Analysis Of National Australian Bank And ANZ Group Limited In An Essay.

Owners Equity

Select two public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, "Investors", "Shareholder Information" or similar name. 

In this section, go to your companies' annual reports and save to your computer your fimrs. latest annual reports consecutively for last three years. Do not use your companies' intethn financial statements or their concise financial sthtements. Please read the financial statements (balance sheet, income statement, statement of changes in owner's equity, cash flow statement) very carefully. Also please read the relevant footnotes of your companies' financial sthtements carefully and include information from these footnotes in your answer. 

(i) From your companies Financial Statements , list each iteam of equity and write your understanding o each item . Discuss any changes each iteam of equity for yours firm over the past year articulating the reasons for the change. 

(ii) Provide a comparative analysis of the debt and equity position of the two firms that you have selected. 

(iii) From the financial statement of your chosen companies, list each item reported in the cash flows statement and write your understanding of each item. Discuss any changes in each item of cash flows statement for your companies over the past years articulating the reasons for the change. 

(iv) Provide a comparative analysis of your companies' three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years. 

(v) Also provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis.

(vi) What items have been reported in the other comprehensive income statement for each company? 
(Al) Why have these items not been reported in Income Statement/Profit and Loss Statements? (Aii) 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? 
(ix) Should other comprehensive income be included in evaluating the performance of managers of the company? 

(x) What are the tax expenses shown in the latest financial statements of the two companies that you have selected? 
(xi) Calculate the effective tax rate for both companies that you have selected. Effective tax rate is calculated as (income tax expense / earnings before tax). Which one of the companies has the higher effective tax rate? 
(xii) Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded. 
(xiii) Was them any increase or decmase in the deferred tax assets or in the deferred tax liability reported by each of your selected companies? 
(xiv) Pkase calculate the ca. tax amount for both companies using the book tax amount, changes in the deferred tax ass. and deferred tax liability (please do your own research for your better understanding of these concepts and the method of calculating the cash tax amount the book tax amount.) 
(xv) Calculate the cash tax rate for both companies. Which company has higher cash tax rate? (Please do your own msearch to familiarise yourself with how to calculate cash tax rate). 
((vi) Why is the cash tax rate different from the book tax rate? 

Please remember some aspects of your companies' treatment of tax can be a very complicated area, particularly for some companies. For a better understanding of the concepts included in the assignment that has not been introduced in the class, please do your own research. 

National Australian Bank and Australia and New Zealand Bank Group Ltd are among the largest Australian financial institutions. The ANZ is one of largest financial institution in Australia after CBA, NAB and the Westpac. The bank was established in the year 1951 and has banking operations in over 34 other countries. Besides, it is one of the largest financial institutions in New Zealand operating two main brands the National Bank and the ANZ in New Zealand. It is the third largest financial institution in Australia by market capitalization. Additionally, ANZ offers retail services and products to different clients and private banking clients across Australia via branch network, contact centre, mortgage specialists as well as numerous self-service channels like phone banking, website, internet banking, ATMS, corporate and digital banking (ANZ 2017). It also offers commercial banking services that entail financial solutions via its dedicated managers who are mostly focused on medium, large and privately owned small firms. The banks institutional segment offers liquidity and work capital solutions, including supply chain financing, clearing, deposits, cash management solutions, documentary trade, payments, specialised loan execution and structuring, export and project finance, acquisition finance, corporate advisory services, debt structuring, loan syndication as well as risk management services on the interest rate, foreign exchange, commodities, wealth solutions, credit and debt capital management (Investing.com 2018). Its New Zealand segment provide commercial and retail banking services and wealth management services to the small business and private banking clients. On the other hand, its Wealth Australia segment offers mortgage, general and life insurance services while it Asia pacific retail segment provides wealth management and general banking services to the medium- and small-sized enterprises institutional clients as well as government institutions.

