Analysis Of National Australia Bank Limited’s Financial Statements

Questions:

Accounting is the basis of any concern that’s running an economic activity. Accounting involves presenting information to all the stakeholders of the business concern in a manner that enables them to make decisions full of worth to them. Entities present business financials to the public through the annual reports. These reports contain all the statements that are required to be presented to public. Out of all those statements analysis is made. The report under consideration uses the example of a prestigious bank of Australia and New Zealand named, National Australia Bank Limited. The organisation is in existence for over 160 years now and their aim is to be good with money. In their surrounding communities, they have funded some of their most important infrastructure like schools, hospitals and roads ((National Australian Bank, 2017).

The cash flow statement of an entity is prepared to enable the public to have an overview of the cash transactions that entity is doing. Cash transactions involve all those activities that lead to spending and receiving of cash by the National Australia Bank Limited. The cash flow statement is prepared on cash basis and not on accrual basis. It means that all the transactions that involve cash are high pointed, irrespective of their year of accrual.

The National Australia Bank Limited has shown a lot of diversity in the cash patterns over the financial year 2017 and financial year 2016. In financial year 2017, the dividend payment by the National Australia Bank Limited had been AUD 4750 million as compared to AUD 4593 million only in financial year 2016. The cash used and generated by the National Australia Bank Limited has been lower in financial year 2017. The net increase in cash and cash equivalents is just AUD 12573 million in 2017, while it was AUD 13,986 in 2016. There are several other transactions also like interest received, dividend received, proceeds from issue of bonds, proceeds from debt issues etc which all have faced a downfall in financial year 2017 leading to the lower increase in cash and cash equivalents. Other reason for same is high amounts of debts repaid (Dolan, et al. 2018).

AUD IN MILLION	2016-17 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2015-16	2014-15
Net cash provided or used by operating activities	13,217	14,460	(13,090)
Net cash provided or used in investing activities	(313)	(9,970)	(1,830)
Net cash provided or used in financing activities	(331)	9496	1,326

The above table shows the results of cash transactions involved under operating, investing and financing activities. As evident, the operating activities have shown a steep rise in financial year 2016 over the year 2015 (Dolan, et al. 2018).  Earlier there was cash used by the operating activities, but starting from financial year 2016, operating activities started providing cash. The reason involves the change in operating liabilities and assets arising out of cash flow movements, e.g. payment to creditors, receipt from debtors etc. However, in financial year 2017, the cash flow from operating activities didn’t improve much.

Regarding the cash used in investing activities, details are not disclosed in the cash flow statement of the concern. For the cash used and provided by financing activities, financial year 2017 shows a decline.  The main reason being, repayment of debts and bonds and no fresh issue of debts into market (Edwards, 2017).

1. From your firm’s financial statement, list each item of reported in the CASH FLOWS STATEMENT and write your understanding of each item. Discuss any changes in each item of CASH FLOWS STATEMENT for your firm over the past year articulating the reasons for the change.

The items that are reported in the other comprehensive income statement are reported briefly below:

AUD in million	2016-2017	2015-16	2014-15
Profit/(Loss) for the period from continuing operations	6181	6425	6,806
Other comprehensive income
Items that may be reclassified to profit or loss (net of tax)	(359)	305	35
Items that will not be reclassified to profit or loss (net of tax)	46	(325)	560
Other comprehensive income (net of tax)	(313)	(20)	595
Total comprehensive income from continuing operations	5868	6405	7401
Net loss for the year from discontinued operations	(893)	(6068)	(414)
Other comprehensive income for the year from discontinued operations, net of income tax	–	979	760
Total comprehensive income/(loss) for the period	4975	1316	7747
Total comprehensive income/(loss) attributable to:
Owners of NAB	4972	1311	7525
Non-controlling interests	3	5	222
Total comprehensive income from continuing operations attributable to:
Owners of NAB	4,969	410
Non-controlling interests	–	–
TOTAL

The statement of other comprehensive income can be torn apart into two major segments. First being the items that cannot be reclassified into profit/loss. This includes fair value changes on financial liabilities designated at fair value attributable to the Group’s own credit risk, Revaluation of land and buildings, Currency adjustments on translation of other contributed equity, revaluation losses or gains on fair value adjustments of equity instruments etc.

