Analysis Of Financial Systems Of Westpac And Commonwealth Bank

Components of the Financial System

Contemporary banking began from the medieval times. At that, time merchants who were model types use to give loans to the exporters and farmers as they carried food grains and other products to the multiple cities. From the 17^th century, notes were introduced in the banking system. Banking in the traditional sense meant a trend of depositing money given by publics. Banking system now days has been an essential part of the globe for the growth of economy in the world. There are worldwide regulatory bodies for smooth running of the banks. In the country to get it sustenance and mark steadiness in the monetary organization there is banking assembly nationally and internationally. The monetary organization that ropes the economy in being alleviated now. To analyze the financial system of Australian banks and to get a sound knowledge of its growth and changes that has taken place in the financial components of the bank comparison of different fiscal components of Westpac bank and Commonwealth Bank is done in this report. The monetary broadcasting and performance of financial declaration permitting to the secretarial standard figures and its character and prominence. The secretarial standard physiques shows a significant character in the design of fiscal reports and monetary declarations. The secretarial communications and the alterations for the identical are soundly accounted and see-through evidence on condition that when the monetary evidence is giving a misunderstanding to the governing body. ( Bultum 2014).

The character of the Australian Accounting Standards Board in the format of comprehensive secretarial standard body has assisted the corporation set consistency in the accounting ethics of fiscal reports. The International Financial Reporting Standard (I.F.R.S) are the standard issued by the International Accounting Standard Bodies. The two companies designated for essential analysis shows the altered conformation of equity and the apparatuses of equity. Shareholders equity for the two companies and the leaning analysis for the same is completed. The virtual debt and equity scrutiny is completed in order to get a monetary summary of the company. Detailed analysis of comprehensive income and cash flow is done for providing the overview of bank operation system. To analyze the financial system of Australian banks and to get a sound knowledge of its growth and changes that has taken place in the financial components of the bank comparison of different fiscal components of Westpac bank and Commonwealth Bank is done in this report.

Equity Analysis

The two public listed company chosen for the financial analysis is Commonwealth Bank and Westpac Bank. The monetary analysis is accomplished on the above companies. Statement of Equity shareholders and a comparison of debt and equity analysis is executed. ( Chatterton 2013).

The different items of equity and the trend concluded the three-year period is discussed:

• Ordinary Share Capital: Ordinary share capital signify the proprietorship capital remunerated by the equity share capital of the corporation. They usually have fecund afterwards the preference shareholder of the company in relation of proceeds and sharing of incomes. Equity or ordinary share capital of the firms have voting privileges though the preference share do not. The equity shareholders of the company stands the uppermost volume of threat in the company.
• Reserves: Reserves are a vital share of the investor’s equity. The reserves is resolute once subtracting entirely the assets and liabilities of the corporation. It is the take-home assets of the business. The reserves is resulting within the company that is recycled by the company as inner foundations of deposit for actions. (Machlup  2014).
• Retained Earnings: Retained Earning or cultivated profit denotes to the sum subtracted from the incomes of the company as an inner reserves for the corporation as a basis of fund for the corporation. The cultivated profit procedure is the portion of the equity share capital, which is a kind of reserves signified as a module of equity share capital. (Kim et al. 2013).

 Commonwealth Bank: The equity share capital of the bank has revealed a substantial growth that displays that the bank has growth the equity source of funding in the bank. Still, the reserves of the bank has reduced and endured unpredictable in the three-year trend period. The retained earnings of the bank has revealed a motionless development on year-to-year beginning from the year 2015 to 2017.

Common Wealth Bank
Particulars	2015	2016	2017
Shareholder’s Equity
Ordinary Share Capital	27,894	34,125	35,262
Other Equity Instruments	1,895	406	–
Reserves	3,195	3,115	2,556
Retained Earnings	20,138	20,430	22,312
Share Capital and reserves attributable to the shareholders of the company	53,122	58,076	60,130
Add: Non-Controlling Interest	–	–	–
Total Shareholders’ Equity	53,122	58,076	60,130

Westpac Banking Corporation: the bank has increased its stockholders equity of the bank by issuance of equity shares of the bank. However, at the similar period the drift in buyback or treasury share has amplified steadily for the bank. Whereas the reserves of the bank has pointedly reduced and the profit maintenance of the bank has improved through the mode of reserved pays of bank.

