The present report is developed for providing an analysis of the two public listed companies listed on the Australian Securities Exchange (ASX). In this context, the companies selected are from the banking industry, that are, Westpac Banking Corporation and National Australia Bank (NAB) that are known to be one of the largest financial institutions within Australia. Westpac is recognized as first major Australia bank that provides a diverse range of financial services and is known to be one of big four banks within Australia. The bank is established in the year 1817 and is attributed to have played a significant role in the economic and social development within Australia. The vision of the banking corporation is to become as one of the biggest service companies providing support to the customers and communities to grow and prosper. The banking corporation is involved in providing diverse range of banking, wealth management and financial services. The banking corporation aims to create maximum value for the shareholders and as such emphasize on giving superior customer experience across its financial and banking solutions (Westpac Group: About us, 2018).
Another publicly listed banking corporation selected is National Australia Bank (NAB) that is known to be one of the largest financial institutions in Australia based on market capitalization. The financial services provided by the banking corporation includes personal banking financial solutions such as internet banking, accounts, insurance, credit cards, home and personal loans. The banking corporation since its establishment in the year 1982 is involved in providing high quality personalized banking services within Australia and New Zealand and has evolved as one of the largest bank in the world in terms of total assets. NAP is known to operate about 1,590 branches and service centers and 4,412 ATM’s across Australia, New Zealand and Asia. NAB is known to provide about 12.7 million customers across the world. This report is developed for examining the financial statements of the selected two banking corporation’s for facilitating the decision-making process of investors (National Bank Australia: About us, 2018). The report undertakes an evaluation of the statement of equity, cash flow statement, income statement and income tax accounting of the selected banking corporations for evaluation of their financial performance. The evaluation of the financial statements of these banks is done for the last three financial years by analyzing the financial statement and the significant information disclosed in the footnotes of the financial report. The analysis of the financial statements of the banking corporations will help in examining their financial performance by examining the significant changes that have occurred in the key financial items and identifying the reasons responsible for the corresponding changes. This will help the investors in analyzing the future performance of the selected companies and taking accurate investment decisions.
(i) List of each item of equity and changes in each item over the past years
Following image shows the each line item of owner’s equity for NAB
( NAB Annual Report, 2017 and NAB Annual Report, 2016)
The items listed in the owner equity statement of NAB are as follows:
Following image shows the each line item of owner’s equity for Westpac
Items listed in the owner equity statement of Westpac are as follows
|
Debt and Equity Position in both the companies |
||||
|
NAB |
Westpac |
|||
|
Solvency Position |
2017 |
2016 |
2017 |
2016 |
|
In million $ |
||||
|
Shareholders’ Equity |
$ 51,317.00 |
$ 51,315.00 |
$ 61,342.00 |
$ 58,181.00 |
|
Total Liabilities |
$ 737,008.00 |
$ 725,395.00 |
$ 790,533.00 |
$ 781,021.00 |
|
Debt to Equity ratio |
14.36 |
14.14 |
12.89 |
13.42 |
(NAB Annual Report, 2017 and NAB Annual Report, 2016) and (Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
It can be said that both companies are highly leveraged in both the years.
(iii): Items reported in the cash flow statement of each company
Cash flow statement of NAB
( NAB Annual Report, 2017 and NAB Annual Report, 2016)
(NAB Annual Report, 2017 and NAB Annual Report, 2016)
Cash flow Statement of Westpac
(Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
(iv): Comparative evaluation of main three categories of cash flow statement in relation to both companies
|
Comparative Analysis of Cash Flow Statement |
|||
|
NAB |
|||
|
For last three years ( 2015, 2016 and 2017) |
|||
|
Amount in $ million |
|||
|
Particulars |
2015 |
2016 |
2017 |
|
Cash flow/used from Operating Activity |
$ (13,090,000,000.00) |
$ 16,195,000,000.00 |
$ 13,217,000,000.00 |
|
Cash flow/used from investing activity |
