In today’s competitive world , the reporting framework that is used by the businesses are considered to be whether the same are appropriate and whether it meets the expectation of the shareholders or not by providing them with relevant information. There is an ideal reporting framework which consists of all relevant information ad disclosures that are relevant for all users of the financial statements . The two companies that are considered for this assessment are Commonwealth Bank and ANZ bank . which are both part of the banking sector.
The commonwealth bank of Australia is the largest Australian multinational bank. It has multiple businesses that is scattered all over New Zealand, Asia and the United states . The bank is helpful in providing a variety of financial services that includes retail and institutional banking , among . It is the largest listed company in Australia .
The ANZ bank is the third largest bank by market capitalisation in Australia. It has operations in both Australia and New Zealand, with Australian operations dominating the largest part of the business. In addition to operations in New Zealand and Australia, it has operations in 34 other nations as well.
The assessment provides a comparative analysis of the cash flow statement , comprehensive items and the debt equity position of the business. The report also shows computation of effective tax rate , tax rate and book rate.
The term owners equity represents the share capital which is used by the businesses for the purpose of funding the operations of the business. The owners equity of a business generally consists of share capital, reserves and other equity related funds(Ampenberger et al.2013). The disclosures of owners equity are shown in the balance sheet of the business. The annual report of ANZ bank which is shown for the year 2017 shows that the owners equity is made up of equity share capital, reserves and retained earnings of the business. The equity share capital is accumulated by the business by issuing equity shares to the public and taking their capital for the purpose of financing projects and even day to day activities of the business( Bhaird 2013). reserves are a part of the profits that is generated by business during a particular period. Reserves are a great source of meeting unplanned expenses and can be used as more of a slush fund for the business(Robb and Robinson 2014). They are a great source of direct finance. It is used by businesses in making occasions and use of retained earnings in a business. It is also known as ploughing back of profits.
The equity share capital of ANZ bank was shown at $ 10765 million in 2015 and the same is shown to have increased significantly in 2017 which signifies that the management of the company needed a huge amount of capital that is drawn from equity shares. The reserve balance for the year 2015 is shown to be at $ 234 million and the same is shown to have reduced drastically and the figure is shown to be at $ 178 million. There has been a growth in the retained earnings of the business. The growth in the retained earnings of the business signifies the growing strengths of the company(Konchitchki and Patatoukas 2013).
In case of commonwealth bank. the share capital is shown to be at $ 17865 million ,which has shown an improvement from the figures of the last years 2015 and 2016. The reserve balance and retained earnings balance also portrays a slight increase compared to last year’s figures. This means that the business is performing better compared to last year analysis. The increase in share capital of the company suggests that the management of the business has issued new shares during the year(Arnold,and Yildiz 2015). The figures for retained earnings is shown to be at $ 675 million
The capital structure of a business depends on the requirements and applications that a business needs for its funds(Serfling 2016.). In order to make decisions regarding capital structures of the business , the management also needs to consider the costs and risk factors which are associated with the sources or options that is available to a business(Graham, Leary and Roberts 2015). The capital structure of ANZ Bank is shown to have both equity and debt as per the balance sheet of a company. The company has taken significant amount of equity and debt capital in 2017 which is evident as per the cash flows. The debt capital of the business is shown to have increased from $ 1244 million to $ 1564 million during the year 2017(Anz.com 2018). This sudden increase in the capital structure of the company suggests that the management of the business is planning to make an improvement in business structure.
The balance sheet which is prepared by Commonwealth bank for the year shows that the management of the company utilises both debt and equity capital of the business. The debt balance of the business for the year 2017 is shown to be at $ 17654 million and the same has reduced in comparison to previous years which shows that the management of the company has repaid a part of the loan for the business(Commbank.com.au 2018). The management is however mote intended on utilising the equity capital of the business for most of the part and use some debt capital to attain a more favourable capital mix.
The analysis shows that ANZ bank believes in balanced debt and equity capital mix as the business is trying to raise more finance through debt since it is cheaper than raising equity. On the other hand the management of Commonwealth Bank is trying to rely more on equity capital as the business is trying to lower the burden of debt capital.