The second section is called the items that can be reclassified into profit or loss and it includes losses or gains on cashflow hedging, foreign currency translation reserve, revaluation gains or losses on adjusting debt instruments at fair value. Both the above sections are demonstrated in the statement after adjusting the income tax amount (Farrell, D., Greig, and Hamoudi, 2018).

The total of both the sections is called the other comprehensive income (net of tax). This amount together with the profits comes from the continuing operations of the year form the figure of total comprehensive income of the period from continuing operations. In this figure the loss from the discontinued operations is deducted and any other comprehensive income from discontinued operations is also adjusted. The resultant figure forms the total comprehensive income for the year. This is shown as a sum of share of owners and non-controlling interest (Genser, and Holzmann, 2018).

Australian companies have to follow the guidelines laid by the accounting standards in preparation of its accounts and financial reports. The accounting standards are framed by the Australian Accounting Standard Board (AASB). This board is responsible for framing, developing and updating the accounting standards in accordance with the principles of International Financial Reporting Standards (IFRS). IFRS have set up instructions for presentation of certain items related to profit and loss. These certain items cannot be shown in the statement of profit and loss but are required to be presented in a separate statement of other comprehensive income (Kubick, et al., 2016).

This is because, the IFRS guidelines requires the presentation either in a combined form or presenting two separate statements. The two statements being statement of profit and loss and other comprehensive income statement (National Australian Bank,  2017).

As a result of these guidelines, the items reported separately in the other comprehensive income statement cannot be shown together with other items of statement of profit and loss. This is a mandatory requirement which is being followed by National Australian Bank (Watson, 2018).

Tax refers to the compulsory monetary payment made by a National Australia Bank Limited to the government without any return expectation. Tax is being computed on the taxable income of a National Australia Bank Limited (Hussainey,  Schleicher, and Walker, 2013).

AUD IN MILLION	2016-17	2015-16
Current tax expense	2,480	2,553

AUD IN MILLION	2016-17	2015-16
Profit before income tax expense	8,661	8,978
Prima facie income tax at 30%	2,598	2,693
Add / (deduct): Tax effect of amounts not deductible / (assessable):
Assessable foreign income	7	4
Foreign tax rate differences	(43)	(36)
Foreign branch income not assessable	(78)	(65)
(Over) / under provision in prior years	(17)	(26)
Offshore banking unit income	(62)	(56)
Restatement of deferred tax balances for tax rate changes	1	4
Treasury shares adjustment	–	(14)
Non-deductible hybrid distributions	70	58
Losses not tax effected	11	42
Other	(7)	(51)
Total income tax expense	2480	2553
Effective tax rate (%)	28.6%	28.4%

Every National Australia Bank Limited computes two types of income, one taxable income as per income tax rules and one accounting income as per accounting standards and policies. Income tax rules prevails over accounting standards and policies when tax expense is considered. Taxable income is computed after adjusting the tax effects of temporary differences (as shown in the table).  This taxable income is used as a base for computing the tax expense of National Australia Bank Limited.

2. Provide a comparative analysis of your company’s three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years

Due to the difference in taxable and accounting income, the National Australia Bank Limited’s tax expense is not equal to the effective rate of 30% times the accounting income (Ifada, and Wulandari, 2015).

AUD IN MILLION	2016-17	2015-16
Deferred tax asset	1,988	1,925

Deferred tax asset is generated when a firm pays tax on its taxable income which amounts to an amount larger than the tax paid on accounting income. The difference in both the tax amounts is the figure of deferred tax asset. But, when the tax paid by a firm on its taxable income is more than the tax on its accounting income, this deficit generated deferred tax liability. In both the financial years the firm has generated deferred tax asset (Mullinova, and Simonyants, 2016).