On the other hand, the NAB is considered as the largest banking institutions within Australia. Besides, this bank offers an array of financial services which include wealth management, banking as well as a platform for the investment banking. Additionally, the bank has locations across New Zealand and Australia as well as in US and UK. Also, NAB has highly regarded research division that releases its business confidence resulting indicators each month followed by the traders globally. In other words, NAB is amongst the big four financial institutions in Australia (NAB 2017). It has over 1,590 service centres and branches and around 4,412 ATMS operating across Asia, New Zealand and Australia serving approximately 12.7 million consumers. With these considerations, the report presents analysis of NAB and ANZ Group. It starts with analysis of their owner’s equity statement and the analysis of cash flow statements. Further, the report present analysis of their other comprehensive Income and items there is as well as analysis of how they both account for their income tax.

Based on NAB statement of the owners’ equity, it is evident that there were a number of items reported. One of the key item reported in this statement include contributed equity, retained profits, reserves as well as non-controlling interest in the controlled entities (Investing.com 2018). Contributed equity comprised of the issuance of the ordinary shares, redemption of the national capital instruments as well as transfer from the equity-based compensation reserves. On the other hand, reserves comprises of total comprehensive income in the year. This also comprised of transfer to the retained profits, transfer from the equity-based compensation reserve as well as equity-based compensation. Retained profit on the other hand, comprised of total comprehensive income, redemption of the national capital instruments, transfer to the retained profits, dividend paid as well as distribution on the other equity instruments.

Items Reported on NAB and ANZ Group Statement of Equity

Contribution equity in million for NAB are said to have increased over the last two years moving from 32,524 million to 32,866 million by June 2017 (NAB 2017). This indicates a slight increase in the contribution equity over the years. The increase in the contribution equity could have been as a result of continued issuance of the ordinary shares by the bank in the year 2017. On the other hand, reserves for the bank decreased from 309 million in the year 2016 to around 190 million in the year 2017. The decrease is attributed by the negative in the total comprehensive income over the period as well as the decrease in the transfer to the retained profits and transfer from the equity-based compensation reserves. Further, retained profit over the period experienced a slight decrease moving from 15,719 million in the year 2016 to around 15,545 million by 2017. The decrease is attributable to increased dividend paid to its shareholders over 2017.

On the other hand, based on ANZ Group statement of the owners’ equity, it is evident that some of the items reported include reserves, ordinary share capitals, the retained earning as well as non-controlling interests. Reserves for the company decreased from 1,078 million in 2016 to 37 million in 2017 (ANZ 2017). Furthermore, ordinary shareholders’ capital increased from 28,765 million to 29,088. This is attributable to dividend reinvestment plan. Additionally, retained earnings increased over the years moving from 27,975 million to 29,834 million.

NAB shareholder’s equity over the period was approximately 51,317 million. This was a slight increase from what was reported in 2016 where the bank reported equity of around 51,315 million (Investing.com 2018). Further, NAB total debt has been increasing over the years with the debt moving from 725,395 million to 737,008 in the last two years. This is a clear sign that the bank is been overlying on debt financing to finance its day to day operations rather than its owner’s equity. On the other hand, ANZ Group total equity increased over the period moving from 57,927 million to 59,075 million (ANZ 2017). Nonetheless, its total debts decreased from 856,942 in 2016 to 838,251 million in 2017. This is a clear sign that the two banks; that is, both ANZ and NAB rely more on debt financing rather than on equity financing.

Based on NAB cash flows statement analysis, it is evident that there were several items reported. These items were grouped or categorized into three major categories; that is, cash emerging from the operations, the cash outflow from the investing undertakings and finally cash from the financing undertakings.  Items included in the cash from the operation section include the amount of interest received and amount of interest paid. Interest received decreased over the years moving from $28,338 million in 2016 to around 27,176 in 2017 while interest paid decreased from as high as $15,592 million to $14,315 million by 2017. Another item reported in this section is dividend received. Dividend received by NAB is found to have increased from 21 million reported in 2016 to around 36 million reported in 2017 (Investing.com 2018).. There is also life insurance which comprised of investment revenue received, premiums and the other revenue received and policy payment and the commission expenses. Amount of premium as well as other revenue received is found to decrease from 9,426 million in 2016 to 76 million in the year 2017 while investment revenue received decreased from 1,797 million to 5 million in 2017. Another items reported in the cash flow from the operations section include net trading income paid which is found to have decreased from 3,351 million in 2016 to about 3,198 million in 2017. Other items include operating expense paid, other operating income received as well as income tax paid. All these amount are said to have experienced a significant boost with payments moving downward while revenues increasing upwards. There are also trading securities, deposits as well as other borrowings, loans and advances, net increase in the deposits with the central banks as well as net movements in the life insurance liabilities and assets.

