Comparative Analysis Of Commonwealth Bank And National Bank Australia: Financial Statements Study

Owners Equity

The aim of this report is to discuss about different concepts of corporate accounting through making the comparison and informative between two businesses belonging to the same sector. This will be helpful in providing a brief about the insight of activities taking place in these two businesses corporate or enterprises. Both the corporate namely, Commonwealth Bank of Australia and National Bank Australia are operating in the same region and are performing well in the industry or sector to which they belong. In this concern, the report is describing the financial position of both organizations through considering different financial statements.

Owners Equity

• Discussion on items of equity for Commonwealth bank and National Australian Bank:

Commonwealth Bank of Australia
Particulars	2017 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2016
	Amount in $ million	Amount in $ million
Share capital	35262	34125
Reserves	2556	3115
Retained profits	22312	20430
Other equity instruments	0	406

The above table explains the items covered in the equity section of Commonwealth Bank of Australia are share capital, reserves, retained profits and other equity instruments. The share capital determines that how much amount is collected by the organization by issuing the shares to the investors. The share capital of commonwealth bank has been increased from financial year 2016 to 2017. The increasing share capital is determining that the organization is attracting to the investors for investment for better returns. As well as, the increasing share capital is determining that the organization is financially sound and is able to invest in more sectors for better return. On the other hand the capital reserve of the organization has been decreased, which is determining that the company has not much authorized capital for specific long-term projects. In addition, the increased retained earnings are determining that the net income of the company is increased in financial year 2017 as compared to 2016.

National Australia Bank
	2017	2016
	Amount in $ million	Amount in $ million
Share capital	32866	32524
Reserves	190	309
Retained profits	15545	15719

Apart from that, the financial statement of both these banks also presents the corresponding amount of these items pertaining to Group. Share capital of the organization has been increased in financial year 2017, which is determining that the company is attracting the investors to invest in the company but the decreasing capital reserve is determining that the company authorised amount of the company has been decreased in financial year 2017 as compared to 2016. As well as, the retained earnings also decreased in financial year 2017, which is not good for the organization.

• Comparative analysis of debt and equity position of Commonwealth bank and National Australian Bank:

The comparative analysis of debt and equity position of Commonwealth bank and National Australian Bank is determined as below:

Commonwealth Bank of Australia
	2017	2016
	Amount in $ million	Amount in $ million
Total liabilities	898722	910333
Equity (excluding non-controlling interest)	60130	58076
Total amount invested	958852	968409

This can be better understood with the help of the following pie chart.

From the above diagram, it is analyzed that total liabilities of the organization has been decreased in financial 2017 as compared to 2016. The decreasing value of total liabilities is determining that the company is gaining good profit from its operational activities and capable to manage the debts in effective manner. In this concern, the financial position and the marketing position of the company is increasing in favourable manner.

In similar way, the total equity of the firm is also increased in 2017 as compared to 2017. The increasing equity is determining the attractiveness of the investors. As well as, the increasing equity position is determining that the company is much capable to pay its short-term liabilities n effective manner. However, the total amount of investment is determining that the entire financial position of the company is not good. Therefore, the management requires taking proper action to improve its total equity through attracting the investors for investment in the firm.

National Australia Bank
	2017	2016
	Amount in $ million	Amount in $ million
Total liabilities	765915	764847
Equity (excluding non-controlling interest)	48601	48552

Comparative Analysis of Debt and Equity Position of the Two Firms

From above diagram, it is analyzed that the total liabilities of National Australian Bank has been increased in 2017 as compared to 2016. The increasing liabilities are determining that the company is not paying its short-term liabilities. The increasing liabilities are not favourable for the firm as the investors will be confused to take investment decision in an increasing liabilities organization. On the other hand, the equity of the firm has been increased in 2017 as compared to 2016. The increasing equity is presenting that the company has good equity position to take further investment decision.

Cash Flows Statement

Item reported in the cash flows statement and changes in each item of these financial statements of Commonwealth bank and National Australian Bank:Commonwealth Bank of Australia

There are some items that have not occurred in both the years. For instance, ‘net proceeds from disposal of entities and businesses’ has occurred in 2016 amounting to $ 110 million but has not occurred in 2017. Likewise, Payments for acquisitions of investments in

associates/joint ventures amounting to $ 15 million has occurred in 2017 but not in 2016. Both these items come under investing activities.

• Comparative analysis of Commonwealth bank and National Australian Bank through three broad categories of cash flows:

National Australia Bank
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Cash flow from operating activities	14562	14020
Cash flow from investing activities	694	4848
Cash flow from financing activities	-2610	6491
Net cash flow/ used in all the three activities	12646	25359

• Also, provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis.

