Financial Reporting
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(30, 09, 2013)
Deferred tax asset is an asset reported on the Statement of Financial Position of a company that will be used in paying taxes for subsequent accounting periods. From financial point of view, deferred tax assets actually reduce the income tax expense for the upcoming periods. On the contrary, the deferred tax liability is an account on the balance sheet which appears because of the temporary differences arises as a result of difference between the profit calculated for accounting purposes and profit computation for the purpose of taxation. In the year end 2012, Apple reported deferred tax assets of $ 4.0 billion which is due to deductible interim differences, tax losses and credits. The company also reported a deferred tax liability of $ 14.9 billion in its annual report for the year ended September 30, 2012 (apple.com, 2013).
The company’s financial experts believe that it may be a product of certain tax planning strategies plus the potential refunds because of existing temporary differences. The company will keep evaluating the recognition of deferred tax assets in quarterly reports by assessing the need for and amount of a valuation allowance. The permanent differences arise because when an expense charged in the expense and revenue summary is not allowed for taxation purposes. The difference arises will not reverse in the succeeding periods and must only be accounted for in the computation of taxation. The reason for the occurrence of temporary difference is because of an expense that is allowed for accounting and tax purposes, but there is a difference in the timing of the allowance. Apple’s accrued income tax have been reduced by the tax benefits from employee benefit plan particularly share options or stock plan awards. The benefit resulted from the difference between the fair market value of the stock at the time of issue and price at the time while exercising the option. Apple has had net tax benefits from financial instruments particularly equity instruments $1.4 billion in 2012 and $1.1 billion in 2011 which were reflected as increases to common stock. The amount of deferred tax assets and tax liabilities represents tax credits, losses, and the potential tax effects on temporary differences between the consolidated financial statements of the entity. The opening carrying value for the tax benefits is $ 1375 million and the carrying value at end of the reporting period is $ 2062 million. Temporary differences are also known as timing differences between book income against versus taxable income reason being the items of revenue or expense that are recognized in one period for taxes, but in a different period for the books. Book recognition can come before or after tax recognition which must be in accordance with the recognition principles of the prevailing international accounting standard which is IAS 12 income tax in this case. The American reporting standards are slightly difference but the convergence project in underway to bring uniformity in financial reporting across the globe (Watkins, 2009).
When an employee offers services to a company during an accounting year, the company is obliged by IAS 19 to recognize the contribution payable to a defined contribution plan against the offered service. It is a simple scheme to deal with because in a defined contribution plan, the employee paid cash into the scheme from its own income and get the return when the service tenure expires due to legitimate reasons. On the contrary, in a defined benefit plan a separate fund is established in which the cash is paid by employees or employers on their behalf or both. That fund is kept separate from the entity and invested to yield returns which multiply its value. The amount of fund is reduced when the company’s pay contribution. Any shortfall in the committed amount is paid by the entity at the time of final payment where as in defined contribution plan an entity is not liable to pay from its own funds. The modern day corporations try to benefit their workers especially strategic managers through share based payments. It is advantageous to both, employee and the employer (apple.com, 2013).
The International Accounting Standard Board requires that all share based transaction should be deal in accordance with the principles of IFRS 2. The balance sheets reports that during the year company has a liability of $ 1740 million under share based payments. Apple records expense related to share-based payment transactions on closing fair market value of the Company’s stock on the issue date. The 2003 employee benefit plan allows for equity based settlements to employees and strategic management. The plan also permits the issue of incentive stock options, purchase rights and performance based job perks. Under the 2003 employee benefit plan the incentives usually expires in seven to ten years. According to the annual report for the year end September 30, 2012, 37.1 million shares were reserved for more issuance under the prior periods plan. In the year end, September 30, 2012 almost 184000 shares were reserved for future issuance under the Director Employee Benefit Plan. The company also operates Employee Stock Purchase Plan that offers all employees Apple’s common stock through payroll deductions at a price equivalent to 85% less than the current market value of the stock at the beginning or the end of half year offering periods (Robertson, 2009).
The payroll deductions for employees under the purchase plan are limited to 10 % of the total employee’s compensation and they cannot buy more than $ 25000 of stock during an accounting period. The official figure in the annual report shows that 2.5 million shares were reserved for future plan on the year end 2012. The Company realizes share based payments expense on a straight line basis over the service period. During the last year, Apple did not pay any stock options. However, the company has given 1,370 stock options in the year 2011. During 2012 and 2010, as a result of business combinations, the company assumed 41,000 and 98,000 stock options, respectively, which had a weighted-average fair value per share of $405.39 and $216.82, respectively. The Company did not assume any stock options during 2011. The weighted-average fair value of stock purchase rights per share was $108.44, $71.47 and $45.03 during 2012, 2011 and 2010, respectively (Robertson, 2009).
