This report is undertaken to examine the financial report of two selected companies from the Australian Securities Exchange (ASX) for evaluation of their financial performance. The companies selected for analysis are Westpac Banking Corporation and National Australia Bank (NAB) Limited. Westpac Banking Corporation is a leading bank of Australia that is attributed to one among the four major banks within the country. The major products provided by the banking corporation are finance, insurance, consumer banking, investment management, private equity, mortgages and credit card. The bank is known to have about 14 million customers and has attained the position of one of the major service company around the world involved in promoting the welfare of its customers and communities at large. It is also known as most sustainable bank and has been listed in the Dow Jones Sustainability Index (Westpac Group: About us, 2018).
On the other hand, National Australia Bank (NAB) is one of the biggest financial service companies in Australia as per its market capital and earning potential. The major financial solutions provided by the bank are internet banking, insurance credit card, home and personal loans. The bank is mainly involved in providing its financial services in Australian, New Zealand and other businesses located across Asia, the UK and the US. The bank is highly committed to provide customer with high quality financial service products and services. This report aims to particularly present a comparative analysis of the equity position, cash flows and comprehensive income statement of the two companies selected. Lastly, it has carried out a comparative evaluation of the accounting for corporate income tax statement of both the companies (National Bank Australia: About us, 2018).
Statement of Owner’s Equity
Each line item of statement of owner’s equity as seen in NAB owner’s equity statement:
(NAB Annual Report 2016 and 2017)
Each line item of Westpac as listed in statement of change in equity:
(Westpac Annual Report, 2016 and 2017)
The analyses of item of equity of NAB are as follows:
- Total Comprehensives Income of the Year: The comprehensive income covering the realized and unrealized gains or losses incurred during an accounting period has increased significantly in the year 2017 as compared with that of the year 2016. The increase is largely due to a large decrease in the losses arising due to discounted operations in the year 2016. The losses incurred by the company due to such operations have declined in the year 2017 causing a significant increase in the comprehensive income of the year (NAB Annual Report 2016 and 2017).
- Equity-based Compensation: The equity compensation, that is, the non-cash pay provided to the employees, has depicted a decrease in its value from the year 2016 to 2017. This can be due to decline the market value of the bank that is responsible for the less sues of this method by the managers for attracting or retaining employees.
- Issue of Ordinary Shares: This represents the new shares issued by a company for raising capital depicting its continued growth and development in the future period. This equity items have presented an increase in the year 2017 as compared with that of the year 2016. These are equity shares and represent the shares issue to the owners and are not determined to provide any dividend to the investors. Thus, it indicates that the basic voting shares of the banking corporation has been increased representing a significant increase the equity capital (Deegan, 2013).
- Dividend Paid: The dividend paid has also increased in the present year as compared with that of the previous year indicating an incline in the mount of dividend paid to the shareholders equity. This is largely due to the increase in the shares issues to the owner’s and are Total Comprehensive Income of the Year: The overall accounted to be deducted from the retained earnings in the equity statement (NAB Annual Report 2016 and 2017).
Equity Item’s of Westpac are discussed as follows:
- Total comprehensive income: It depicts the revenue realized by the bank because of both of its continued and discontinued operations. It has reported a significant increase in the value in the present year as compared with that of the year 2016. The increase in the amount due to less loss realized from the items of other comprehensive income.
- Share-based payment arrangements: Share-based payment, a transaction involving receiving goods or services from a third party that is settled through equity. It has reported a decrease in the value from the year 2016 to 2017. This represents an increase in the equity of the company due to fewer outflows of cash required for setting the transaction.
- Dividend on ordinary shares: The profit entitled to be retained by the owners and is not distributed to the investors. There has been increase in the value of dividend on ordinary shares due to issue of new ordinary shares by the bank that resulted in increasing the dividend retained on them (Westpac Annual Report, 2016 and 2017).
It can be said from the comparison of debt and equity position for both the firms that there is increase in the debt to equity ratio for NAB bank from 14.14 to 14.46 during the year 2016-2017. There is decrease in the debt to equity ratio from the year 2016 to 2017 for Westpac bank from 13.42 to 12.89. Thus, it can be said that although both the banking corporations are adopting high use of leverage but the debt level of NAB bank is higher as compared with that of Westpac. (Calculation of debt to equity ratio of both the banks is provided in appendix section of this assignment).
Accounting of cash flow statement
Cash Flow Statement Analysis of NAB
- Interest Received: It is a major item of the operating activities section of the cash flow statement of the bank and is a major source of income for the banks. It has depicted a large decrease in the value from 2016 to 2017 that can be mainly due to decline in the interest rate during the financial period.