$ (1,830,000,000.00) |
$ (9,970,000,000.00) |
$ (313,000,000.00) |
|
Cash flow/ used from Financing Activity |
$ 1,326,000,000.00 |
$ 7,761,000,000.00 |
$ (331,000,000.00) |
|
Net Change in cash and cash Equivalent |
$ (13,594,000,000.00) |
$ 13,986,000,000.00 |
$ 12,573,000,000.00 |
( NAB Annual Report, 2017 and NAB Annual Report, 2016)
|
Comparative Analysis of Cash Flow Statement |
|||
|
Westpac |
|||
|
For last three years ( 2015, 2016 and 2017) |
|||
|
Amount in $ million |
|||
|
Particulars |
2015 |
2016 |
2017 |
|
Cash flow/used from Operating Activity |
$ (541,000,000.00) |
$ 5,497,000,000.00 |
$ 2,820,000,000.00 |
|
Cash flow/used from investing activity |
$ (18,715,000,000.00) |
$ (7,245,000,000.00) |
$ (1,698,000,000.00) |
|
Cash flow/ used from Financing Activity |
$ 5,513,000,000.00 |
$ 4,573,000,000.00 |
$ 552,000,000.00 |
|
Net Change in cash and cash Equivalent |
$ (13,743,000,000.00) |
$ 2,825,000,000.00 |
$ 1,674,000,000.00 |
(Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
(v): Comparative analysis of cash flow statement of both the companies in relation to each activity
Comparative analysis of cash flow statement for both the companies it has been found that cash flow position of both the companies in year 2015 was adverse as cash flow from operating activity was negative and companies has made capital issue in same year in order to finance the cash requirement in investing activity (Baker and Nofsinger, 2010). The year 2016 was very bright for the companies as both has generated significant amount of cash flow from the operating activity that makes them to employ enough amount of cash in investing activity. Cash flow position of NAB was much stronger as compared to Westpac in year 2016 and 2017. In year 2017 there was major reduction in cash flow operating activity in case of Westpac that forces them to reduce the cash used in investing activity. On the other hand NAB has been successful in generating enough cash flow from the operating activity in the same year.
(vi): Items reported in other comprehensive income statement of each banking company selected
There are mainly two items that are shown in other comprehensive income statement they are items that will not reclassified to profit or loss and items that will be reclassified as profit or loss subsequently.
|
Items that are reported in other comprehensive income of Telstra |
||||
|
NAB |
Westpac |
|||
|
Other comprehensive income items |
2017 |
2016 |
2017 |
2016 |
|
Amount in $ m |
Amount in $ m |
|||
|
Profit/(loss) for the year from continuing operations |
$ 6,181.00 |
$ 6,425.00 |
$ 7,997.00 |
$ 7,460.00 |
|
Items that will not be reclassified to the income statement |
||||
|
Revaluation |
$ 1.00 |
$ (1.00) |
$ (164.00) |
$ (54.00) |
|
Fair value changes in financial liabilities |
$ 11.00 |
$ (113.00) |
||
|
Currency Adjustments at fair value |
$ 4.00 |
$ (183.00) |
||
|
Revaluation Losses |
$ (1.00) |
$ (51.00) |
||
|
Tax on items transferred to equity |
$ 31.00 |
$ 23.00 |
||
|
Re-measurement of defined benefit obligation as shown in equity |
$ 190.00 |
$ (47.00) |
||
|
Sub Total |
$ 46.00 |
$ (325.00) |
$ 26.00 |
$ (101.00) |
|
Items that may be subsequently reclassified to the income statement |
||||
|
Foreign currency translation reserve |
$ (283.00) |
$ 249.00 |
$ (116.00) |
$ (238.00) |
|
Cash flow hedging reserve |
$ (114.00) |
$ 32.00 |
$ 24.00 |
$ (283.00) |
|
Gains/(losses) on available-for-sale securities: |
$ 72.00 |
$ 48.00 |
||
|
Share of associates’ other comprehensive income: |
$ 12.00 |
$ (17.00) |
||
|
Income tax on items taken to or transferred from equity: |
$ (24.00) |
$ 72.00 |
||
|
Debt instruments at fair value through other comprehensive income reserve |
$ 38.00 |
$ 24.00 |
||
|
Sub Total |
$ (359.00) |
$ 305.00 |
$ (32.00) |
$ (418.00) |
|
Total other comprehensive income |
$ (313.00) |
$ (20.00) |
$ (6.00) |
$ (519.00) |
|
Total comprehensive income for the year |
$ 5,868.00 |
$ 6,405.00 |
$ 7,991.00 |
$ 6,941.00 |
(NAB Annual Report, 2017 and NAB Annual Report, 2016) and(Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
(vii) Reason why other comprehensive items are not reported in income statement
Income statement contains only those items that belong to current financial year and that significant for financial reporting purpose. The other comprehensive income items of does not impact the current accounting profit but it can impact the accounting profit any subsequent year that requires to be reported. There are some items in other comprehensive income statement that does not impact the profit stated in the income statement but certainly impact the profit attributable to the equity shareholders.
