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Financial Reporting Disclosures in the “Technology One”

Free Business Essays The report provides an overview of the disclosures on income tax in an Australia-based corporation that traded in ASX 200. In order to inform about the importance of financial information, first, the report reviews the general objective and qualitative characteristics of financial data. Further, a detailed analysis of compliance of the notes published by Technology One on income tax and requirements imposed by the relevant Australian standard AASB 112 is provided. Further, the notes of the company are discussed for their compliance with the fundamental and enhancing qualitative characteristics of financial information. The final recommendation on improvement of the corporation’s notes on income tax is based on the evidence: changes in the disclosed data can enhance usefulness of the report for investors and creditors of Technology One.

Purpose of the Business Report

The business report is devoted to acquiring the understanding of the importance of high-quality financial statements for users of financial information and, in particular, to the analysis of disclosures on income tax provided in the notes to the published financial statements. The report evaluates compliance of the income tax disclosure of Technology One as published in its annual report for the financial year 2015 with the requirements of AASB 112, fundamental and enhancing qualitative characteristics listed in the conceptual framework of Australian standards, and general purpose of the financial statements of the organization. The analyzed company is the largest enterprise in Australia dealing with software production and distribution as well as rendering related consulting services to the businesses. The company already works with over 1000 various companies and government authorities providing them with necessary business software and continuous support (Technology One, 2016). It is currently trading in ASX 200 as TNE (Market Index, 2016).

Objective and Qualitative Characteristics of Financial Information

Australian framework defines the general purpose of the financial information as serving to the company’s investors and creditors in making their decisions on financing the organization’s activities through equity holdings or lending provided. This definition is rather similar to that provided by the International Financial Reporting Standards that also focus on the usefulness of financial reporting for lenders, current and potential investors, and other creditors (Mackenzie et al, 2013). Thus, financial statements of an Australian corporation need to provide all necessary information in the general financial reports and disclosures to them that can be useful and important for investors and creditors, both locally and internationally.

At the same time, financial information has to follow the fundamental and enhancing qualitative characteristics included in QC1 – QC39 of the Framework (Australian Accounting Standards Board, 2013). Fundamental features of financial information incorporate relevance (in linkage with materiality) and faithful presentation. Financial information is considered to be relevant when its presence in the published reports can make a difference in the investors’ and creditors’ decisions (Shamrock, 2012). This information is always useful for the users and, respectively, all relevant data should be included and properly disclosed in the statements. At the same time, one needs to apply the materiality criterion for controlling possible omissions and errors in financial information. A company might omit or allow small errors in the reports (that usually occur due to management judgments and human factors of accountants) but they should not have a material impact on the decisions made based on the report (Ormiston & Fraser, 2013). Also, the financial data should be presented faithfully which means “complete, neutral and free from error” depiction (Australian Accounting Standards Board, 2013). There are also four enhancing characteristics of financial information to be useful for decision-makers. They include verifiability, comparability, understandability, and timeliness. Finally, a prudent accountant and management of any organization should not only comply with the fundamental and enhancing qualitative characteristics but also keep in mind the cost constraint (that is the cost of preparation ideal financial data should not be higher than benefits from such accuracy) in order to provide users with actually useful financial reports.

Compliance of Technology One’s Disclosures on Income Taxes with AASB 112

Annual report for the financial year 2015 of Technology One contains three notes related to income tax: note 7 on income tax expense, note 13 on deferred tax assets and note 20 on deferred tax liabilities (see Appendix). The presentation of the disclosures on income statements is regulated by paragraphs 79 – 88 on AASB 112. In general, the company’s notes are in compliance with the requirements for disclosing information regarding income taxes. Namely, the notes contain the following:

  • all the major component required by paragraphs 79 and 80 are disclosed, including current and deferred tax expense (income) and related adjustments;
  • there is separate disclosure of current and deferred taxes, as required by paragraph 81a;
  • there is a reconciliation of tax expense and accounting profit provided in note 7 as required by paragraph 81c;
  • there is a separate amount of deferred tax assets related to the acquisition of a new subsidiary in 2015 as required by paragraph 81j.

Nevertheless, one should mention some instances of incompliance that need to be considered and improved by the company:

  • the notes on income tax do not comprise a disclosure of the amount of income tax accrued for components of other comprehensive income as required by paragraph 81ab, while Technology One had reported other comprehensive income related to the exchange differences on translation of foreign operations;
  • there is no explanation on changes in the income tax rates and any notion on whether the rate has changed in the previous year or is expected to change in the future year (for deferred taxes) as required by paragraph 81d;
  • no expiry dates reported for the recognized temporary differences in the note on deferred tax assets as required by paragraph 81e;
  • no income tax consequences related to the declared and paid dividends to shareholders are presented as required by paragraph 81i while the company has declared total dividends per share in the amount of 8.78 cents in 2015 (Technology One, 2015);
  • there is no reconciliation with the tax rates on the foreign component (in the UK) as required by paragraphs 84 and 85;
  • the notes do not provide the value of the company’s effective tax rate as required by paragraph 86.
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Compliance of Technology One’s Disclosures on Income Tax with Qualitative Characteristics

Notes published by Technology One regarding income taxes fully satisfy fundamental and enhancing qualitative characteristics required by Australian Framework. In particular, the notes are relevant for the decision-making as tax expenses and related disclosures on deferred tax assets and liabilities can assist in projecting net income of the corporation not only for the reported year but also for the future periods. Also, investors and creditors can align expectations on the tax liabilities and payments of the company with the reliability of Technology One as a financing option. Besides, valuing to nearly one-third of the company’s net income and one-sixth of its total balance sheet figure (total assets), income tax expense is material in nature that increases its importance for investors and usefulness of the related disclosures. Analyzed notes are believed to be presented faithfully in the part of completeness, but it is not possible to check the possible errors in presentation and neutrality. Still, full compliance with the principle of the faithful presentation can only be derived from the unqualified audit opinion supporting the presented financial statements and notes (including those on income statements) of the company. Annual report for the financial year 2015 of Technology One (with the related notes on income taxes) was audited by the independent audit firm Ernst & Young. Compliance with comparability enhancing characteristics can easily be proved by the fact that all three notes on income tax contain comparable information on the previous year and there are no significant changes in presentation and amounts disclosed in each line of the notes. Also, presentation of all necessary information on income tax expense, reconciliation of the accounting and taxable profit, deferred tax assets and liabilities are provided in the form of short and clear tables that makes the notes very understandable for users of this financial information. However, this qualitative characteristic of the company’s report could be improved by presenting all three notes in a consecutive order or in one note, so that a user of the financial information would not need to search throughout the whole list of note to obtain information on income tax expense, deferred tax assets, and deferred tax liabilities.

Conclusions and Recommendations

In general, the notes on income tax presented by Technology One in its annual report for the year 2015 are very useful for investors and creditors and, thus, well serve the general objective of financial information as stated by the Australian Framework. Namely, users of financial reports are interested in the provided disclosures of income tax expense related to the current and deferred taxes as well as in the decomposition of the deferred tax assets and liabilities. Nonetheless, some improvements to the notes can be recommended. In order to enhance the usefulness of the disclosed data for investors and creditors, the company needs to present expected expiration or usage dates of each component of the deferred tax asset. Also, a short calculation of the effective tax rate including the impact of a foreign subsidiary would be of high interest for investors of the corporation.

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