The various considerations in the report has been included with thw various types of discussions which are seen in the annual reports of Commonwealth Bank and ANZ bank. Based on the depictions of the cash flow statement the different categories are divided as finance, operating and investing activities. The main categorization of the item is discussed as follows:
Cash flow from operating activities
Commonwealth Bank
The various items that are included include the interest received from bank deposits from the bank customers. This is the main source of income for the bank. The interest income for the bank is $34112 million in the year 2016 and $ 34047 million in the year 2017. It represents a slight reduction in the interest income of the bank. This reduction in interest income can be attributed to reasons including a rising interest bank rate and a fall in cash reserves of the banks. Another significant application of ach is ithe interest paid to customers. It decreased from $16283 million to $ 16083 million in the year from 2016 to 2017, which is a good sign for the bank. They are able to reduce the interest expense in this regard(Commbank.com.au 2018).
ANZ Bank
The various items that are included include the deposits and other borrowings made by customers and the interest received and interest paid. The interest income for the bank reduced from $ 25416 million in 2016 to $ 25395 million. This reduction in interest income can be attributed to reasons like a rise in interest rate or a fall in cash reserves . Also in the annual report it can be found that the interest payment slightly increased from $ 10213 million to $ 10260 million between 2016 and 2017, which is not a good sign for the bank. They have to try to find ways to improve this gap(Anz.com 2018)..
Cash flow from operating activities
Commonwealth Bank
The various items that are included in this activity include a net movement in available for sale investments , a net increase in loans, bill discounted and receivables due from other financial statements. The net movement in available for sale investments represents the difference between sale and purchase of net proceeds from investment. The net difference has increased from $ 2567 million to $ 2654 million between the year 2016 and 2017,which suggests that the bank has made better investment decisions and has increased its earnings on the investment that it has made. There has been a decrease in loans , bills discounted in the years between 2016 and 2107. It has decreased from $52825 million to $ 45768 million, which suggests that the firm may have tightened its credit policy and that it has increased its lending rates, which means that the customers are reluctant to borrow from this bank(Commbank.com.au 2018).
ANZ bank
The various items that are included in this activity include a net movement in available for sale assets , which is sales minus purchase and the sale of Asia Retail and Wealth Businesses. The net movement in available for sale investments has increased from $ 15678 million to $ 16213 million, which suggests that the bank has made good investment choices and has taken advantage of employing an effective ROI(Anz.com 2018). It has sold its Asia and Retail wealth business to the amount of $5213 million , which suggests that the bank have made a good decision because this division was not performing really well.
Cash flow from Financing activities
Commonwealth Bank
The various items that are included in this statement include the acquisition payments of controlled entities and net sales from disposal of entities and business. The amounts for payment of acquisition have changed from $ 564 million to $ 587 million in the years from 2016 and 2017. This suggests that a firm have more plans to expand their businesses in the future. The net proceeds from disposal of entities and business has increased from $ 72 million to $ 112 million which suggests that the firm disposed of a lot of entities and business which were not earning much revenue for the bank
ANZ bank
The various items that are included in this statement include the issue and redemption of share capital , dividends paid and share buyback . The issue of share capital has reduced from $ 34678 million to $ 2987 million in the year from 2016 and 2017 , which suggests that the firm has been reluctant to bring more capital from public investors. The dividend paid has reduced from $ 4532 million to $ 4321 million in the year from 2016 to 2107, which suggests that the firm has made less profits in the year in the year 2016 than 2017.
Comparative Analysis
As per the cash flow statement of ANZ bank, the operating activities of the business shown a balance of $ 32414 million for the year 2017 which has slightly decreased from the previous year analysis of 2016 and 2015. This may be due to the increase in the overall outflows of the business or lower sales of the business. The cash from investing activities of the business shows a negative figure which is mainly due to excessive purchases of businesses and properties which the management of ANZ bank has undertaken during this period. The financing activities of the business of the year 2017 shows that the business has raises significant amount of capital from equity sources during the year which is mainly due to the financing of some project meeting certain obligations. A graph and a table has been shown to illustrate the following
|
particular |
2015($ million) |
2016($ million) |
2017($ million) |
|
net cash provided by operating activity |
23626 |
23450 |
32414 |
|
net cash used/ provided by investing activities |
-6745 |
-12830 |
-21092 |
|
net cash used/provided by financing activities |
2371 |
1958 |
-6667 |
Source-(Anz.com 2018).