Cash Flows Statement

On the cash from the investing activities, items reported comprised of movement in the debt instruments at the fair value vial the other comprehensive income; that is, proceeds from the maturity and disposal and purchases, movement in the other equity and debt instruments; that is proceeds from maturity and disposal and purchases (Investing.com 2018).. There are also purchases of the controlled entities and the business combination, proceeds on the sales of the joint ventures and associates, proceeds from sales of PPE, purchases of the PPE as well as proceed from the sales of the controlled entities. Further, based on the second section, that is, cash from the financing undertakings, the key items reported include repayment of the bonds, which increased from 29,543 million to 32,426 million. There are also proceeds from the other debt issues and repayment of the other debt issues. Another item reported in this section is proceeds from the issuance of the bonds and repayment of the other contributed equity. Finally, there is distribution and dividend paid which increased from 4,593 million in 2016 to around 4,750 million.

Based on ANZ Group cash flow statement, it is clear that the items recorded there in were categorized into three broad categories; that is, cash from operations, cash from the investment as well as cash utilized in financing its activities (Investing.com 2018).. Items reported in the first section of the cash flow statement include profit after tax, depreciation and amortization, collateral paid, profit on the sale of the PPE, provision for the credit impairment, trading securities, impairment of the investment in the AmBank, net loans and advances, collateral received, deposits and borrowings as well as life insurance contracts. On the other hand, items reported in its cash used in its investment activities include purchases, Esanda dealer financial divestment, available-for-sales asset, purchases, as well as sales of the Asia retail business. Finally, items reported in the third section; that is, cash used by the financing activities include issue proceeds, dividends paid, redemptions as well as share-buy-back.

NAB amount of cash collected from the operations was 13,217 in the year 2017, this is an decrease from the year 2016 where the bank had reported net cash from the operation of 14,460 million and in 2015 the bank had recorded 14,562 million (Investing.com 2018).. Further, based on NAB cash flow statement, it is evident that total amount utilized in its investment activities decreased from 9,970 million in the year 2016 to around 313 million in the year 2017 (NAB 2017). The decrease in this amount was mostly attributed by increment in the amount of proceeds collected from sales of the controlled entities as well as due to proceeds collected on sale of the joint venture and associates. Additionally, from the statement, it is evident that NAB cash flows from its financing undertakings decreased from 9,496 million in the year 2016 to around -331 million in the year 2017. The decrease was attributed by the significant decrease in proceeds from the issuance of the bonds as well as due to repayments of the other debt issues. It was also attributable to increase in repayments of the bonds over the year.

Items Reported on NAB and ANZ Group Statement of Cash Flows

On the contrary, ANZ Group’s cash from operations increased with a significant margin moving from 10,841 million in 2016 to around 23,972 million in 2017. Further, its cash utilized in its investment decreased as from 14,410 million to 12,830 million. Moreover, cash provided by the financing activities decreased from 1,958 million in 2016 to -6,667 million in 2017 (ANZ 2017). Therefore, ANZ Group seems to enjoy relatively higher cash flow generation compared to NAB.

Based on the two banks cash flow analysis, it is evident that the NAB has been doing better than its counterpart ANZ Group in cash flow generation and cash flow management. In fact, the analysis shows that NAB has been in a position to generate significant amount of the cash flow over the years from its operations; hence, it has relatively high amount of cash and cash equivalent over the period.