(viii) Comparative analysis of items shown other comprehensive income statement of both the companies
The comparative analysis of other comprehensive income statement of both the companies shows that there are many similarities in relation to other comprehensive income items shown under both major heading of other comprehensive income statement but there are some differences in relation to items. The items that will not be reclassified to the income statement significantly impact the profit attributable to shareholders as in year 2016 these items has decreased the income for shareholders with slight increase in year 2017. Items that will be subsequently reclassified to income statement have critically decreased the profit for shareholders of Westpac in both the years with significant impact in year 2016. While in case of NAB these items have reduced the profit for shareholders in year 2017 but increase in year 2016. Overall it has been found that other comprehensive income items have reduced the profit attributable to shareholders (Arnold, 2013).
(ix) Does managers performance depends upon the other comprehensive income items
As other comprehensive income items critically impact the profit attributable to shareholders hence impacts the company profitability position during the year. So it important that such item must be included while evaluating the performance of managers of company.
(x) Tax expenses shown in the financial statements of both the companies
The income tax expenses has been provided in income statement of both the companies and they are different from the tax calculated on the basis of flay income tax rate. The income tax expense as reported in the National Australia Bank was $2480 million in year 2017 and $2553 in year 2016 ( NAB Annual Report, 2017 and NAB Annual Report, 2016). On the other hand income tax expense shown in income statement of Westpac Bank was $3518 million in year 2017 and $ 3184 million in year 2016 (Westpac Annual Report, 2017 and Westpac Annual Report, 2016).
(xi) Calculation of effective tax rate for both the banking companies for last two years
Effective tax rate means percentage of tax rate calculated using the actual tax expenses income earned before tax. It means effective tax rate provides the percentage of tax that company had to pay on the earning before tax.
|
Calculation of Effective tax rate |
||||
|
Particulars |
NAB |
Westpac |
||
|
2017 |
2016 |
2017 |
2016 |
|
|
Profit before tax |
$ 2,480.00 |
$ 2,553.00 |
$ 3,518.00 |
$ 3,184.00 |
|
Actual tax expenses reported in income statement |
$ 8,661.00 |
$ 8,978.00 |
$ 11,515.00 |
$ 10,644.00 |
|
Effective Tax Rate |
28.63% |
28.44% |
30.55% |
29.91% |
(NAB Annual Report, 2017 and NAB Annual Report, 2016) and (Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
On the basis of calculated effective tax rate of both the banking companies it can be Westpac has higher effective tax rate as compared to NAB.
(xii)Deferred tax assets and deferred tax liabilities as reported in financial statement of both the companies
Before understanding the concept of deferred tax assets and deferred tax liabilities it is important to understand why these assets and liabilities arise. The difference in calculation of book tax (Accounting tax) and cash tax (income tax expense) bring in the timing differences to treat various elements of financial statement for tax purpose. The timing differences can either be temporary or permanent in nature depending upon its reversal in any subsequent year. The temporary timing differences are capable of reversing while permanent timing differences are not capable of reversing. It is important to give accounting treatment to temporary timing differences in book of accounts as future tax treatment either creates deferred tax assets or deferred tax liabilities. Deferred tax assets reflect the amount of tax paid by the company in current year even the liability to pay such taxes has not been aroused in that year (The Tax Council, 2008). A deferred tax asset is shown in assets side of balance sheet as they are capable of generating tax benefits in any subsequent year. It is type of tax credits availed by the company due to difference of treatment of tax in accounting GAAP and income tax laws. On the other hand deferred tax liabilities arise when company does not settle the current tax liabilities and has to be settled in any subsequent year. This is the reason why deferred tax liabilities have to be shown in balance sheet to give effect to the expenses that are due but not paid (Deegan, 2013).
Following information shows the deferred tax assets and deferred tax liabilities shown in financial statement of National Bank of Australia:
(NAB Annual Report, 2017 and NAB Annual Report, 2016)
Above image shows various elements that are shown as deferred tax assets and deferred tax liabilities in balance sheet.
Following is the deferred tax assets and deferred tax liabilities shown by Westpac in their financial statements:
The possible reasons why deferred tax assets and liabilities have been recognised in both the financial statements of the companies is to give effect to the temporary differences that arises due to tax bases of assets or liabilities and carrying value of both. The main reason why deferred tax assets are created is because it is probable that future taxable amounts will be there to offset the currently created tax assets (The Tax Council, 2008).
(xiii) Increase of decrease in deferred tax asset and deferred tax liabilities in case of both companies
As per notes to accounts of National Bank of Australia the total deferred tax assets was $2254 million in year 2016 and it got decreased to $2292 million in year 2017. The balance of deferred tax asset has been shown without considering set off of deferred tax liabilities from the balance of deferred tax liabilities. The total balance of deferred tax liabilities in case of NAB was $329 million on year 2016 and it got reduced to $ 304 million in year 2017.
