Accounting conservatism and managerial risk - Myassignmenthelp.Com

Question: Discuss about the Accounting conservatism and managerial risk. Answer: The items of equity of Ramsay Health Care limited are listed in the consolidated statement of financial position. Constituent of equity of Ramsay comprise of issued capital, treasury shares, convertible adjusted rate equities securities, retained earnings and other reserves. It also involves parent interest and non controlling interest. Issues share capital is the face value of shares and amount of nominal value of shares that is held by shareholders. It is the amount that shareholders invest in the company. Such shares might comprise of equity shares and preference shares. Treasury shares are the shares that the issuing company buys back from shareholders that have the impact of reducing outstanding shares in open market. Convertible adjustable rate equity securities are types of preferred stock where payment of dividend is set a base rate and a benchmark interest rate (Balakrishnan et al., 2016). Reserves are the amount that is created out of profits of company. Revenue reserves and capital reserves are the two types of reserves that a company has. Retained earnings are the cumulative earning earned by corporation that is not intended for distributing to shareholders (Chaibi et al., 2014). Such earnings are reinvested in the business and are not distributed as profits to shareholders. Total value of equity for Ramsay Health Care limited is recorded at $ 2046061 million in year 2016 compared to $ 1837794 in year 2015. This increase in value of equity is mainly because of increase in value of treasury shares, other reserves and retained earnings. Total amount of income tax paid by Ramsay Health Care Limited is depicted in consolidated statement of comprehensive income. The income tax expense for year 2015 is recorded at $ 221216 million and in year 2016, company reduced income tax expense by amount $ 23542 million. Income tax in year 2016 stood at $ 187674 million (ramsayhealth.com, 2018). In the current year that is 2017, income tax expense is recorded at $ 198669 million. Therefore, income tax expense reduced initially and increased thereafter. Income tax rate that is applicable to Ramsay Health Care Limited is the rate of corporate tax is 30%. Accounting income of company for year 2016 is reported at $ 445298 and for year 2015, amount stood at $ 432073 (ramsayhealth.com, 2018). There was increase in value of accounting income of company. Now, computation of accounting income of firm times the corporate tax rate for both the years is computed at ($ 445298 * 30%) is 311708.6 for 2016 and ($ 432073 * 30%) is $ 302451.1 for year 2015. Computation of above figures is indicative of the fact that the percentage of accounting income to corporate tax has increased. When comparing the above figures with that of tax expenses recorded for particular years, it can be inferred that tax expense for both the years is less than accounting income as income tax percentage. Therefore, figures of income tax expense are considerably different from that of above figures. Factors responsible for causing this difference are that income tax expense has reduced considerably through the years of analysis (ramsayhealth.com, 2018). Deferred tax assets are recorded under the heading noncurrent assets of consolidated statement of financial position. The amount of deferred tax assets for year 2016 is recorded at $ 199726 compared to $ 204977 in year 2015. It indicated that amount of deferred tax reduced in year 2016. On other hand, deferred tax liabilities are recorded under the heading noncurrent liabilities of the statement. Deferred tax liabilities mount for year 2016 is recorded at $ 296130 compared to $ 310204 in year 2015indicating that there was reduction in deferred tax liabilities in year 2016 (ramsayhealth.com, 2018). Recording of deferred income tax is provided for all temporary difference between carrying amount and reporting date between tax base for liabilities and assets for the rationale of financial reporting. Recognition of deferred income tax liabilities is done for temporary differences that are taxable (Agrawal Cooper, 2017). Deferred income liabilities identification is done for deductible t emporary differences, tax losses that are not used and carry forwarding of tax assets that are not used. The amount of income tax payable recorded by Ramsay Health Care limited in its annual report is reported at $ 49560 for year 2016 compared to $ 42021 for year 2015. Higher figure indicates that total amount of income tax payable has increased in year 2016. On other hand, income tax expense was recorded at $ 197674 for year 2016 and $ 221216 for year 2015 respectively. Comparing these mentioned figures, it is depicted that income tax expenses for both the period is significantly higher than income tax that are payable. Expense related to income taxexceeds income tax payable by amount $ 148114 in year 2016 and $ 179195 respectively (ramsayhealth.com, 2018). This difference in value between income tax payable and income tax expense is attributable to difference in accounting treatment of both the values. The amount that is payable by company by way of income tax is based on net profit reported by company. However, this does not form the sole basis of devising the total amount of tax that is to be paid by company. There can be alterations in the total amount of net profit or accounting profits reported by company resulting from various adjustments as per the taxation law that the government imposes (Warren Jones, 2018). Such adjustments can lead to differences in timing between the accounting profits or profit recognition and tax reporting for the purpose of accounting. As a consequence o this, there would be differences in total amount of income tax payable and income tax expenses reported in the income statement of company. Expenses related to income tax of Ramsay Health Care limited is recorded in the income statement while the total amount of income tax paid is recorded in the consolidated statement of comprehensive income. The allocation of income tax expense is done on the basis of tax sharing arrangement on a tailored standalone basis that is according to the principles of income tax of AASB 112. Recognition of tax allocation is done considering decrease or increase in intercompany accounts of subsidiary with the tax consolidated group head company. Expense related to income tax for year 2016 is recorded at $ 197674 while the total amount of income tax paid is $ 13505 million. On other hand, income tax expense for year 2015 is recorded at $ 221216 and amount of income tax is received of amount $ 1041 million. At differences analysis of figures is indicative of the fact that there is significant difference between amount of income tax paid and income tax expenses. Hence, income tax paid is less than total amount of income tax paid in both the years (Lee, 2014). Income tax is the amount of income tax liability of organization and it is calculated using the effective income tax rate. On other hand, accounting profit reported by company forms the basis of calculation of income tax expense. Amount of income tax paid required calculation of taxation determined by taxation rules and income tax expenses is imbibed in determination of net loss and net profit for any particular period. Therefore, income tax expense is calculated using net accounting profit and the concept of financial accounting is involved in total amount of income tax paid. Moreover, general accounting principle and practices is also involved in calculations that lead to differences. Classification of taxable and accounting income is done in form of permanent and timing differences. Timing differences arises because of difference in period in which some items of revenue and expenses are recorded (Warren Jones, 2018). This is because period in which recording of such items in taxa ble income does not coincide with period in which recording of such items are done for arriving at accounting income. This explanation demonstrates the reasons for difference between income tax expense and income tax paid. Analysis of annual report of Ramsay Health Care limited depicts that treatment of tax in the financial statement has been done by proper segmentation. Detailed explanation has been provided in the financial statements notes as there each and every particulars and component of taxation has been discussed. Explanation of difference income tax expense and income tax payable has been explained in the context of temporary and permanent differences. Components of income tax expenses have been shown in separate section. Annual report has also demonstrated numerical reconciliation between calculation of tax expense as per income tax rate and aggregate tax expense that is recognized in the income statement. Moreover, recognition of tax liabilities and tax assets has been done disclosing figures of respective components of tax assets and tax liabilities. Detailed explanation of tax effect accounting has been done in the annual report. Measurement and recognition of income tax and the accountin g treatment of taxation has been discussed in the notes to financial statement. Therefore, analysis of annual report depicts that understanding of treatment of taxation was interesting and information has been gained about accounting for income tax. References list: Agrawal, A., Cooper, T. (2017). 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