Commonwealth and Bank of Queensland are some of the largest banks in Australia. CBA is considered as the Australian multinational financial institution with operations across United States, UK, Asia and New Zealand (ADVFN 2018). The bank offers different form of financial services comprising of the business, institutional and retail banking, superannuation, brokering, investment, funds management and insurance services (CBA 2018). In essence, CBA is one of the largest Australian listed firm on ASX as of the year ended 2015. Established by the year 1911, by the government and then fully privatized by 1996, CBA is amongst the big four financial institutions in the country amongst WBC, ANZ and NAB. Its main headquarter is in Sydney (Commonwealth Bank 2017). On the other hand, BOQ is an Australian oldest financial bank established in 1874 whose headquarter is located in Queensland. BOQ offers quite a number of the financial services across New Zealand and Australia. The bank has employed over 48,556 individuals or staff who are currently operating its over 200 branches (Bank of Queensland 2017). The bank has a number of branches with a rough network of about 252 branches which entails both 78 corporate managed and around 166 owners’ managed. The bank operates under two main segments or divisions; that is, the insurance as well as the banking (MorningStar.com 2018). It insurance division deals with life insurance, customer credit insurance, funeral insurance, motor vehicle gap insurance as well as the accident death insurance. Additionally, its banking division entails personal, treasury, commercial, retail banking, debtor finance, small business loans as well as the transaction and savings accounts (Morningstar 2017). The paper presents some analysis of the two banks based on their financial statements and to be specific based on their owner’s equity statements, cash flow, other comprehensive income statements as well as based on their corporate income tax payment.
OWNERS EQUITY
Based on BOQ statements of the changes in the equity, it is evident that there were a number of items reported. Some of these items included employees benefits reserves, cash flow hedge reserve, ordinary shares, equity reserves for the credit losses, retained profits as well as available-for-sales reserves. Some of the figures included in the ordinary shares included balance at the start of the year of around 3,243 million, issues of the ordinary shares of around 12 million, as well as dividend reinvestment plan of 105 million (Bank of Queensland 2017). Further, figures attributable to employees benefits reserves included balance at the start of the year, as well as equity settled transactions of around -1 million. Cash flow hedge reserves comprised of balance at the start of the year, of about -153 million, net gains moved to equity of 13 million as well as net losses that was transferred to the income statement of 23 million. Equity reserves comprised of balance at the start of the financial year of 81 million. On the other hand, retained income comprised of balance at the start of the financial year of 311 million, profit generated within the year of 352 million, and dividends to the shareholders of -292 million. Finally, Available-for the sales reserves comprised of balance at the beginning of the financial period of around 78 million, net variation in the fair value for the financial assets of 3 million and net gains transferrable to the income statement of -14 million (Reuters.com 2018).
Furthermore, based on the statement, value for the ordinary shares increased over the past two years moving from 3,243 million to 3,360 million in 2017. Nonetheless, employees benefits reserves decreased from 27 million reported in 2016 to 26 million which was reported in 2017. Further, equity reserves for the credit losses remained constant over the past two years at 81 million. Cash flows hedge reserves increased decreased from -153 million to – 117 million while its available-for the sale reserve decreased from 78 million to 67 million. Retained earnings for BOQ on the other hand, increased from 311 million to 371 million by 2017. On overall, BOQ total equity increased from 3,587 million to 3,788 million in the year 2017.
