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Equity and liability positions of Medibank Ltd, QBE Insurance Group Ltd, and NIB Health Funds

(i) From your companies’ financial statements, list each item of equity reported and write your understanding of each item. Discuss any changes in each item of equity
for your firms over last three years articulating the reasons for the change.

(ii) From your companies’ financial statements, list each item of liability reported and write your understanding of each item. Discuss any changes in each item of liability
for your firms over last three years articulating the reasons for the change.

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

(iv) 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 last three years articulating the reasons for the change.

(v) 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.

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

(vii) What items have been reported in the other comprehensive income statement for each company?

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

(ix) Provide a comparative analysis of the items shown in the other comprehensive income statement section for the three 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?

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

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

(xii) Calculate the effective tax rate for all three 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?

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

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

(xv) Please calculate the cash tax amount for all three companies using the book tax amount, changes in the deferred tax assets 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.)

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

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

Equity and liability positions of Medibank Ltd, QBE Insurance Group Ltd, and NIB Health Funds

The analysis of the various medical and health care services of the various companies operating in the Australia were analysed for the company. The various parts of the financial report and the components of the equity and liabilities of the companies were discussed and the reason behind the changes in the value of the same were taken into consideration for analysis. The changes in the cash flow statement of the company and the trend followed by the companies in the three years of times frame was also discussed (Nib.com.au 2018). The evaluation of the other comprehensive income statement of the company and a comparative analysis of the various items of the health care companies were discussed. The analysis of the accounting for the corporate income tax rate and the effective tax rate for the company was determined. The effective tax rate and the cash tax rate for the company thereby analysing the various aspect of the taxation was taken into consideration. On an overall basis the complete description of the above three companies were provided in various financial aspects (Catão and Milesi-Ferretti 2014). 

  1. Changes in Equity: The Changes in equity could be well attributed to the various components of the equity, which are in the financial statement of the company. Common Stock, Retained Earnings and Other Comprehensive Income are some of the common items that were reported by the companies(Mourik 2014). The changes in Equity level was attributed and analysed for the three-year trend period and relevant analysis was discussed in the same context.
  • Common Stock: The common stock for the NIB Health Funds has remained the same in the year 2016 and 2017 and has changed consistently in the year 2018. The common stock for the company increased in the year 2018. The common stock for the Medibank Ltd Company has remained the same showing that the company has not increased the equity base financing for the company in the trend period. The common stock for the QBE Insurance Group ltd. has remained almost the same for the company but has fallen slightly reflecting that the company have buy backed the shares of the company(Braun, Schmeiser and Siegel 2014).
  • Retained Earnings: The retained earnings for the NIB Health Fund Company has increased from the year 2016 and 2017 and the same has consistently decreased consistently in the year 2018(Nguyen 2016). The fall could be attributed to the buyback that is done by the company by utilizing the retained profits of the company.  The retained earnings of the Medibank Company has increased consistently with the rising profitability and retention ratio of the company. The retained earnings of the NIB Holdings Ltd Company has also increased for the company with the increasing profitability of the company (Prampolini and Morini 2017).
  1. Changes in Liability: The various components of the liability that were reported by the company were the Short Term Debt, Long Term Debt, Unearned Premiums and Deferred Income Taxes(Campbell, Galpin and Johnson 2016).
  • Unearned Premium: The changes in the unearned premium represents the contingent liability of the companies. The unearned premium for the QBE Insurance Group Ltd has fallen consistently for the company in the three years of period. The unearned premium for the Medibank Ltd has increased for the company in the trend period reflecting the company is collecting fees and charges in advances from customers for the services that the company will be providing. The unearned premium for the NIB Holding Company also increased for the company in the trend period as same as the Medibank Company reflecting the contingent liability that is recognized in the financial statement of the company.
  • Deferred Income Taxes: Thedeferred income taxes for the company changed frequently for the companies in the financial year 2016-2018. The deferred income tax for the QBE Insurance Company decreased slightly in the trend period representing a reducing liability in the deferred taxes for the company.  The Deferred income tax for the Medibank Company increased from the year 2016-17 with the increasing profitability of the company. The deferred income tax for the NIB Company has also increased for the company and remained volatile for the company. The changes in the deferred income taxes could be well attributed to the changing depreciation method, recognition of revenues and valuation of the inventory for the company.
  • Changes in Debt and Equity: The change in the debt and equity for the companies was evaluated by assessing the changes in the financing source of the companies.

Debt and Equity Position of Firm (2016)

Particulars

QBE Ltd

Medibank Ltd

NIB Ltd

Debt

4815220

1687500

151867

Equity

14378593

1578700

387651

Debt and Equity Position of Firm (2017)

Particulars

QBE Ltd

Medibank Ltd

NIB Ltd

Debt

4787175

1742700

151700

Equity

14212272

1719800

428600

Debt and Equity Position of Firm (2018)

Particulars

QBE Ltd

Medibank Ltd

NIB Ltd

Debt

4626923

1715700

229500

Equity

11357692

1829200

557800

Debt and Equity Position of Firm (2016)

Particulars

QBE Ltd

Medibank Ltd

NIB Ltd

Debt

25.09%

51.67%

28.15%

Equity

74.91%

48.33%

71.85%

Total

100%

100%

100%

The debt and equity position shows the effect of the company on the financials of the company and the implication thereby on the overall capital structure of the company. The debt position in the company shows the overall effect of the financial risk of the company in contrast to the total capital structure of the company. Thus, it is optimal for the companies that they maintain an optimal debt to equity ratio for the company. 