The cash flow statement of commonwealth bank shows that the cash flow from operating activity has increased significantly from the years 2016 and 2015. , which is mainly due to higher interest income of the business. The cash investing activities of the business has also decreased from the years 2017 which shows that the company has not made a significant sale of assets and property. The net cash flows from financing activities has shown to be a drop in the year 2017 because it has remitted a significant amount of loan capital. A table and a graph has been illustrated as follows:
|
particular |
2015($ million) |
2016($ million) |
2017($ million) |
|
net cash from operating activities |
13369 |
13992 |
17519 |
|
net cash flow used in investing activities |
21124 |
34128 |
11201 |
|
net cash flows used in financing activities |
11710 |
23647 |
19912 |
Source-(Commbank.com.au 2018).
The comprehensive income for the year 2107 shows that the business of Commonwealth Bank have made a foreign currency reserve net of tax and have invested in hedging contracts. The comprehensive items that are included in the financial statements of ANZ bank shows dividend income on treasury shares and the treasury shares of Wealth Adjustment adjustment and the hedging contracts. The annual reports of both companies show similar items in case f comprehensive item disclosures
The comprehensive items are shown separately because they are extraordinary in nature and therefore can affect the financial statements directly if included in the profit and loss statement. In addition to this , the items are non recurring in nature for the companies which are considered for this assessment and therefore the same is not shown in the profit and loss statement(Sunder, Sunder and Zhang 2018).
The comprehensive items of both ANZ bank and Commonwealth Bank effectively shows same items such as hedge cash flow contracts, foreign currency reserve during the year. The comprehensive income of ANZ bank is shown to be $ 23, 564 million during 2017 and the same has decreased from the previous year. While the comprehensive income of Commonwealth Bank is shown to be $ 32, 432 million which is quite higher than ANZ bank but this can be due to higher scale of operations of Commonwealth Bank compared to ANZ bank. A graphical representation of the cash flows is shown in the figure below
The comprehensive items which are shown in the annual reports of the business should not affect the decision making process of the management as these items are non recurring in nature and may or may not take place in a year. The management van however make provisions for the same.
The tax expense which is incurred by Commonwealth Bank as per the profit and loss statement is shown to be $ 8788 million for the year 2017 and the same has increased in comparison to previous year analysis. The tax expense of ANZ bank is shown to be $ 3206 million for the year 2017(Anz.com 2018).
|
Computation of effective tax rate |
||
|
Particulars |
Commonwealth Bank($) |
Anz bank($) |
|
Income tax expense |
8788 |
3206 |
|
Earning before tax |
27,906 |
9627 |
|
Effective tax rate |
31.49% |
33.30% |
The effective tax rate of Commonwealth bank which is calculated in the table above is shown to be 31.49% which is a little lower than effective tax rate for the year 2017. The effective tax rate of ANZ bank is a little higher compared to the effective tax rate which is shown for Commonwealth Bank.
The deferred tax and liabilities refer to the tax obligations that are either paid in advance by the business or is due to be paid and the same relates to tax items for the precious years as well(Markle 2016). The deferred tax and liabilities are shown in the balance sheet of both the companies, as shown in the annual reports that are prepared by the companies(Graham et al. 2013). The deferred tax liabilities ANZ bank for the year 2017 is shown to have a slight increase while the deferred tax assets of the business is shown to have a declining trend. This indicates that the business has tax obligations that relates to past years. In the case of Commonwealth bank, the company has only deferred tax assets which are shown in the financial statements and the same is shown to have an increasing trend during the years.