The statement of profit or loss contains items like the revenue, the cost pf sales, the expenses, the finance costs, and the income tax. A comprehensive income is added to this with items such as a gain or a loss in the revaluation of non-current assets. The revaluation of the non-current asset is seen as the assessment of the unrealized reserves on the assets. These reserves are also captured in the statement of changes in equity. Other gains or losses can from international currency translation adjustments, pensions and/or post-retirement benefit plans and available-for-sale investment can be captured here as well as activities on discontinued operations.

Other Comprehensive Income Statement

• What items have been reported in the other comprehensive income statement for each company?

Comprehensive income or ‘Total comprehensive income’ is basically any income or expenses (except those transactions with owners of the company) that would and would not be reported in ‘ordinary’ income statement, which is due to unfit with definition of ‘ordinary’ net profit or loss or rather ordinary net income or expenses. The latter would be referred to as ‘Other comprehensive income statements’. According to IFRS, this would mean “Net Profit or Loss + Other comprehensive income”. Examples of ‘Other comprehensive income’ would include unrealized gain or losses that would not make it into the ‘ordinary’ profit or loss. Other examples are given by Sebastian again.

In this case, the comprehensive income statement and income statement is different by one large component – Other comprehensive income. Because it better informs business decision makers and improves the accuracy of their decisions. In this concern, the management can take a better business decision for further expansion through proper analysis of the comprehensive income statement.

Business leaders need to make decisions with regard to different time periods that are called horizons. For simplicity, this is often summarized as the three horizons concept which could be broken down into (1) the immediate needs, (2) the exploitation of current strategies and (3) future exploitable opportunities.

To make accurate decisions for each of these time periods, business decision makers need appropriate reports adapted specifically for each horizon. While an all inclusive profit report might be sufficient for the immediate horizon, it may not be suitable as an information source for longer-term horizons and decisions.

Cash Flows Statement Analysis

To differentiate between the two :

1. Title: Income statement(or Statement of Profit or Loss) OR comprehensive income statements Statement (or Statement of Profit or Loss and Other comprehensive income)
2. Components:
   • Comprehensive Income Statement (or Statement of Profit or Loss and Other Comprehensive income) : One will find Other Comprehensive income items in this statement. Also, in the end, one should find “Total Comprehensive income” or Net income.
   • Incomestatement (or Statement of Profit or Loss): This should only include ‘ordinary’ income statement items. In the end, you should find “Net Profit or Loss” or Net income. Also, IFRS requires another statement if only this type of statement is used rather than the Comprehensive income statement, which is Statement of Other Comprehensive Income.

Items that may be reclassified subsequently to profit/(loss) and Items that will not be reclassified to profit/(loss) have been included in the comprehensive income statements. These items can be further categorized into various sub-categories.

(vii) Why have these items not been reported in Income Statement/Profit and Loss Statements?

There is a specific format of each and every statement included or incorporated in the financial statement. Thus, items covered in the comprehensive income statement are not included in the statement of profit and loss and vice versa.

In the temporal method, translation adjustments hit Comprehensive income. The translation adjustment is a ‘plug figure’ in equity which balances the balance sheet. The ‘plug figure’/translation adjustment imitates net changed gain (or loss) associated to the monetary things only. The ‘plug figure’ under the temporal method should ‘balance’ the change in retained earnings over the period and net income. In other words, retained earnings are the balance sheet balances and a line for foreign exchange gain or loss has to be included in the income statement.

In the income statement, average and historical exchange rates are used to convert from the local currency to the presentation currency. Usually, average rates (ex. for converting revenue and some COGS items) refer to beginning and average of the period rate. The period could be annual, quarterly, etc.

(viii) Provide a comparative analysis of the items shown in the other comprehensive income statement section for the two companies. If these items were included in the income statement/profit and loss statements of each company, how would the profit attributable to shareholders of the company be affected?

Commonwealth Bank of Australia
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Total of items that may be reclassified	-642	-76
Total of items that will not be reclassified	191	10
Other comprehensive income/(expense) net of income tax	-451	-66
Total comprehensive income for the financial year	8528	8573

National Australia Bank
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Total of items that may be reclassified	-75	64
Total of items that will not be reclassified	69	-173
Other comprehensive income/(expense) net of income tax	-6	-109
Total comprehensive income for the financial year	4969	410

Should other comprehensive income be included in evaluating the performance of managers of the company?

It is not advisable or preferable to include the items of comprehensive income statements for evaluating the performance and effectiveness of managers of concerned business enterprises (Broad, 2014).