Westpac Banking Corporation
Particulars	2015	2016	2017
Shareholder’s Equity
Ordinary Share Capital	29,280	33,469	34,889
Treasury Shares	-385	-455	-495
Reserves	1,031	727	794
Retained Earnings	23,172	24,379	26,100
Share Capital and reserves attributable to the shareholders of the company	53,098	58,120	61,288
Add: Non-Controlling Interest	817	61	54
Total Shareholders’ Equity	53,915	58,181	61,342

Table 2: Westpac Banking Corporation

(Source: Annual Report, 2017)

Debt and Equity Analysis
Particulars	Common Wealth Bank	Westpac Banking Corporation
Total Long Term Debt	134,966.00	168,356.00
Shareholders’ Equity	60,130.00	61,342.00
Debt/Equity Ratio	2.24	2.74

Table 3: Debt and Equity Analysis

• Operating Activities:under this component of cash flow statement information regarding the cash that is generated by a bank by its daily operating deeds. These activities, which produce cash inflows, comprise client gatherings from auctions of their main products or services, proceeds of interest and dividends, and supplementary operating cash incomes. Operating activities, which generate cash outflows, comprise disbursements to suppliers, employees, interest payments, disbursement of revenue taxes and other operational cash disbursements.
• Investing Activities:Investing activities comprise buying and selling of non-current assets that would be recycled to create revenues over an extended era of time; or buying and selling of securities that is not classified as cash equivalents. Cash inflows created by investing activities comprise sales of non-current assets such as PPE. Investing activities can likewise comprise the acquisition or auction of stock and securities. Lending cash and unloading loan disbursements would also be deliberated as investing activities.
• Financing Activities:Financing activities comprise deriving and reimbursing currency, distributing stock (equity) and reimbursing dividends. (Pavlovi? and Bogdanovi? 2013).

Westpac Bank Cash flow Comparative Analysis
Particulars	2017	% Change 2017	2016	%Change 2016	2015
Amount ($M)	Amount ($M)	Amount ($M)
Cash flow from operating Activities
Net cash provided by/(used in) operating activities	-235	1.07	3443	-2.72	-2003
Cash flow from Investing Activities
Net cash (used in)/provided by investing activities	1604	0.74	6094	-0.61	15590
Cash flow of Financing Activities
Net cash provided by/(used in) financing activities	45	0.99	5049	0.03	4882

Table 3: Westpac Bank Corporation

(Source: Annual Report)

Westpac Bank: As compared from the previous year’s overall cash flow of the bank gives an overview that bank has shown improvement in its cash activities in every component of the cash flow statement.

Commonwealth Bank Cash flow Comparative Analysis
Particulars	2017	% Change 2017	2016	%Change 2016	2015
Amount ($M)	Amount ($M)	Amount ($M)
Cash flow from operating Activities
Net cash provided by/(used in) operating activities	1,183	-1.22	-5463	-2.71	3204
Cash flow from Investing Activities
Net cash (used in)/provided by investing activities	6006	1.83	2,125	-0.39	3480
Cash flow of Financing Activities
Net cash provided by/(used in) financing activities	3509	-2.76	-1990	-0.75	-8005

Table 4: Commonwealth Bank Cash flow

(Source: Annual Report)

Commonwealth Bank: As compared from the previous years overall cash flow of the bank gives an overview that bank has shown improvement in its cash activities in operating activities it has increased its investment with incensement in financing activities of the cash flow statement too. 

According to the guidelines present in the IFRS, the line items that presented in the other comprehensive income are classified by nature for using equity method. These items are not subsequently reclassified to profit or loss but they are reclassified subsequently to profit and loss at the time of exact circumstances are seen. (Khan and Bradbury 2014).

. Other comprehensive income comprises all fluctuations that are not allowed to be comprised in profit or loss. It is mostly appreciated for sympathetic ongoing fluctuations in the fair value of a business’s assets.   OCI is a financial presentation concept where gains and losses leisurely over an era that was created to make available for things that companies did not need logged in their net revenue and earnings per share (EPS) numbers. Other comprehensive income statement section for the two companies.

