the year 2017:

Book-Tax $23925000

Deferred Tax Adjustment ($5651000)

Cash Tax  $18274000.

The cash tax amount evaluated as per tax laws reflects the amount the company must pay to satisfy its obligation relating to the government. The formula for cash tax rate is Cash tax paid for the year/ earnings before taxes.

Myer Holdings for the year 2017:

Profit before income tax $30213000

Cash Tax $18274000

Rate 60.05%

Kathmandu holding for the year 2017:

Profit before income tax $54974000

Cash Tax $16935000

Rate 30.80%

Kathmandu holding Ltd has lower cash tax rate as a higher adjustment from deferred tax asset are available and on the contrary same are not available in case of Myer holding Ltd. The same has enhanced the cash tax effective rate.

The cash tax rate is estimated as per the tax laws and replicates the total amount that company have to pay in order to complete its tax duty towards the government. On the other hand, the book tax rate is estimated pursuant to financial accounting rules which are directed by GAAP that is Generally Accepted Accounting Principles, and it is reported on financial reports of the company.  Further, the major difference among the tax laws and GAAP is that whilst cash taxes owed under the tax laws are estimated on the basis of the current year, the tax liabilities which are recorded in the financial reports of a company entails current as well as future year tax liabilities. Thus cash tax rate is different from book tax rate because book tax rate is calculated on tax in accordance with profit earned during the year and cash tax rate is evaluated on the basis of cash tax paid during the year.

Conclusion 

The core elements of an annual report are a statement of affairs, profit and loss statement, statement of changes in equity and cash flow statement. All these statements reveals detail information relating to financial efficiency and other areas such as investment done by the organization, financing and other information. The performance of both the companies has been done with the assistance of their annual reports. It can be concluded from the above study that the equity of Myer Ltd is higher than that of Kathmandu Ltd. Further, the debt to equity ratio of Myer is higher which implies that the company is relying more on internal financing. Moreover, the net decrease in cash flow of Kathmandu Ltd is higher in comparison to Myer Ltd. The reason behind same has enhanced investment in plant, property and equipment, associates, intangibles and another asset. In addition to this above study concludes that the other income should not be included while evaluating the executive’s performance since they are volatile. Subsequently, in case, they are included than same will provide inappropriate information to the user of manager performance report as it will provide the result of the basis of volatile information.

References

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Black, D. E. (2016). Other comprehensive income: a review and directions for future research. Accounting & Finance, 56(1), 9-45.

Cable, R.J., Healy, P.& Sun, N., (2018). The Changes in Cash Flows from Operating Activities and Related Debt and Interest Coverage Ratios of Fortune 200 Companies–An Analysis of FASB’s Proposed Accounting Standards Update. International Research Journal of Applied Finance, 9(5), pp.232-240.

Collins, D.W., Hribar, P. & Tian, X.S., (2014). Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), pp.173-200.

Edwards, A. (2017). The deferred tax asset valuation allowance and firm creditworthiness. The Journal of the American Taxation Association, 40(1), 57-80.

Fitri, M.C., Supriyanto, A. & Oemar, A., (2016). Analysis of debt to equity ratio, firm size, inventory turnover, cash turnover, working capital turnover and current ratio to profitability company (study on mining companies listed in bei period 2010-2013). Journal Of Accounting, 2(2).

Gitman, L.J., Juchau, R. & Flanagan, J., (2015). Principles of managerial finance. Pearson Higher Education AU.

Hanlon, D., Navissi, F., & Soepriyanto, G. (2014). The value relevance of deferred tax attributed to asset revaluations. Journal of Contemporary Accounting & Economics, 10(2), 87-99.

Kathmandu Holdings Ltd Annual Report 2015. (2015).  [PDF]. Available through < https://www.annualreports.com/HostedData/AnnualReportArchive/K/ASX_KMD_2015.pdf>.[Accessed on 22 September 2018]

Kathmandu Holdings Ltd Annual Report 2017. 2017. [PDF]. Available through < https://www.kathmanduholdings.com/wp-content/uploads/2012/08/Kathmandu-Annual-Report-2017_online.pdf>.[Accessed on 22 September 2018]

Khan, S., & Bradbury, M. E. (2014). Volatility and risk relevance of comprehensive income. Journal of Contemporary Accounting & Economics, 10(1), 76-85.

Lee, T. A. (2014). Cash Flow Reporting (RLE Accounting): A Recent History of an Accounting Practice. Routledge.

Morris, J. L. (2017). Classification of Deferred Tax Assets and Deferred Tax Liabilities: An Evaluation of FASB’s Attempt at Standards Simplification. Journal of Accounting & Finance (2158-3625), 17(8).

Myer Holdings Ltd Annual Report 2016. (2016). [PDF]. Available through < nvestor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2016.pdf>. [Accessed on 22 September 2018]

Myer Holdings Ltd Annual Report 2017. (2017). [PDF]. Available through < https://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2017.pdf>. [Accessed on 22 September 2018]

Nejad, M. Y., Ahmad, A., & Embong, Z. (2018). Value Relevance Of Other Comprehensive Income. Asian Journal of Accounting and Governance, 8, 133-144.