Gildan
Activewear Inc. is a Canadian company that manufactures and sells activewear,
socks, and underwear. Manufacturing is primarily done in Honduras and Dominican
Republic and sales are made worldwide.
Instructions
Through
SEDAR (www.sedar.com) or Gildan’s website (www.gildan.com), obtain a copy of
the company’s financial statements for its year ended October 4, 2009 (2009
year end), and answer the following questions.
(a)
Review the Consolidated Statements of Earnings and Comprehensive Income for 2009
and 2008. What was the income tax expense for each year? Did the company apply
intraperiod tax allocation in 2009 or 2008? Why or why not? How much does the
company show as income taxes payable on the Balance Sheet for the fiscal year
ends 2009 and 2008? What was paid for income taxes in 2009 and 2008, and where
did you find this information? Why are the income taxes payable amounts and
paid amounts significantly different for 2008 and 2009?
(b)
What was the company’s effective tax rate for 2009? For 2008? What was the
statutory rate in each of these years? What caused the differences? Be specific
about whether the effective rate was increased or decreased as a result of each
cause that you identify.
(c)
For each future income tax account reported on the October 4, 2009 balance
sheet, explain what underlies the balance that is reported. For each temporary
difference, identify the balance sheet asset or liability where the tax basis
and book value differ.
(d)
What are the losses that the company has available to carry forward? When do
these losses expire? How has the company accounted for these losses?
(a)
The
amount of the income tax expense (recovery) for 2009 was a recovery of
US$5,786,000 and for 2008 an expense of US$34,400,000. The company did not use intraperiod tax
allocation since it did not have any OCI items or discontinued operations. The amount of income taxes payable for each
fiscal year end was US$11,822,000 for 2009 and US$46,627,000 for 2008. The amount of taxes paid during the 2009 and
2008 years was US$30,419,000 and US$5,867,000, respectively. This information was found in Note 17(a)
which was supplemental note to the company’s cash flow statement.
The
reason for the significant differences between the income taxes payable for 2008
and 2009 relate to the reassessment by CRA that was finalized in December, 2008
(as described in Note 14). As a result
of this assessment, the company paid US$24.6 million in 2009. This reassessment would have been included in
the income taxes payable at 2008.
(b)
The
statutory tax rates and effective tax rates for 2009 and 2008 are
presented below. There are significant
differences between the rates in both years.
The main item that
caused the effective rate to be more
than the statutory rate in 2007 was
|
(US$ in thousands
)
|
2009
%
|
2008
%
|
|
|
|
|
|
Canadian Statutory
rate
|
31.1
|
31.1
|
|
Reduction due to
tax rates in foreign subsidiaries
|
-36.0
|
-28.4
|
|
Income tax
(recovery) charge for prior year’s taxation
|
-6.8
|
14.8
|
|
Effect of
non-deductible expenses and other
|
5.1
|
1.5
|
|
|
|
|
|
Total
|
-6.6
|
19
|
The first large
reduction in both years results from the company having foreign subsidiaries
operating in jurisdictions with substantially lower tax rates than Canada. The large increase in 2008, results from a
tax reassessment. As disclosed in Note
14, the company was reassessed in 2008 by CRA
for fiscal years 2000, 2001, 2002 and 2003.
Under dispute was the company’s transfer pricing and allocation of
income between Canadian operations (paying tax at 31%) and its foreign
subsidiaries (which pay significantly lower tax rates as can be seen by the
reductions above). In 1999, the company
had restructured its international wholesale operations and related assets to
its Barbados subsidiary, which resulted in the transfer pricing (and transfer
of profits from Canada to Barbados) to be questioned by CRA . This reassessment was settled, resulting in a
charge to current income taxes in 2008 of US$ 26.9 million and a reclassification
of future income tax liabilities to income taxes payable. In 2009, the company
was also reassessed for 2004 to 2006 taxation years, but no significant
differences were found.
Finally, there are
small adjustments in the statutory rate to reflect non-deductible expenses and
other.
(c)
A schedule of the future tax balances reported on the 2009 balance sheet along with their causes and
the related asset or liability with different tax and book values is
reported below. Where there is no related asset or
liability, the classification of the tax balance would be based on when the
related temporary difference was expected to reverse.
Amounts in thousands
of US$
|
Underlying item
|
Amount
|
Balance sheet item
|
|
Non capital losses
|
9,261
|
N/A – for loss
carry forwards
|
|
Reserves and
accruals
|
5,094
|
No details given
|
|
Other
|
2,653
|
No details given
|
|
Valuation
allowance
|
(2,579)
|
Reduction of
losses to “more likely than not
|
|
Property, plant,
and equipment, intangibles and other
|
(30,283)
|
PP&E and
intangible accounts
|
|
Total
|
(15,854)
|
|
This balance has
been classified as Assets – non-current US$ 7.91 million and Liabilities –
non-current US$23.764 million. There are
no current future income tax accounts.
(d) Gildan has loss carry forwards
for Canadian taxes of CAD$9.8 million and US taxes of US$20.3 million. These losses expire between 2022 and 2029. The company has recorded some amount as a
benefit: The total loss benefit of
US$9.261 has been reduced by a valuation allowance of US$2.579 million, for a
net benefit of US$6.682 million which has been included in future income tax
assets.