- Interest Paid: The interest paid on the short and long-term loans by the bank has reported a decrease in the value form the year 2016 to 2017. This can be due to reduction in the cash inflows in the bank (NAB Annual Report 2016 and 2017).
- Changes in operating assets & liabilities arising from cash flow statement: There is decrease in the value form the year 2016 to 2017 that can be regarded due to increase in the current liability of the bank that is not good for its future financial health.
- Investment in Instruments: It is a major item of the investing activity of the cash flow statement and has depicted an increase from the year 2016 to 2017. Thus, it can be said that bank is making increasing investment in purchase of debt instruments for realizing larger cash inflows in the future through selling it.
- Proceeds from issue of bonds, notes and subordinated debt: It is a major item of the financial activity of the cash flow that has depicted a decrease in the value due to less issue of debt instruments by the banks (National Bank Australia: About us, 2018).
There is a net increase in the cash and cash equivalents at the end of the year from the year 2016 to 2017 that is mainly due to less cash utilized by the banks in financing its operations.
Cash Flow Statement Analysis of Westpac Banking Corporation Limited
- Interest Received: The interest received has reported a decrease in the value from the year 2016 to 2017 from 31,817 to 31,133 as result of the reduction in the rate of interest.
- Interest Paid: The bank is also paying less interest for repaying its debt obligations due to less cash realized by the bank form its operating activities
- Issue of loan capital: The cash is used in financing the loans due to issue of loan capital that has increased from the year 2016 to 2017. This represents an increasing potential of the bank to realize cash inflows in the future by realizing interest from the loans.
- Investment in Instruments: There is increase in the cash outflows incurred from purchasing the securities that indicates larger investment incurred by the bank for purchasing the securities.
There is a net increase in the cash and cash equivalents at the end of the year mainly due to less cash utilized by the bank in its investment activities.
In order to provide comparative evaluation three main activities of cash flow statement it has been decided prepare the table that list all three activities for last three years in case of both the companies.
In this section comparative analysis of cash flow statement of both the companies has been performed in relation to each activity. It can be stated from the comparative analysis of the cash flow statement of both the banking companies that there cash flow position is not good. The banks have realized a negative cash flow from the operating activity in the year 2015 due to large capital issued for financing the cash requirements. The cash flow position of the banking companies is good for the year 2016 as there is good inflow of cash from the operating activities. The cash flow position f NAB bank can be regarded as better in comparison to the Westpac. There is reduction n the cash realized from the operational activities in case of Westpac that is responsible for reducing the cash utilized in investment activity. However, NAB has realized adequate amount of cash from its business operations in the same year.
Other comprehensive income statement
This section of this assignment will provide the list items reported in the other comprehensive income statement of both the companies.
(National Bank Australia: About us, 2018) and (Westpac Annual Report, 2016 and 2017)
The income statement prepared for a year mainly contains the significant items that are in relation to the present financial year and need to be disclosed for gaining an analysis of the current financial performance of the bank. On the other hand, the other comprehensive income statement contains the item of income that does not have any impact on the current profitability position but have an influence on the future profitability. This is because the items do not have any impact on the profit reported in the income statement but on the profit available to the equity holders. Thus, such financial items required to be reported in the income statement in the future period on which it has an impact (Weston and Brigham, 2015).
The comparative analysis done in respect of both the companies in relation to other comprehensive income statement shows that both the companies have opted the same method to prepare the statement of other comprehensive income statement and has divided this statement into two major parts i.e. items that will not be reclassified in income statement and items will be reclassified in income statement after certain period of time. If items of other comprehensive income statement were included in the income statement will certainly reduced the profit attributable to the equity shareholders in case of both the companies (Weston and Brigham, 2015).
The items reported in other comprehensive income statement has a direct impact on the profit realized by the shareholders. Therefore, it can be said that manager performance is dependent on the items of other comprehensive income.
Income Tax Accounting in case of both the banks
Tax expense refers to the expense that has been calculated as per the accounting policies and it has been reported in income statement. The income tax is generally calculated on earnings before tax (EBIT less Interest expenses) which means that income tax provides tax shield for the debt expenses paid by the company. According to the income statement of NAB the tax expenses reported in the company income statement was $ 2553 million in year 2016 and $2480 million in year 2017 (National Bank Australia: About us, 2018). Income tax expense reported in Westpac income statement was $ 3184 million in year 2016 and $ 3518 million in year 2017 (Westpac Annual Report, 2016 and 2017).