  1. The Cash flow statement for the company is broadly divided into three broad categories as cash flows from operating, investing and financing activities. The Operating activities shows the operating activities conducted by the company on a cash basis. The investing activity shows the purchase or sales of fixed assets for the company. The financing activities shows the amount and sources of financing activity done by the company(Robinson et al. 2015). The Cash flow analysis for the respective company was done for the three year trend period and the relevant analysis in regard to the same were taken into consideration for the companies.
  2. Comparative Analysis

Particulars (2018)

QBE Ltd

Medibank Ltd

NIB Ltd

Cash Flow from Operating Activities

172

408.3

233.8

Cash Flow from Investment Activity

297

-190.8

-182

Cash Flow from Financing Activity

-721

342

75

Particulars (2017)

QBE Ltd

Medibank Ltd

NIB Ltd

Cash Flow from Operating Activities

559

393.4

171.7

Cash Flow from Investment Activity

158

75.9

-61

Cash Flow from Financing Activity

-555

313.4

-80.8

Particulars (2016)

QBE Ltd

Medibank Ltd

NIB Ltd

Cash Flow from Operating Activities

-16

352.3

148.4

Cash Flow from Investment Activity

-555

-38.6

-211.8

Cash Flow from Financing Activity

-388

-283.7

30.5

The Cash flow activities of the companies were evaluated by taking the changes in the operating, investing and financing activities of the company. The cash flow from operating activity for the QBE Ltd Company has been volatile and changing frequently reflecting volatile operations of the company. The operating activities of the Medibank Company at the same time has remained sustainable. Investment and financing activities for the company at the same time has remained sustainable for the above three companies and not much material changes were seen(Lin et al. 2015).

  • The items that were reported in the comprehensive income statement of

Medibank Ltd:

  • Revaluation of Land and Buildings
  • Actuarial Gain/Loss on Retirement Benefit Obligation(Medibank.com.au 2018).

QBE Insurance Group Ltd:

  • Net Movement in Foreign Currency Translation Reserves
  • Net Movement in Cash Flow Hedges
  • Gain/Loss on re-measurement of Super Annuity Plan.
  • Losses on Revaluation of Owner Occupied Property.

NIB Health Funds:

  • Exchange Difference on Translation of Foreign Reserves
  • Income Tax
  • The above items were not reported in the income statement as the items are not directly attributed to the operations of the income statement and the inclusion of the same in the income statement will make it volatile(Wahlen, Baginski and Bradshaw 2014).
  1. Comparative Analysis:

Other Comprehensive Income

2016

2017

2018

QBE INSURANCE GROUP LTD

126

-480

-118

MEDIBANK PRIVATE LTD

2

2.5

0.7

NIB HOLDINGS LTD

94.5

120.1

131.5

 QBE Insurance Group Ltd:The inclusion of OCI will make the company report loss and the financial statement of the company would be volatile.

  • Medibank Pvt Ltd:Other Comprehensive Income for the company has been positive as the company did not had major exposure to foreign currency and other related accounts.
  • NIB Holdings Ltd:The Company had a classified wide range of OCI items which were reported by the company and the company has also classified the range of items that can be classified and attributed to Income statement.
  1. Income is a key measure for managing the performance of the company and the same should be evaluated on an overall basis(Khan and Bradbury 2014). The other comprehensive income statement should be used for the evaluation of the performance of the company. The OCI statement includes several key points that including the revaluation of assets and the foreign currency gains and loss which could be well hedged by application of derivatives contracts should be assessed carefully (Gazzola and Amelio 2014). 
  1. The tax expenses which are show by the company in the financial report are:
  • QBE Insurance Group Ltd:
  • Income Tax Expense on Profit
  • Income tax in Contrast to Other Comprehensive Income Statement.
  • Medibank Pvt Ltd:
  • Income Tax Expenses
  • NIB Health Funds Ltd:
  • Income Tax
  • Taxation on Other Comprehensive Income Statement.
  • The effective tax rate for all the three companies were calculated by the formula (Income Tax Expenses/Earnings before Tax). The effective tax rate for the NIB Health Fund was the highest at around 31.08% among the peer companies evaluated for the trend period 2017-18(Qbe2016.qreports.com.au 2018). The effective tax rate for the company was calculated using the latest financial report of the company.

Particulars

QBE

Medibank

NIB

Profit before Income Tax

1072

628.3

174.4

Income Tax Expenses

228

183.2

54.2

Effective Tax Rate

21.27%

29.16%

31.08%

The deferred tax liability is created when the profit as per the tax law is lower than the actual reported profit in the books of accounts. The deferred tax asset is reported when the profit as per the tax is greater than the tax low. He reason for recording of deferred tax was the variability in the profitability level as per book and tax law. 