Accounting For Corporate Income Tax

(x) What are the tax expenses shown in the latest financial statements of the two companies that you have selected?

The tax expenses for National Australian Bank and Commonwealth Bank is described in the below tables:

Commonwealth Bank of Australia
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Income tax expenses	3146	2820

National Australia Bank
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Income tax expenses	1744	1767

(xi) Calculate the effective tax rate for both companies that you have selected. The effective tax rate is calculated as (income tax expense/earnings before tax). Which one of the companies has the higher effective tax rate?

Commonwealth Bank of Australia
	2017	2016
Particulars	%	%
Effective tax rate	26	24.6

From the above table it is analyzed that the tax rate for the firm has been increased from 24.6 to 26%, which is not favourable for the firm. Due to increasing tax rate, the profitability of the firm may be decreased.

National Australia Bank
	2017	2016
Particulars	%	%
Income tax expenses	3146	2820
Profit before income tax	6719	2286
Effective tax rate	46.82%	123.36%

From the above table it is analyze that the tax rate has been decreased from 123.36% to 46.82% but total income tax rate has been increased. Based on this, it is analyzed that the net profitability of the organization has been increased in 2017 as compared to 2016.

(xii) Comment on deferred tax assets/liabilities that are reported in the balance sheet articulating the possible reasons why they have been recorded.

Commonwealth Bank of Australia
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Deferred tax assets	1380	793
Deferred tax liabilities	825	1200

Comparative Evaluation of Three Broad Categories of Cash Flows

From the above table, it is analyze that the deferred tax on the assets has be increased for Commonwealth Bank, which is not favourable for the organization. However, if the cause of increasing tax is increased assets value than it is good for the firm, as it presents that the firm has good potentials to pay its short term liabilities through its assets. On the other hand, the deferred tax on liabilities is decreased for Commonwealth bank, which is much favourable for the firm.

National Australia Bank
	2017	2016
Particulars	Amount (in $ million)	Amount (in $ million)
Deferred tax assets	1458	1415
Deferred tax liabilities	216	243

From the above table, it is analyzed that the deferred tax on assets of National Australian Bank in increased in 2017 as compared 201 but the deferred tax liabilities has been decreased in 2017 as compared to previous financial year.

(xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies?

In the case of the Commonwealth Bank of Australia, deferred tax assets have increased while deferred tax liabilities have decreased. On the other hand, in the case of National Australia Bank deferred tax assets have increased while deferred tax liabilities have decreased. Thus, the increase or decrease is the same in both the companies. However, the percentage increase or decrease is not same or similar in both the business enterprises namely, Commonwealth Bank of Australia and National Australia Bank (Foropon&McLahlin, 2013).

(xiv) Please calculate the cash tax amount for both companies using the book tax amount, changes in the deferred tax assets and deferred tax liability.

Cash tax amount has not been specifically mentioned in the annual report of these two companies. Accordingly, income tax expenses can be considered to be the cash tax amount. The same amount has also been considered for the computation and determination of cash tax rate (Ibrahim & Primiana, 2015).

(xv) Calculate the cash tax rate for both companies. Which company has higher cash tax rate? (Please do your own research to familiarise yourself with how to calculate cash tax rate).

Cash tax of both the business enterprises is same and akin to the effective tax rate. Thus, the cash tax rate of Commonwealth Bank of Australia is 26% and 24.6% respectively in 2017 and 2016. On the other hand, the cash tax rate of the Nationalbank in Australia is 46.82% and 123.36%. Accordingly, it can be said that National Bank Australia has the highest tax rate than that of Commonwealth Bank of Australia (Jusoh & Ling, 2012).

(xvi) Why is the cash tax rate different from the book tax rate?

Both the cash tax rate and book tax rate never tally. This is because computation of both tax rates is totally different from each other. While, book tax rates consider the accounting provisions namely, International Financial Reporting Framework, Generally Accepted Accounting Provisions and other associated accounting standards, cash tax rate take into consideration the income tax provisions namely, rules framed by Australian Taxation Office (Karam & Saydam, 2015).

Conclusion

Throughout the report, several financial discussions have been made which will help to take financial decisions accordingly. Also, wherever possible discussions have been made in the form of a comparative table. Such comparative analysis can be done in relation to any other business corporate or enterprises. Accordingly, such kind of information will assist all the stakeholders, directly or indirectly interested in the business affairs of the concerned business corporate. It will be more beneficial for the investors, covering both existing and prospective on the basis of which they can take financial decisions and can earn higher amount of profits thereby ensuring that their invested amount is safe and secure.

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