From CBA’s statement of equity, it is evident that there were various items listed in this statement. The first item included ordinary share capital which totalled to 34,971 million by 30th June 2017. The second item was the reverses which totalled to 1,869 million. Third was the retained profit which was totalling to 26,330 million (Commonwealth Bank of Australia 2017). Fourth was the shareholders’ equity that was attributable to the equity holders of this bank which was around 63,170 million and finally was the non-controlling interests totalling to around 546 million. The ordinary share capital comprised of amount of dividend reinvestment plan, issues of the shares on net of the issue costs, the purchase of the treasury shares as well as sale and the vesting of the treasury share. On the other hand, reserves comprises of the total comprehensive income within the year, share-based payments as well as other changes within the year. Retained profits comprised of total comprehensive incomes, the amount of the dividends paid on the ordinary share as well as other changes reported in the period. Shareholders’ equity which was contributed by the equity holders in the bank comprised of total comprehensive incomes, dividends paid on the ordinary shares, dividends reinvestment plan, issues of the shares, share-based payment, the purchases of the treasury share, sales and the vesting of the treasury share as well as other variations reported within the year. Finally, non-controlling interest in CBA included total comprehensive income and other changes.
Reserves for the CBA are found to have decreased from 2,734 million in June 2016 to around 1,869 million in 2017. The decreased is attributable to high net other comprehensive income in 2017 compared to the previous year (Investing.com 2018). Ordinary share capital for this bank for the past two years is found to increase from 33,845 million in June 2016 to 34,971 million by June 2017. The increase is attributable to increased dividend reinvestment plan within the year as well as sale and vesting of the treasury shares. Retained profit for CBA is also found to have increased from 23,435 million in 2016 to about 26,330 million by June 2017. The increase is attributable to increased net profit in 2017. Non-controlling interests decreased from 550 million as at June 2016 to around 546 million in 2017. The decrease is as a result of increase in other changes resulting to a slight decrease in the company non-controlling interests. Shareholders’ equity that is attributable to the equity holders over the past two years increased from 60,014 million as at June 2016 to 63,170 million in 2017 (Commonwealth Bank of Australia 2017). The increase is attributable to increase in the company net profit as well as increased dividend reinvestment plan.
Based on the above highlights, it is evident that BOQ reported total equity of 3,587 million at 2016 3,788 million at September 2017. This marks an increase in the bank’s total equity with around 201 million or 5.6%. On the other hand, CBA total shareholder’s equity as at June 2017 was 63,716 million. This amount was relatively higher compared to BOQ meaning that CBA had high amount of equity to be used in running its operations compared to CBA.
Item recorded in cash flows statements of the two banks
From BOQ cash flow statements there are a number of items that have been listed. These items have been listed based on the three categories; that is, cash from the operations segment, cash used in the investment activities segment and cash from the financing operations segment (Bank of Queensland 2017). The items reported in the cash flow from operations category included interest received which is said to have decreased over the years from 2,156 million in 2016 to 1,990 million in 2017. There were also fees and other income that increased from 130 million to 137 million and dividends received which remained constant at 1 million over the past three years. Interest paid was another items repowered in this section which is said to have decreased from 1,263 million to 1,066 million by 2017. Cash paid also decreased from 502 million in 2016 to 478 million in the year 2017 while income tax paid decreased from 174 million in 2016 to 143 million in 2017 (Reuters. Com 2018). Increase in the operating assets on loans and advances was another items reported in the section which is said to have decreased from 2,259 million to 699 million in 2017 while increase in the operating assets on the other financial assets increased from 395 to 484 million. Finally there was increase in the operating liabilities on deposits which is said to have decreased from 1,925 million in 2016 to 440 million in 2017 (Bank of Queensland 2017).
Items that are reported in the cash from the investment section include acquisition of the BOQF cash flow Finance Ltd costing 14 million, disposal of the vendor finance firm of 19 million, and receipt of the third party repayment of loan of 95 million. Other items are payments for the PPE of 18 million an increase from 16 million from previous year, payments of the intangible assets of 46 million a decrease from 67 million in the previous year.
Items that were reported in the cash from the financing operations section comprised of proceeds from the issues of the ordinary shares of 12 million a decrease from 20 million in the previous year. There is also the proceeds from the borrowing of around 4,090 million an increase from 3,515 million reported in the previous year, repayments of the borrowings of 3,963 million an increase from 2,818 million from the amount reported in the year 2016 (Bank of Queensland 2017). Further, there was a payment for the treasury shares of 12 million which was a decrease from 20 million reported in 2016 and finally dividends paid of 188 million which was an increase from 180 million reported in 2017.
