(a) Building upon your work on this note in Assignment #1, examine the note closely. Identify and explain what important tax-related information about BP is available in the note and elsewhere in the audited financial statements and BP’s Business Review. (10 marks)
Every stakeholder would always want to know how a company’s income is affected by prevailing tax rate. For BP plc, the management is careful enough to present the most important tax related information. One of the tax information released in company’s annual report is reconciliation of the effective tax rate. The company releases this information to allow the public to know about the difference existing between the tax rate of the statutory federal income and the effective income tax rate. The note gives a useful information on the important aspects involved when the company involves in reconciliation of the effective tax rate. First, the note implicates the impairment losses are not in any way associated to decrease or increase in effective tax rate. The note shows that the statutory corporation tax rate have been constant for the rest of 2014. The note also goes further list the jurisdiction that are highly associated to significantly affecting the effective tax rate. Still on the reconciliation of the effective tax rate, the note also implicates the effect of legislation on cutting down on supplementary charge tax rate.
There is also a section for forecast, showing that the company will be well placed with enough taxable profit to allow them utilize the deferred tax assets. The note lists all the important aspects within the company that are likely to affect deferred tax of the company. This allows the stakeholders to determine assets arising from taxes that have been paid but not yet put into recognition. This section is important for the shareholder since it allows them to monitor the use of deferred tax assets by the company. Among the major aspect listed as components of deferred tax liability are depreciation, pension plan surpluses and other temporary differences in taxable income. Deferred tax assets include tax credits, pension plan, decommissioning and loss carry forward (BP, 125). All these reveal a significant information regarding how the company treats tax in its operations.
The importance of the tax note is also much depicted in how the movement of tax trend appears through the years. The note gives a picture of how the percentage taken by deferred tax on the income statement and balance sheet from 2012 to 2013. This is important for the public image since the potential investors are able to tell on the implication of tax on the company’s financial position. Apart from this, at the bottom of the note there are small writing that define every critical movement of the company’s taxation implication through the year. For instance, in this area, the note includes the country mostly affected by impairments. Still building on this, the information about the impact of impairment also shows how the company’s profit before taxation, tax change and effective tax rate could change with regards to the movement in the market.
Taxation note also gives another information regarding unutilized tax credits and tax losses. This gives information about the non-recognized deferred tax in the company annual report. The additional information indicate that the company recognizes there is fixed expiry date for the entire tax losses evident within the company. This is a provision for categorizing the tax losses.
(b) Compare this note to Potash Corporation’s tax related information and tax in its 2014 audited financial statements. Which is of better quality? Support your answer. (5 marks) Note*: Part (B) can be analyzed based on, however, it is encouraged to add some other differences that are specific towards Potach Corp and BP
Every company strive for transparency as one of the major strategies for enforcing customer’s loyalty. Quality presentation of the impact of taxation on a company financial imposition is of importance, in this case, since it allows the shareholders to have an overview about the company’s future. Consequently, using the case provided for BP and Potash is a good avenue for determining how a company reporting on taxation can have a difference to that presented by other company.
As evident from the two notes, BP’s tax note comes out as of better quality and this can be contributed on the weight of the aspects highlighted in both cases. However, there are some striking similarities between the companies. First the time period for comparison is similar in both cases, with each using reports presented from 2012 to 2014. This is an implication that both of the companies were exploring the trend over the same years, hence they could be compared easily.
Both companies have treated effective tax rate in the same way. The two companies considered the inclusion of the trend taken by effective tax rate over the two years, 2013 and 2014. They both show to the public that the effective tax rate increased from 2013 to 2013. Further, the companies also include the most probable reason for the evident rise in effective tax rate of the years. In this case, the companies are much effective in how they present the information regarding the effective tax rate to the public. While BP indicates that the rise is the result of impairments, Potash indicates that the rise is due to the different income weightings evident between different jurisdictions.
BP seems to be much effective in the way it presents information regarding components of deferred tax assets and liabilities. The note presented contains all these aspects in one place with each component listed and its reported amount also included. This is so much different to the case of Potash whereby the company have failed to put a clear distinction among the different components of the deferred tax liabilities and assets. Potash company implies these on general terms and in no way shall the public be able to distinguish between the different components. The inefficiency of the company in preparing the report is also much evident when the it is quote that “The aggregate amount of temporary differences associated with investments in subsidiaries and equity-accounted investees, for which deferred tax liabilities have
not been recognized, as at December 31, 2014 was $6,431” (POTASH CORP, p. 113) This is an indication that the company does not give much priority in effectively segmenting its tax note.
BP also comes out as much effective because it presents trend taken by deferred tax liability and unused tax losses witnessed over the years. This is much different to the scenario depicted by Potash which does not present any information regarding the trend depicted by the two. In which case, this is ineffectiveness on the part of Potash because the public are unable to realize the implications of deferred taxes on the company’s operations.
Work cited
POTASH CORP. Potash Corp Annual Integrated Report. 2014.
BP. BP Annual Report and Form 20-F. 2014