Based on NAB (2017), the main items reported in the bank’s statement of the other comprehensive income include fair value variations on the financial liabilities that is designated at the fair value attributable to bank’s own credit risk. The fair value variation reported in the year 2017 was around 11 million which was a major increase from the previous year (Investing.com 2018). Another item reported in the statement is revaluation of the land and buildings. The amount for revaluation of the lands and buildings was at 1 million in the year 2017 compared to -1 million which was reported in 2016. This shows that revaluation of the lands and buildings increased with significant margin over the period. The third item reported on the equity statement was currency adjustment on the translation of the other contributed equity. This amount was at 4 million in 2017, an increase from -183 million reported in the year 2016. Such means that the amount increased over the year (NAB 2017). The fourth item was equity instruments at the fair value via the other comprehensive income which comprised of the tax on the items transferred to the equity directly and revaluation losses. The tax on the items transferred to the equity increased as from 23 million in 2016 to around 31 million. All the above items formed the total items which would not at any point be reclassified to the income statement. Other items reported in the statement include those items which would be reclassified subsequently to income statement. These items included the cash flow hedges; that is, losses transferred to income statement and gains on the cash flow of the hedging instrument. The other item was the foreign currency translation reserves; that is transfers to income statement on a disposal of the foreign operations as well as currency adjustments on the translation of the foreign operations.  There are also revaluation gains and gains from the sale transferred to income statement. The items reclassified subsequent to the income statement plus items that would not be reclassified to the profit or loss statement forms other comprehensive income.

On the other hand, based on ANZ Group statement of other comprehensive income, there are a number of items reported in this statement. Some of these items include items that could not be reclassified to the income statement. These amounts for these items were 26 million in the year 2017 (ANZ 2017). Other items were those items that might be reclassified to the income statement which include exchange differences taken to the equity of around 748 million, exchange difference that was transferred to the income statement as well as other reserve movement. It also includes items such as share of the associates and income tax that was attributable to other reserve movements (Investing.com 2018)..

Other Comprehensive Income Statement

Those items in other comprehensive statement are not necessarily reported in the income statement (Black 2016). This is based on the fact that the items are yet to be realized as incomes thus no need to report them to the income statement till they are realized (Khan, Bradbury & Courtenay 2018).

The other comprehensive income for the two firms differed accordingly based on the company financial performance. To be more specific, ANZ Group other comprehensive income decreased over the year from -585 in 2016 to -1,040 in 2017. This was the case in NAB where the total other comprehensive income decreased as from -20 million in 2016 to -313 million in 2017. In case all the items reported in the other comprehensive income statement were reported in income statement, all the amount of profit attributable to stakeholder’s equity would in return decline for the two firms.

With the fact that items reported in other comprehensive income statement result in a decline in organization’s net income, the items and in particular other comprehensive income analysis ought to be included while examining or evaluating managers’ performance (Bradbury 2016). This is due to the notion that items reported in the statement have significant impact on the organization’s profitability and in particular net income generation (Pascan 2014).

Accounting for Corporate Income Tax

Tax expenses usually entail income before tax then multiplied by a specific tax rate. The amount of tax expenses reported in NAB and ANZ Group financial statements include income tax expense and corporate tax expense. NAB incurred $2,480 million as income tax expenses in 2017. Nonetheless, ANZ Group income tax expenses were approximately 3,206 million in the year 2017. This means that ANZ Group income tax expenses were higher compared to those one paid by NAB.

Effective tax rate is usually computed by dividing income tax expenses by the EBIT (Elschner & Vanborren 2009). Therefore, in our case, effective tax rate for ANZ and NAB would be as shows below:

ANZ Effective tax rate = 3,206/9,627 = 33.30%

NAB Effective tax rate = 2,480/8,661 = 28.63%

From the above results, it is clear that ANZ Group had high effective tax rate compared to its counterpart; NAB.

NAB deferred tax assets was approximately 1,988 in the year 2017 while it had no deferred tax liabilities within this year. On the other hand, ANZ Group deferred tax asset were 675 million in the year 2017 while the deferred tax liabilities were 257 million. The deferred tax assets as well as the liabilities are usually reported in the firms’ balance sheets in order to give a provision for future taxation that might arise whenever the taxable incomes are significantly lower than the net incomes or the profit generated before tax.