Effective interest rate is percentage of tax expenses that is calculated on total tax expenses reported in the income statement and profit before tax calculated in the same statement. It is generally different from the normal tax rate on companies due to difference of some important accounting adjustments such as foreign tax rate difference, income adjustment from foreign branches etc. On the basis of calculation (See Appendix Section for calculation purpose) the effective tax rate of NAB was 28.44 % in year 2016 and it was increased in year 2017 to 28.63%. In case of Westpac the effective tax rate was 29.91% in year 2016 and it got increased to 30.55% in year 2017. The effective tax rate of Westpac was higher than the effective tax rate of NAB.
In this section comments on deferred tax assets and deferred tax liabilities for both companies has been provided and also the reason to record them has been given in detail. The difference in calculation of accounting tax (tax expense) and cash tax (actual tax paid) give rise to the timing differences that can be temporary or permanent in nature. Temporary timing differences are capable for reversal in any subsequent year while permanent differences are not capable for reversal in any subsequent year. So it is important to give effect to temporary differences in the balance sheet of the company. The increase or decrease of cash tax in comparison to the tax expenses decides whether deferred tax assets or deferred tax liabilities has to recorded in the balance sheet. Deferred tax assets are recorded when company pay extra taxes in comparison to actual tax expense while deferred tax liabilities are recorded when company has not paid actual tax expenses as calculated (Deegan, 2013). Deferred tax assets are type of tax credits that can be used for future payment of future tax expenses.
Deferred tax assets and deferred tax liabilities reported in case NAB has depicted in the following image:
The items of deferred tax assets and deferred tax liabilities shown in financial statements of Westpac are as follows:
The possible reasons why both the companies have reported the deferred tax assets and deferred tax liabilities is that there are many financial items that are being needed to treat for the temporary differences which ultimately give rise to the deferred tax assets and deferred tax liabilities. Deferred tax assets created by both the companies were because it is probable that there will be future tax liabilities that will help to utilize the deferred tax assets in any future period to pay the tax expenses (The Tax Council, 2008).
On the basis of analyse it has been found that there has been change in deferred tax assets and deferred liabilities in case of both the companies. On the basis of information provided in notes to accounts of NAB it can be said that deferred tax assets has been decreased from $2254 million in year 2016 to $2292 million in year 2017. This balance of deferred tax assets has been shown without considering the net impact of deferred tax liabilities. The balance of deferred tax liabilities has been reduced in current year from $329 million in year 2016 to $304 million in year 2017 (National Bank Australia: About us, 2018).
In case of Westpac it has been found that value of deferred tax assets has been decreased from the balance of 2176 million in year 2016 to $1692 million in year 2017. On the other hand, value of deferred tax liabilities has been also been reduced from $861 million in year 2016 to $ 590 million in year 2017.
So it can be said that overall both deferred tax assets and deferred tax liabilities have been decreased in case of both the companies.
In this section of report cash tax amount has been calculated for the companies for last two years. In order to calculate the cash tax amount there is need to make the adjustments in the value of tax expense reported in the income statement. The adjustments have been made in relation to the change in deferred tax assets and deferred tax liabilities in current as compare to previous year. Complete calculation has been reflected in below table:
(National Bank Australia: About us, 2018) and (Westpac Annual Report, 2016 and 2017)
In order to calculate the cash tax rate there is need to use values of cash tax amount calculated in above part.
Formula to calculate the cash tax rate is: Cash Tax Amount/EBITA (Ross, Jaffe and Kakani, 2008)
Where cash tax amount is amount paid to tax authorities and EBITA refers to earnings before interest, tax and amortisation.
Details of calculation have been seen in below table:
(National Bank Australia: About us, 2018) and (Westpac Annual Report, 2016 and 2017)
On the basis of calculation it has been found that Westpac has higher tax rate as compare to NAB in year 2017 while in year 2016 NAB has higher cash tax rate as compared to Westpac.
The difference of cash tax rate and book tax rate is because of change in value of cash tax rate and book tax amount calculated by the company. The book tax amount is calculated on book profits while cash tax amount is calculated on tax profits. The book profits and tax profits differ due to changes in deferred tax assets and deferred tax liabilities (Higgins, 2012).
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
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: 23 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: 23 September 2018].
National Bank Australia: About us. 2018. [Online]. Available at: https://www.nab.com.au/#[Accessed on: 23 September 2018].
Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.
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: 23 September 2018].
Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.
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: 23 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: 23 September 2018].
Westpac Group: About us. 2018. [Online]. Available at: https://www.westpac.com.au/about-westpac/westpac-group/ [Accessed on: 23 September 2018].