In CBA cash flow statements, there were a number of items listed. To start with, the first items included in CBA cash flow statement are grouped into cash from the operating activities. These items include interest received which is found to have decreased from 34,908 million in 2016 to 33,807 million in 2017. Another item is interest paid that decreased from 18,935 million in 2016 to 17,057 million 2017. There are also other operating incomes that were received within the year. This item is found to have increased over the years moving from 3,674 million in 2016 to 3,959 million by 2017. There are also expenses paid which are said to have increased from 7,961 million in 2016 to 8,152 million in 2017. Another important item recorded in the cash flow from operating activities section is the income taxes paid which is found to have increased from 2,661 million in 2016 to 3,163 million in 2017. There is also the new inflow from the assets at the fair value over the profit/loss statement which is found to have amplified from -3,367 million in 2016 to 2,742 million in 2017 (Commonwealth Bank of Australia 2017). The section also include investment income, premium received, other liabilities at the fair value as well as policy payment and the commission expenses. All the above items yield cash from the operating activities prior to the variations in the operating liabilities and assets. CBA cash flow also entails items recorded in the cash flows from the investing activities section. Some of the items recorded in this section include dividends received which is said to have decreased from 1,462 in 2016 to 1,200 in 2017. There is also the new amount that is received from the controlled entities which increased from 1,307 in 2016 to 5,500 in 2017. Another important item recorded in the net cash from investing activities section is the proceeds from the sales of PPE which is found to have decreased from 122 million in 2016 to 50 million in 2017. There is also the net purchase of the intangible assets which is said to have decreased from 450 million in 2016 to 409 million in 2017 (Investing.com 2018). The third section in CBA cash flow statement is cash from the financing activities. Some of the items recorded in this section include dividends paid which is said to have increased from 5,777 million in 2016 to 6,084 million 2017. There is also redemption of the other equity instruments which is said to have decreased from 1,483 million in 2016 to 406 million in 2017. Another item recorded in the section is proceeds from the issuance of the debt securities that is found to have decreased from 88,920 million in 2016 to 77,938 million in 2017. In this section there is redemption of the issued debt securities that increased 90,149 million in 2016 to 71,345 million in 2017. There is also issue of the loan capital that decreased from 3,943 million in 2016 to 3,379 million in 2017 (Commonwealth Bank of Australia 2017).
Analysis of the Banks Based on the Three Classes of Cash Flows Statement
CBA cash from the operating activities as at June 2017 was -807 million indicating a significant increase from 2015 and 2016. Its net cash from the investing activities was -677 million while net cash from the financing undertakings was 10,472 million indicating a major increase from the past three years (Commonwealth Bank of Australia 2017). On the other hand, BOQ cash outflow from the operations decreased from 875 million in 2015 to 381 million in 2016 and later to 302 million in 2017. Its cash from the investment increased from 56 million to 68 million in 2016 but in 2017, BOQ generating some cash income from its investment of around 49 million. It cash from the financing activities decreased in the last three years from 765 million to 574 million and further to -61 million in 2017.
Based on the cash flow statement analysis of the two companies, it is evident that CBA was doing relatively better in terms of cash flow generations. Besides, from the comparative analysis, CBA is able to generate significantly high amount of cash flow from its operating activities, financing and investing activities compared to its counterpart. In other words, CBA was able to generate positive income from its operations and from its financing activities unlike BOQ instead incurred some negative amount from operations and its financing operations.