Based on the NAB balance sheet, it is evident that NAB deferred tax assets increased over the year with a significant margin moving from 1,925 million by 2016 to around 1,988 million by 2017. Nonetheless, since there was no deferred tax liabilities it is evident that the bank deferred neither tax liabilities did not increase nor decrease. This is based on the notion that there was nothing to increase or decrease. On the other hand, deferred tax assets for ANZ Group decreased as from 623 million in 2016 to around 675 million in the year 2017. Its deferred tax liabilities also decreased from 227 million in 2016 to 257 million in 2017.

Cash tax is usually equals to = the book tax + upsurge in company’s deferred tax liabilities – increment in company’s deferred tax assets

Therefore, NAB’s cash tax = 2,480 + (0) – (1,988-1,925) = 2,417

ANZ’s cash tax = 3,206 + (257-227) – (675-623) = 3,184

According to Noor and Fadzillah (2010), Cash tax rate is usually computed by dividing cash tax amount by the EBIT. Hence, in this scenario, ANZ Group’s cash tax rate = 3,184/9,627 = 33.07%

NAB’s cash tax rate = 2,417/ 8,661 = 27.91%

As from the above result, it can be stated that ANZ Group had high cash tax rate than its counterpart.

Cash tax rate is said to vary from book tax rate since the computation of the cash tax rate is based on original income tax expense plus the variation in the deferred tax asset and the company’s deferred tax liabilities (Devereux, Lockwood & Redoano 2009). This is not the case for the book tax rate since this is only computed by dividing original tax expense by the reported EBIT.

Conclusion

In conclusion, ANZ Group and NAB are considered as some of the largest banking institution in Australia in terms of market capitalization. Therefore, based on the analysis, ANZ Group seems to be doing relatively better in terms of cash flow generation and in terms of tax income management compared to NAZ. Furthermore, the ANZ Group ANZ Group is doing better in equity management and debt management compared to NAB which seems to be overlying on debt financing to finance its operations over the period.

References

ANZ (2017), ANZ annual report 2017: Viewed from: https://shareholder.anz.com/sites/default/files/2017_anz_annual_report.pdf (Accessed at 18th September 2018)

Black, DE (2016), ‘Other comprehensive income: a review and directions for future research,’ Accounting & Finance, 56(1), 9-45.

Bradbury, ME (2016), ‘Discussion of ‘Other comprehensive income: a review and directions for future research,’ Accounting & Finance, 56(1), 47-58.

Devereux, MP, Lockwood, B & Redoano, M (2009), ‘Do countries compete over corporate tax rates?,’ Journal of Public Economics, 92(5-6), 1210-1235.

Elschner, C & Vanborren, W (2009) Corporate effective tax rates in an enlarged European Union (No. 14). Directorate General Taxation and Customs Union, European Commission.

Investing.com (2018), ANZ Banking Group (ANZ) Company profile: Viewed at: https://www.investing.com/equities/australia---nz-banking-grp-ltd-company-profile (Accessed 6th September 2018)

Investing.com (2018), National Australia Bank Ltd (NAB): Viewed from: https://www.investing.com/equities/national-australia-bank-limited-ratios (Accessed at 18th September 2018)

Investing.com (2018), National Australia Bank Ltd (NAB): Viewed from: https://www.investing.com/equities/national-australia-bank-limited-income-statement (Accessed at 18th September 2018)

Investing.com (2018), National Australia Bank Ltd (NAB): Viewed from: https://www.investing.com/equities/national-australia-bank-limited-balance-sheet (Accessed at 18th September 2018)

Khan, S, Bradbury, ME & Courtenay, S (2018), ‘Value Relevance of Comprehensive Income,’ Australian Accounting Review, 28(2), 279-287.

NAB (2017) National Australian Bank annual report 2017: Viewed from: https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2017-annual-financial-report.pdf (Accessed at 18th 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.

Pascan, ID (2014), ‘Does comprehensive income tell us more about an Entity’s Performance Compared to Net Income,’ Study on Romanian Listed Entities.