The current income tax expense is the amount of tax the National Australia Bank Limited bears and generates as a result of the activities relating to current financial year itself. The amount of tax relating to the accruals of previous financial years are eliminated. Whereas, the income tax payable is the total figure of tax calculated by a National Australia Bank Limited, irrespective of the year of the reason of tax generating transaction (Phillips, Pincus, and Rego, 2013).

AUD IN MILLION	2016-17	2015-16
Income tax expense recorded in books	2480	2,553
Income tax paid	2544	3148

Income tax paid is a figure taken from the cash flow statement of an entity, it refers to the amount of tax paid to the authorities, irrespective of the year of the accrual. However, the current tax expense is the amount of tax relating and accruing just in the current financial year. As both the amounts vary in the year of accrual, they vary in their value (National Australian Bank, 2017).

The most interesting thing about National Australia Bank Limited’s financials is the presence of clear cut details and information with regards to each statement. There is no confusion or difficulty as the statements are not being repeated with different information.

The only confusing this is different amount of cash flow transactions shown for financial year 2016 in the financial reports of year 2017 and 2016. The difference has arisen due to the different figure of operating transaction differences under the head operating activities (Wang, Butterfield, and Campbell, 2016)

Conclusion

After analysing the annual report of company, it could be inferred that company has established proper compliance program for preparing its financial statement. National Australia Bank Limited has established harmonization in its domestic and international business functioning. National Australian Bank has recorded deferred tax asset that is generated when a firm pays tax on its taxable income which amounts to an amount larger than the tax paid on accounting income.

References

Dolan, C., Blanchet, J., Iyengar, G. and Lall, U., 2018. A model robust real options valuation methodology incorporating climate risk. Resources Policy.

Edwards, A., 2017. The deferred tax asset valuation allowance and firm creditworthiness. Journal of the American Taxation Association.

Farrell, D., Greig, F. and Hamoudi, A., 2018. Deferred Care: How Tax Refunds Enable Healthcare Spending.

Genser, B. and Holzmann, R., 2018. A Viable International Tax-Order for Cross-Border Pensions (No. 2018-02). Department of Economics, University of Konstanz.

Hussainey, K., Schleicher, T. and Walker, M., 2003. Undertaking large-scale disclosure studies when AIMR-FAF ratings are not available: the case of prices leading earnings. Accounting and Business Research, 33(4), pp.275-294.

Ifada, L.M. and Wulandari, N., 2015. THE EFFECT OF DEFERRED TAX AND TAX PLANNING TOWARD EARNINGS MANAGEMENT PRACTICE: AN EMPIRICAL STUDY ON NON MANUFACTURING COMPANIES LISTED IN INDONESIA STOCK EXCHANGE IN THE PERIOD OF 2008-2012. International Journal of Organizational Innovation (Online), 8(1), p.155.

Kubick, T.R., Lynch, D.P., Mayberry, M.A. and Omer, T.C., 2016. The effects of regulatory scrutiny on tax avoidance: An examination of SEC comment letters. The Accounting Review, 91(6), pp.1751-1780.

Mullinova, S. and Simonyants, N., 2016. Reflection of a deferred tax liability in the credit union reporting according to IFRS (IAS) 12″ Income taxes”. Modern European Researches, (1), pp.83-88.

National Australian Bank  2017., Annual report., [Online]., Available from https://www.nab.com.au/about-us/shareholder-centre/financial-disclosuresandreporting/annual-reports-and-presentations., [Accessed 14th May, 2018].

Phillips, J., Pincus, M. and Rego, S.O., 2013. Earnings management: New evidence based on deferred tax expense. The Accounting Review, 78(2), pp.491-521.

Pulker, C.E., Scott, J.A. and Pollard, C.M., 2018. Ultra-processed family foods in Australia: nutrition claims, health claims and marketing techniques. Public health nutrition, 21(1), pp.38-48.

Wang, Y., Butterfield, S. and Campbell, M., 2016. Deferred tax items as earnings management indicators. International Management Review, 12(2), p.37.

Watson, L., 2018. The Deferred Tax Asset Valuation Allowance and Firm Creditworthiness. The Journal of the American Taxation Association, 40(1), pp.81-85.