Westpac has realized deferred tax assets of amount $ 2176 million in year 2016 and it got decreased to balance of $ 1692 million in year 2017. This amount is calculated without giving effect of settlement of deferred tax liabilities that have been created in same year. The deferred tax liabilities have been $ 861 million in year 2016 and it got reduced to $ 590 million in year 2017. So overall it can be said that balance of deferred tax assets and deferred tax liabilities have been decreased in year 2017 as compared to year 2016 in case of both the selected companies (Firer, 2012).
|
Calculation of cash tax amount for both the companies |
||||
|
Particulars |
NAB |
Westpac |
||
|
2017 |
2016 |
2017 |
2016 |
|
|
Book Taxes as per income statement |
$ 2,480.00 |
$ 2,553.00 |
$ 3,518.00 |
$ 3,184.00 |
|
Changes in deferred taxes |
||||
|
Less: Increase in deferred tax assets |
$ (63.00) |
$ (175.00) |
||
|
Add: Decrease in deferred tax assets |
$ 216.00 |
$ 239.00 |
||
|
Add: Decrease in deferred tax liabilities |
$ 26.00 |
$ 19.00 |
||
|
Current income taxes or cash tax amount |
$ 2,417.00 |
$ 2,769.00 |
$ 3,783.00 |
$ 3,028.00 |
|
Note: For the purpose of calculation of cash tax amount, the adjustment related to unlevered expenses or gain has been made but due to banking companies there is no requirement to make such adjustments |
( NAB Annual Report, 2017 and NAB Annual Report, 2016) and (Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
(xv) Calculation of cash tax rate for both the banking company
In order to calculate the cash tax rate there is need to divide the cash tax amount by EBITA as provided in income statement. The following table shows the cash tax rate of both the banking companies:
|
Calculation of cash tax amount for both the companies |
||||
|
Particulars |
NAB |
Westpac |
||
|
2017 |
2016 |
2017 |
2016 |
|
|
Cash Tax Amount |
$ 2,417.00 |
$ 2,769.00 |
$ 3,783.00 |
$ 3,028.00 |
|
EBITA (Operating Income) |
$ 9,145.00 |
$ 8,958.00 |
$ 11,692.00 |
$ 10,955.00 |
|
Cash tax rate |
26.43% |
30.91% |
32.36% |
27.64% |
( NAB Annual Report, 2017 and NAB Annual Report, 2016) and (Westpac Annual Report, 2017 and Westpac Annual Report, 2016)
In year 2016, NAB has higher cash tax rate while in year 2017, Westpac has higher tax rate. It means in year 2016, NAB has paid higher tax to tax authorities as compared to Westpac while in year 2017, Westpac has paid higher tax as compared to NAB.
(xvi) Difference between cash tax rate and book tax rate
The book tax rate is the percentage of book tax amount presented in financial statements. It is also called as effective tax rate as it calculated as percentage of total tax shown in financial statements and profit before tax. On the other hand cash tax rate is the actual rate on which company has paid the taxes to the government and it is calculated as a percentage of cash tax amount and earnings before interest and tax and amortization (The Tax Council, 2008).
References
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and Markets. John Wiley & Sons.
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
FIRER, C. 2012. Fundamentals of Corporate Finance. 5th Edition. Berkshire.McGraw-Hill Companies, Inc.
NAB Annual Report 2016. [Online]. Available at: https://www.nab.com.au/content/dam/nabrwd/documents/reports/financial/2016-annual-financial-report.pdf [Accessed on: 18 September 2018].
NAB Annual Report 2017. [Online]. Available at: https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2017-annual-financial-report.pdf [Accessed on: 18 September 2018].
National Bank Australia: About us. 2018. [Online]. Available at: https://www.nab.com.au/#[Accessed on: 18 September 2018].
The Tax Council. 2008. Cash Tax vs Book Tax. [Online]. Available at: https://www.thetaxcouncil.org/wp-content/files/2013/05/Cash-Tax-vs-Book-Tax_final.pdf [Accessed on: 18 September 2018].
Westpac Annual Report 2017. [Online]. Available at: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2017_Westpac_Annual_Report_Web_ready_&_Bookmarked.pdf [Accessed on: 18 September 2018].
Westpac Annual Report 2017. [Online]. Available at: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2016_Westpac_Annual_Report.pdf [Accessed on: 18 September 2018].
Westpac Group: About us. 2018. [Online]. Available at: https://www.westpac.com.au/about-westpac/westpac-group/ [Accessed on: 18 September 2018].
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download