Essay: Corporate Accounting Analysis Of Commonwealth Bank And Westpac Bank.

You need to do the following tasks:

OWNERS EQUITY (5 Marks)

(i) From your companies’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms 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.

CASH FLOWS STATEMENT (5 Marks)

(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.

OTHER COMPREHENSIVE INCOME STATEMENT (5 Marks)

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

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

(viii) 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?

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

ACCOUNTING FOR CROPORATE INCOME TAX (15 Marks)

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

(xiv) Please calculate the cash tax amount for both 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.)

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

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

Companies brief

Corporate accounting is accounting’s part which focuses on the treatment of the accounting figures of the company. It evaluates the different item of the final financial statement of an organization to conclude that whether the company has followed the proper policies or whether the proper presentation has been done by the business to reach over the conclusion. The corporate accounting process plays a crucial role in an organization and stakeholder in order to make it easier for the internal and external stakeholder of the business to identify the performance of the business and compare it with the other companies in the same industry for the purpose of the investment etc. (Lumby and Jones, 2007).

The report has been conducted to understand the process of corporate accounting in better way. The Commonwealth bank of Australia and Westpac bank has been taken into the context to identify the overall position of the business in an organization in order to present, record and evaluate the final financial statement items and figures of the business. The cash flow statement, owner’s equity, comprehensive income statement and corporate taxation treatment of the business has been studied in the report.

Companies brief:

Commonwealths bank of Australia:

Commonwealth bank of Australia (CBA) is an Australian bank which operating area is worldwide. Mainly, the operating market of the business is new Zealand, Asia, United states, united kingdom etc. the bank offers numerous financial services and products such as consumer banking, corporate banking, investment management, global wealth management, mortgages, private equity etc. the company is among the largest bank of the Australia and the services of the bank are also huge in numbers (Home, 2018).

Westpac bank:

Westpac Bank is an Australian bank and financial service provider company. The company is serving its operation at worldwide level. However, the main operating market of the business is New Zealand, Australia, Asia, United States pacific region. The bank offers numerous financial services and products such as consumer banking, corporate banking, investment management, global wealth management, and mortgages, private equity etc. (Home, 2018). The bank is among the largest bank of the Australia and the services of the bank are also huge in numbers.

Owner’s equity:

Owner’s equity is a head of statement of financial performance of an entity which represents the entire funds which has been raised by the business through issuing the share and through keeping few amount from the profit of the company for any emergency.

1. Equity item list:

The equity item list of CBA and Westpac bank has been prepared to enhance the understanding about the equity items and identify the changes into the equity position of the company from last year. The equity item list is as follows:

Equity Items
	Commonwealth bank of Australia			Westpac Bank
AUD in million	2017	2016	Changes	2017	2016	Changes
Stockholders' equity
Share capital
Ordinary share capital	35262	34125	3.33%	34889	33469	4.24%
Other equity instrument	-	406		-437	-369	18.43%
Reserves	2556	3115	-17.95%	858	790	8.61%
Retained earnings	22312	20430	9.21%	16871	15311	10.19%
Total stockholder's equity	60130	58076	3.54%	52181	49201	6.06%

(Annual report, 2017)

Above table represent that the main equity item of a business is share capital, reserves and retained earnings. Share capital represents the amount which has been generated by an entity through issuance of the equity shares and preference shares in the market. In case of share capital in CBA, 3.33% improvement has been seen and the Westpac bank depicts 4.24% increment in equity share and 18.43% in preference shares of the company.

Owner’s equity

In addition, reserve stand for the amount which is kept aside by the business for any sudden issue in the business which has been lowered by CBA by 17.95% and improved by Westpac by 18.43%. The retained earnings are the amount which is retained for future investment of the company. The retained earnings of both the company has been improved by 9.21% and 10.19% respectively.  

2. Debt and equity position:

Debt is the borrowings of an organization which has been raised by the business from the market whereas the equity stands for the amount which has been raised by the business through selling the ownership in the market. The debt and equity level of CBA and Westpac are as follows:

Equity Items
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Long term debt	17953	17666
Equity	60130	52181
Debt / Equity	29.86%	33.86%

(Annual report, 2017)

The debt equity level of the CBA is 29.86% and the Westpac bank is 33.86% which represents the higher position of Westpac. The Westpac is managing higher debt in context

The debt equity level of the CBA is 29.86% and the Westpac bank is 33.86% which represents the higher position of Westpac. The Westpac is managing higher debt in context with the equity than the CBA.

Cash flow statement:

Cash flow statement is a financial statement of an entity which represents the entire changes in the cash outflow and inflow position of the company in a specific period of time.

3. Cash flow item list:

The cash flow item list of CBA and Westpac bank has been prepared to enhance the understanding about the cash flow items and identify the changes into the cash flow position of the company from last year. The equity item list is as follows:

Figure 1: Cash flow statement of CBA

(Annual report, 2017)

On the basis of the evaluation on the cash flow statement of CBA and Westpac, it has been found that the various items have been recorded in the cash flow statement on the basis of the operating, investing and financial cash flows of the company. On the basis of the study, it has been found that all those items of a business which is related to the main and daily activity or operations of the business is represented in the operating activities of the business. The operating level of CBA briefs positive changes into the cash flow position and Westpac briefs downward position of operating cash (Lumby and Jones, 2007).