The company’s Earnings per Share have increased in 2012 to $ 44.64 from $ 28.05 of 2011. The reported diluted earnings per share in the year 2012 are $ 44.15 which was $ 27.68 in 2011. The basic earnings per share are calculated on the basis of 945355 million ordinary share capital in issue while the diluted earnings per share are based on $ 945355 million weighted average share capital. The diluted earnings are always less as compare to basic earnings because a company may have issued various financial instruments during the accounting period that entitles the holder to ordinary shares at a future date (apple.com, 2013).
In the technical terms, these instruments are referred as potential ordinary shares. For instance, Convertible debt or equity instruments, share warrants and options, employee share schemes etc. When these rights are exercised the total number of ordinary shares in issue rises and the earnings per share decreases. This is also called potential dilutive potential effect on earnings per share. During the year in consideration, Apple issued number of financial instruments that have affected the earning and will also influence potential earnings in the coming periods. The company also has some contractual obligations that might also lower their potential EPS. The annual report is not so comprehensively discusses the contractual obligations and off balance sheet arrangements. However, it clearly says that company has financial guarantees, derivative instruments and contingent arrangements that are subject to market risk which may favorably or adversely affect the future performance. The debt or equity instruments may become ordinary shares in the future (Watkins, 2009).
Apple had issued convertible loan stock at the end of year which will affect the financial figures in the following manner. There must be a saving of markup which is a tax deductible expense and so the subsequent tax effects will be forwarded to the adjusted profits. The holder has the choice of dates for conversion which will increase the number of shares and hence the earning per share will fall. To meet its operating expenses the company issued share warrants and options during the period this supplied money into the entity to improve liquidity to maximize earning potential.
The share warrants give the holder right to purchase ordinary shares which would increase the total number of ordinary shares in issue and the earning per share will fall. The point to be noted here is that falling EPS due to increase in weighted average number of shares does not mean that entity has performed badly. The entity might have performed well because the inflow of resources from these potential ordinary shares or financial instruments increases the earning potential of the company. When the right is exercised by the holder it said to have a dilutive effect on the earning per share. Apple has so many financial instruments in issue which are dealt according to the provisions of IAS 32 and IAS 39 and its similar GAAP as allowed by the security and exchange commission of the USA. There are government, treasury, corporate, municipal and others securities mentioned in the financial statements.
The company uses indirect method of cash flow statement presentation. The only difference between the two methods is the operating section. The investing and financing section are quite similar. Under indirect method the operating section starts with the profit from operations or profit before tax plus adjustments for non cash charges. On the contrary, the direct method shows operating cash receipts and payments. This includes cash receipts from customers, cash payments to suppliers. Mostly the large corporations use indirect method because it is easily understood by the users of the financial statements. The indirect method, however, needs so many adjustments such as depreciation, amortization, profit or loss on disposal of fixed assets, change in working capital cycle. Under the direct method the cash flow from operations is calculated from the scratch. Apple presents many non cash items on the statement of cash flows such as depreciation, amortization, bad debts, accrued charges and provisions. The cash flow statement actually shows that how changes in the statement of financial position and income statement effects the cash and its equivalents. The cash flow statement gives an idea to the users of the financial statements about the cash generating ability of an entity (Robertson, 2009).
The company has had various investing activities during the year 2012. The company has received funds from the maturity and sale of marketable securities. The investments in the acquisitions of property, plant and equipment and intangible assets such as good will, brand or trademark will increase company’s earning potential for the coming periods. The investments in securities will also increase interest income for the company in the succeeding periods. The information available about financing activities in the annual report sounds good. The company has issued common stock during the period which is probably due to the obligation under employee benefit scheme or share based compensation. The tax benefits from equity awards and dividends equivalent rights are also covered in the financing activities of the cash flow statements. The company also impaired the amount of intangible assets keeping in view the market value which has declined from the prior periods. However, the company did not record any noticeable impairment for property, plant and equipment during the year. Non cash items or non monetary items actually decrease’s net income and taxes therefore accountants add them back into profits while preparing statement of cash flows (Watkins, 2009).
Apple has mentioned various non cash items in the current cash flow statement. These items are amortization, depreciation, bad debts etc. The cost of depreciation and amortization is $ 3277 million in the year 2012 and $ 1814 million in the year 2011. The depletion of a land value should also be included in the report because in the recent years real estate prices have declined due to low spending power of the people. Usually the industries like oil, mining and gas exploration reports the gradual decrease in the value of the land in their annual reports. The cash flow statement of Apple for the year ended September 30, 2012 also contains other non cash transactions such as acquisition of assets by means of lease and acquisition of an entity by means of equity issue. However some hybrid financial instruments have also been issued by the company during the year. In addition, convertible securities from debt to equity also cover large part of the financial statements which needs further interpretation and explanation.
References
Investor.apple.com (2013). Apple Inc. - Overview. [online] Retrieved from: http://investor.apple.com/ [Accessed: 30 Sep 2013].
Robertson, L. (2009). Financial management. Oxford: CIMA Pub..
Watkins, J. (2009). Financial operations. Oxford, U.K.: CIMA Publishing/Elsevier.