|
Computation of effective tax rate |
||
|
($ million) |
($ million) |
|
|
Particulars |
Com Bank |
ANZ bank |
|
Income tax provision |
8788 |
3206 |
|
Add: Increase in DTL |
32 |
|
|
Less: Increase in DTA |
-78 |
-45 |
|
Add: taxes on finance costs |
1370.1 |
702 |
|
Cash tax amount |
10080.1 |
3895 |
|
EBIT |
31245 |
10987 |
|
Cash tax rate |
32.26% |
35.45% |
|
Computation of effective tax rate |
||
|
Particulars |
Commonwealth Bank($ million) |
Anz bank($ million) |
|
Income tax expense |
8788 |
3206 |
|
Earning before tax |
27,906 |
9627 |
|
Effective tax rate |
31.49% |
33.30% |
The cash tax rate which is computed in the above table shows that the cash tax rate of ANZ bank is more than the Commonwealth Bank for the year 2017. The computation considers the change in deferred tax assets and liabilities of the business.
The cash tax rate computation considers the cash items of the business and also considers the changes that takes place in deferred tax assets and liabilities of the business as shown in the table above. The book tax rate on the other hand does not consider such changes and is the general tax rate on which tax is charged on a business(Hoi, Wu and Zhang 2013).
Conclusion
Thus , from the discussion above , it can be ascertained that the business of commonwealth bank is larger in operations and profit growing capacity than ANZ bank. This is the main reason that their profits are considerably high. The position of Commonwealth Bank is shown to be better than ANZ bank , which means that the liquidity position of the bank is also better in comparison to ANZ bank.
References:
Ampenberger, M., Schmid, T., Achleitner, A.K. and Kaserer, C., 2013. Capital structure decisions in family firms: empirical evidence from a bank-based economy. Review of Managerial Science, 7(3), pp.247-275.
Anz.com. 2018. Annual Report / Annual Review | ANZ Shareholder Centre. [online] Available at: https://shareholder.anz.com/annual-report-annual-review [Accessed 27 Sep. 2018].
Arnold, U. and Yildiz, Ö., 2015. Economic risk analysis of decentralized renewable energy infrastructures–A Monte Carlo Simulation approach. Renewable Energy, 77, pp.227-239.
Call, A.C., Chen, S. and Tong, Y.H., 2013. Are analysts’ cash flow forecasts naïve extensions of their own earnings forecasts?. Contemporary Accounting Research, 30(2), pp.438-465.
Coleman, S., Cotei, C. and Farhat, J., 2016. The debt-equity financing decisions of US startup firms. Journal of Economics and Finance, 40(1), pp.105-126.
Commbank.com.au. 2018. Annual reports. [online] Available at: https://www.commbank.com.au/about-us/investors/annual-reports.html [Accessed 27 Sep. 2018].
Farshadfar, S. and Monem, R., 2013. Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), pp.111-133.
Graham, J.R., Hanlon, M., Shevlin, T. and Shroff, N., 2013. Incentives for tax planning and avoidance: Evidence from the field. The Accounting Review, 89(3), pp.991-1023.
Graham, J.R., Leary, M.T. and Roberts, M.R., 2015. A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), pp.658-683.
Hoi, C.K., Wu, Q. and Zhang, H., 2013. Is corporate social responsibility (CSR) associated with tax avoidance? Evidence from irresponsible CSR activities. The Accounting Review, 88(6), pp.2025-2059.
Konchitchki, Y. and Patatoukas, P.N., 2013. Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), pp.669-694.
Lennox, C., Lisowsky, P. and Pittman, J., 2013. Tax aggressiveness and accounting fraud. Journal of Accounting Research, 51(4), pp.739-778.
Lozano-Vivas, A. and Pasiouras, F., 2014. Bank productivity change and off-balance-sheet activities across different levels of economic development. Journal of Financial Services Research, 46(3), pp.271-294.
Mac an Bhaird, C., 2013. Demand for debt and equity before and after the financial crisis. Research in International Business and Finance, 28, pp.105-117.
Markle, K., 2016. A comparison of the tax?motivated income shifting of multinationals in territorial and worldwide countries. Contemporary Accounting Research, 33(1), pp.7-43.
Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
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