Particulars

QBE

Medibank

NIB

Deferred income tax assets

514

0

0

Deferred income taxes Liability

56

15.9

33.6

  • Variability in Deferred Tax Asset and Liability.

Particulars

QBE

Medibank

NIB

Year

2018

2017

2017

2016

2018

2017

Deferred income tax assets

514

778

0

0

0

0

Deferred income taxes Liability

56

106

15.9

27.4

33.6

26.9

Cash flow activities of the three healthcare companies

QBE Insurance Group Ltd: The deferred tax assets for the QBE Company decreased in the year17-18 from 778 to 514mn. The deferred tax liability also decreased by about 50% for the company.

  • Medibank Ltd:The Company did not had any deferred tax asset in the trend period however the deferred tax liability decreased in the trend period.
  • NIB Health Fund Ltd:NIB did not had any deferred tax asset in the financial statement but still the deferred tax liability for the company increased from 26.9mn to 33.6mn in the trend period.
  1. Cash Tax Rate

Particulars

QBE

Medibank

NIB

Income Tax Expenses

228

183.2

54.2

Add: Decrease in DTA

264

0

0

Less: Decrease in DTL

50

11.5

-6.7

Cash Tax

442

171.7

60.9

EBITDA

1072

628.3

174.4

Cash Tax Rate

41%

27%

35%

The company which had the highest cash tax rate was the QBE Insurance Group Ltd having the highest amount of cash tax rate at 41%. NIB Health Fund had a 35% cash tax rate and Medibank has 27% cash tax rate.

The cash tax rate and the book tax rate differs as the cash tax rate takes deferred tax and liabilities into account and then finally computes the actual cash tax which is paid by the company. The cash tax rate is a better assessment way for determining the net tax paid by the company after taking various factors and account in analysis. 

Conclusion

The assignment dealt with covering various aspects like the equity and liability base of the company. The cash flow statements of these companies was also analysed and the changes in the cash flow activities of the companies were also analysed for the last three years of time frame. The health care companies analysed for the purpose of analysis was the Medibank Company, QBE Company and NIB Company. The analysis of the company was done by analysing the equity and liability base of the company. The other comprehensive income statement of the company was also analysed for the company thereby analysing the implication of the same in the financial statement of the company. The OCI statement includes several key points including the revaluation of assets and the foreign currency gains and loss, which could be well hedged by application of derivatives contracts, should be assessed carefully. Taxation effect was viewed for analysing the various aspects and analysing the net cash rate and effective tax rate applicable for the company. On an overall basis there were various approaches and factors that were taken into consideration for the analysis of the companies operating in the industry.

Reference

Braun, A., Schmeiser, H. and Siegel, C., 2014. The impact of private equity on a life insurer's capital charges under Solvency II and the Swiss Solvency Test. Journal of Risk and Insurance, 81(1), pp.113-158.

Campbell, T.C., Galpin, N. and Johnson, S.A., 2016. Optimal inside debt compensation and the value of equity and debt. Journal of Financial Economics, 119(2), pp.336-352.

Catão, L.A. and Milesi-Ferretti, G.M., 2014. External liabilities and crises. Journal of International Economics, 94(1), pp.18-32.

Gazzola, P. and Amelio, S., 2014. Is total comprehensive income or net income better for the evaluation of companies' financial performance?

Khan, S. and Bradbury, M.E., 2014. Volatility and risk relevance of comprehensive income. Journal of Contemporary Accounting & Economics, 10(1), pp.76-85.

Lin, C.C., Chiu, A.A., Huang, S.Y. and Yen, D.C., 2015. Detecting the financial statement fraud: The analysis of the differences between data mining techniques and experts’ judgments. Knowledge-Based Systems, 89, pp.459-470.

Medibank.com.au. (2018). [online] Available at: https://www.medibank.com.au/content/dam/retail/about-assets/pdfs/investor-centre/annual-reports/Medibank_Annual_Report_2018.pdf [Accessed 26 Jan. 2019].

Nguyen, Q.T., 2016. Determinants of Reinvested Earnings of Multinational Subsidiaries in Emerging Economies. In Impact of International Business (pp. 43-61). Palgrave Macmillan, London.

Nib.com.au. (2018). [online] Available at: https://www.nib.com.au/shareholders/file/Appendix%204E%20and%202018%20Annual%20Report.pdf [Accessed 26 Jan. 2019].

Prampolini, A. and Morini, M., 2017. Derivatives hedging, capital and leverage.

Qbe2016.qreports.com.au. (2018). Annual Report. [online] Available at: https://qbe2016.qreports.com.au/xresources/pdf/QBE16AR_Financial_Report.pdf [Accessed 26 Jan. 2019].

Robinson, T.R., Henry, E., Pirie, W.L., Broihahn, M.A. and Cope, A.T., 2015. International Financial Statement Analysis, (CFA Institute Investment Series). John Wiley & Sons.

van Mourik, C., 2014. The equity theories and the IASB conceptual framework. Accounting in Europe, 11(2), pp.219-233.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

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