Items in the Banks’ Other Comprehensive Income Statements
As per BOQ statement of the comprehensive income, it is evident that a number of items were reported in the financial year 2016/2017. Basically, some of the items reported included cash flow hedges which comprised of net losses transferred to the income statements and net losses to equity. In this case, the bank reported net gains taken to the equity of around 13 million in 2017 while it reported net losses that were transferrable to income statements of around 23 million. the net gains taken to the equity for BOQ increased as from -75 in the year 2016 to 13 million in the year 2017 while its net losses that were transferable to the income statements increased from 12 million to 23 million by 2017 (Morningstar.com 2018). Other items reported in this statement were foreign currency translation variances on the foreign manoeuvres and net variation in the fair value of the financial assets which was available-for sale of around 3 million. Foreign currency translation variations on the foreign operations for BOQ increased from -1 to a positive figure in 2017 (Bank of Queensland 2017). Nonetheless, the net variations in fair value of the financial assets recorded a significant decrease from 24 million in the year 2016 to around 3 million in 2017. Further, there were net gains which were transferable to the income statement for the financial assets which were available-for-sale. The net gains transferable to the income statement for the bank decreased from -10 million in 2016 to -14 million by 2017.
Some of the items recorded in CBA statement of the other comprehensive income include items that might be reclassified afterward in the income statement; that is, the foreign currency translation reserves of the tax, gains or losses on the available-for-sale investments as well as gains or losses on the cash flow hedging instrument (Investing.com 2018). There is also those items that might not be reclassified in the profit/loss statement; that is, losses on the liabilities at the fair value as a result of variations in the own credit risk, actuarial gains from the defined benefits superannuation plans as well as revaluation of the properties (Commonwealth Bank of Australia 2017). The total amount of the items on the other comprehensive income statement that might be reclassified to the income statement for CBA decreased from 277 million in 2016 to -914 million in 2017 while total items which are not classifiable to organization’s profit/loss account increased from 10 million in 2016 to 195 million in 2017.
The reason for failure to report such items
The items are not reported in the profit and loss statements of the two companies since they have not yet been realized (Black 2016).
Comparison of items shown in this section for BOQ and CBA
The items recorded in the other comprehensive income statement of the two companies differ over the years. For instance, gains on available-for sale security for BOQ increased this was contrary to CBA where gains on the available-for-sale security were negative all through. Additionally, gains on cash flow hedging instrument for CBA decreased over the past three years unlike BOQ where its gains on the cash flow hedging instrument increased over the years. In case the items were recorded in the profit and loss account of every firm, profit attributable to the shareholders would decrease for both companies.
Whether other comprehensive income ought to be included in evaluation of managers’ performance
Given that the items included in the other comprehensive income would result in a decrease in the companies’ net profit, the other comprehensive income should be included while assessing performance of the managers of the two companies. This is based on the fact that the other comprehensive income also has a significant impact on the companies’ performance.
Tax expenses for CBA and BOQ
The tax expenses reported in the case of CBA and BOQ include the deferred and current tax. The current tax comprises of the expected tax payables or receivable on taxable income.
Effective tax rate of the two banks
Effective tax rate for the companies was as follows;
Effective tax rate for CBA = 3,960/13,944 *1005 = 28.40
Effective tax for BOQ in 2017 =155/507 * 100% = 30.57%
From these calculations, it is evident that BOQ effective tax rate was relatively higher in comparison to that one of CBA. This is a clear view that BOQ was a bit effective while settling most of its tax obligations in comparison to CBA.
According to Commonwealth Bank of Australia (2017), it is clear that CBA deferred tax assets by financial year 2017 was around 962 million while its deferred tax liabilities was approximately 332 million. On the other hand, according to Bank of Queensland (2017, BOQ deferred tax assets was approximately 55 million by year 2017while it did not report any form of deferred tax liabilities within this year. Deferred tax assets are included in this section since they are usually recognized for the unused tax deductible and losses temporary difference to extent that there is probability that the future taxable revenue would be willingly accessible beside that they could be utilized.