Debt Analysis

Companies usually comprise in income all expenses, gains, revenues and losses that are identified during the particular period. These items are categorized within the income statement so that monetary report readers can better comprehend the implication of numerous apparatuses of net income. Fluctuations in secretarial principles and corrections of mistakes are omitted from the calculation of net revenue because their properties relay to preceding periods. In recent years, there is an improved use of fair values for gauging assets and liabilities. Furthermore, imaginable commentary of gains and losses associated to fluctuations in fair value have positioned a tension on income writing. Since fair values are repeatedly fluctuating, some debate that distinguishing these gains and losses in net income is ambiguous. (Eaton, Easterday and Rhodes 2013).

Income tax expense is the sum of expenditure that a company or business identifies in an accounting era in relation to government tax in regard of taxable revenue. The tax expenses recorded on the financial statements of the banks are deferred asset and liability tax, change in currency reserve, dividend adjustments and more.

Commonwealth Bank
	2017	2016	2015
Particulars	Amount ($ M)
Income tax Expense	3,146	2820	2694
Profit before tax	12,125	11,459	11,670
Effective Tax Rate (%)	0.26	0.25	0.23

Table 7: Commonwealth Bank

(Source: Annual Report)

Westpac Bank
	2017	2016	2015
Particulars	Amount($M)
Income tax Expense	2,620	2437	2121
Profit before tax	10,463	8744	2,660
Effective Tax Rate (%)	0.25	0.28	0.80

Table 8: Westpac Bank

(Source: Annual Report)

Effective rate compared between both the banks differs with nearly in one digit. Commonwealth Bank has the higher tax rate of 26% than compared to Westpac Bank in 2017. Both the banks had fluctuating tax rate in the previous years.

The temporary difference in the recorded revenues and expenses between accounting book and tax return are the direct result of deferred tax assets and liability. In added words, every modification in the tax basis of bookkeeping revenue and taxable revenue causes a tax modification between the income tax expense stated for accounting records and income tax billed conveyed for tax revenues. Deferred taxes can be deferments for whichever the tax disbursement or tax allocated, which produces deferred tax assets or liabilities correspondingly on a balance sheet. (Laux 2013).

There was increase in the deferred tax assets of commonwealth Bank in all the three years. Fluctuating figures are seen in all thee three years in case of Westpac Bank regarding deferred tax assets.

Commonwealth Bank
Calculation of Cash Tax Amount
	2017	2016	2015
Particulars	Amount ($ M)
Income tax	3146	2820	2694
Add- Changes in Deferred Liability
Finance Cost	17764	19545	21006
Less-Change in Deferred Asset	587	22	-25
Cash Tax Amount	20323	22343	23725
EBIT	22349	21150	20778
Cash Tax Rate (%)	0.91	1.06	1.14

Table: 9 Commonwealth Bank

(Source: Annual Report)

Westpac Bank
Calculation of Cash Tax Amount
	2017	2016	2015
Particulars	Amount ($)
Income tax	2620	2473	2121
Add- Changes in Deferred Liability
Finance Cost	17765	19182	20502
Less-Change in Deferred Asset	346	-64	141
Cash Tax Amount	20039	21719	22482
EBIT	19231	17238	17263
Cash Tax Rate (%)	1.04	1.26	1.30

Table: 10 Westpac Bank

(Source: Annual Report)

Cash tax rate of Westpac Bank is higher as compared Commonwealth Bank.

Cash tax denotes to tax remunerated to government bodies such as the Internal Revenue Service and is constructed upon the sum of revenue that is described on a tax return every year. The revenue that is stated and sum of cash tax paid is resolute under the tax commandments and is the earnings by which incomes are elevated for government processes.

Cash Flow Analysis

Book tax denotes to the taxes revealed on a company’s monetary reports. Depositors and lenders practice these monetary statements to comprehend the monetary fitness of both public and private corporations. GAAP decides the amount that is to be howed in the financial statements under income heads or other items. In order to present a comprehensive image, a business’s records will record a tax disbursement for its total probable cash tax liability, even if a share of that cash tax liability would be remunerated in a future year. (Lubbe,  Modack and Watson 2014).

Conclusion:

In preparation of economic development, banking institutions in the country has been allocated a main role. The reliability and well-organized banking system designates the robust economy. The report is about the banking system in Australia and their permissible day-to-day development. The study is to judge the components of financial statement and analyze the tax methods. The study is based on the freehold of 3 years that is from 2015-2017. Percentage scrutiny was associated to dismember and trust on the theme of the patterns in management account commerce and fiscal operation. The financial soundness of the two common bank of  Australia is judged in the report.

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