Trend in deferred tax liabilities or assets for CBA and BOQ
CBA reported increased deferred tax assets over the past two year moving from 389 million to approximately 962 million by 2017 (ADVFN 2018). Further, its deferred tax liabilities is reported to have experienced decreasing trend with a downward movement from around 340 to approximately 332 million by the year 2017. On the other hand, BOQ reported decreasing trend in its deferred tax assets moving from around 80 million in 2016 to approximate 55 million by the year 2017. However, since the company did not report deferred tax liabilities within the year, no decrease or increase can be traced for the same.
The Cash tax amount of any organization is computed by adding the difference in increase of deferred tax liabilities and subtracting increase in its deferred tax assets from the book tax value (Noor & Fadzillah 2010). Following the above formula, the two companies cash tax amount for CBA and BOQ would be as follows:
Cash tax amount for CBA = 3,960+ (332-340) – (962-389) = 3,379
Cash tax amount for the BOQ = 155 + (0) – (55-80) = 180
The cash tax rate is usually gotten by dividing cash tax amount with the net earnings before interest and tax or by operating income before tax. Based on this formula the two companies cash tax rate would be:
CBA cash tax rate is equal = 3,379/13,944 = 24.23%
BOQ cash tax rate is equal to = 180/507 * 100% = 35.50%
Based on the above computations, BOQ has relatively high cash tax rate compared to its counterpart.
Reason for Difference in cash tax rate and the book tax rate
Cash tax rate varies from the book tax rate as their computation are basically founded on book tax value, increase or decrease in deferred tax asset and variation in the deferred tax liability. Contrary, the book tax rate is gotten through division of the original tax expenses with EBIT (Elschner & Vanborren 2009).
Conclusion
To conclude, CBA as well as BOQ are found to be amongst the most successful and competitive banks within the sector. To establish this, analysis of these banks statements of the owner’s equity, cash flow, statements of the other comprehensive income as well as corporate income tax was assessed. Through this analysis, CBA is found as one of the most financially healthy bank in comparison to the BOQ. This is based on the fact that the bank had relatively high cash flows both from operations and from financing undertaking unlike in BOQ where negative and low cash figures were recorded over the last three years. Further, based on the corporate income analysis, or analysis of effective tax rate as well as of cash tax rate, BOQ seems to enjoy relatively high value in both categories.
List of References
ADVFN 2018, Commonwealth Bank of Australia Financial Data; Viewed at: https://au.advfn.com/stock-market/ASX/CBA/financials (Accessed 18th September 2018).
Bank of Queensland (2017), Bank of Queensland annual report 2017: Viewed from: https://www.boq.com.au/content/dam/boq/files/reports/annual-report/annual-report-2017.pdf (Accessed 22nd September 2018)
CBA (2018), CBA, About us: Viewed at: https://cbagroup.com/about-us/ (Accessed 18th September 2018)
Commonwealth Bank of Australia 2017, Commonwealth Bank Australia annual report 2017: Viewed from: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf (Accessed at 15th September 2018)
Elschner, C & Vanborren, W 2009, Corporate effective tax rates in an enlarged European Union (No. 14). Directorate General Taxation and Customs Union, European Commission.
Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/balance-sheet/bs.html?t=BOQ®ion=aus&culture=en-US (Accessed 22nd September 2018)
Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/ratios/r.html?t=BOQ®ion=aus&culture=en-US (Accessed 22nd September 2018)
Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/income-statement/is.html?t=BOQ®ion=aus&culture=en-US (Accessed 22nd September 2018)
Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/cash-flow/cf.html?t=BOQ®ion=aus&culture=en-US (Accessed 22nd September 2018)
Noor, RM & Fadzillah, NS 2010, ‘Corporate tax planning: A study on corporate effective tax rates of Malaysian listed companies,’ International Journal of Trade, Economics and Finance, 1(2), 189.
Reuters.com (2018), Bank of Queensland annual report 2017: Viewed from: https://www.reuters.com/finance/stocks/companyProfile/BOQ.AX (Accessed 22nd September 2018)
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