Further, all those items of a business which is related to the investment activity or operations of the business is represented in the investing activities of the business. The investing level of CBA and Westpac briefs positive changes. Lastly, all those items of a business which is related to the financial activity or operations of the business are represented in the financing activities of the business. The financial level of CBA briefs positive changes and in Westpac, it offers the negative changes.

Figure 2: Cash flow statement of Westpac

(Annual report, 2017)

4. Comparative analysis in cash flows:

The main activities of cash flows categories of the company have been done to identify the occurred changes into the cash level of the business. In case of CBA, it has been found that the entire cash position of the company has been improved from last year. The expenses have been reduced due to which the operating outflows have been reduced (annual report, 2017). As well as, through identifying the investing and financial activities of the business, it has been found that the inflows of the company has been improved because of issue of new shares and sales the PPE of the company.

	Commonwealth bank of Australia
AUD in million	2017	2016	2015
Net cash used for operating activities	-1183	-5463	3204
Net cash used for investing activities	6006	2125	3480
Net cash provided by (used for) financing activities	3509	-1990	1935

Cash flows statement

(Annual report, 2016)

Further, in case of Westpac, it has been found that the cash position of the company has been changes at great level and explains about higher cash outflow of the company in 2017. The operating expenses of the company have been improved and due to which the operating outflows of the company has been improved. As well as, through identifying the investing and financial activities of the business, it has been found that the inflows of the company has been improved because of sales the PPE of the company and the financial activities depict about reduced inflow because of repayment of borrowings.

	Westpac Bank
AUD in million	2017	2016	2015
Net cash used for operating activities	-235	3443	-2003
Net cash used for investing activities	1640	-6094	-7894
Net cash provided by (used for) financing activities	45	5049	3548

(Annual report, 2016)

5. Comparative analysis among the companies:

Further, the comparative analysis has been done among both the companies to measure the changes and performance of the companies in the industry. Through identifying the net operating cash flows of both the companies, it has been found that the performance of Westpac is better in current scenario but in the perspective of the growth, the position of CBs is better (Lord, 2007). Further, the investing cash flows comparison depict that the position of CBA is better and lastly, through evaluating the financing activities of the business, the position of CBA us better in the growth and current scenario both.

	Commonwealth bank of Australia			Westpac Bank
AUD in million	2017	2016	Changes	2017	2016	Changes
Net cash used for operating activities	-1183	-5463	-78.35%	-235	3443	-106.83%
Net cash used for investing activities	6006	2125	182.64%	1640	-6094	-126.91%
Net cash provided by (used for) financing activities	3509	-1990	-276.33%	45	5049	-99.11%

(Annual report, 2017)

On the basis of the overall evaluation, better position has been maintained by the CBs in order to manage the cash level and the performance of the business.

Comprehensive income statement is a financial statement of an entity which represents the different items of business which is not related to the daily activities of the business.

6. Comprehensive income statement items:

The comprehensive income statement item list of CBA and Westpac bank has been prepared to enhance the understanding about the comprehensive income statement items and identify the changes into the profitability position of the company due to these items. The comprehensive income statement item list is as follows:

Comprehensive income statement  Items
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Recognised in equity	-11	88
Transferred to income statements	-666	-3
Recognised in equity	35	-42
Transferred to income statements	175	19
Exchange differences on translation of foreign operations	-3	-77
Available-for-sale securities reserve		-25
Cash flow hedging reserve		7
Recognised in equity (net of tax)	19	-164

(Annual report, 2017)

7. Reasons:

Comprehensive income statement is prepared separately by the companies in order to maintain and present the items differently which are not related to business directly. Though, they play an important role in the financial performance of the business and affect the profitability position of the business (Jiashu, 2009). These items take place because of the fluctuations in the economical factors and the fluctuation in the foreign currency. If these items would be added into the financial performance statement of the business then it could manipulate the result for the internal analysis of the business.

8. Comparative analysis:

In case of comparative analysis among the profitability level of the business and the changes in the profitability level of the business after showing the impact of the comprehensive income statement in the business, it has been found that the various changes have occurred into the profitability level of both the business (Hillier, Grinblatt and Titman, 2011). In case of Westpac, it has been found that the profit of the company is $ 7843 million before the impact and after the impact; it has been lowered to $ 7828 million. Further, in case of CBA, it has been found that it has been found that the profit of the company is $ 8979 million before the impact and after the impact; it has been lowered to $ 8528 million. It explains that the profit position of both the companies have been lower because of the comprehensive income statement of the business.

9. Manager’s performance:

Comprehensive income statement

A manager and the top level management of a business always been evaluated on the basis of the financial performance of the business. Such as, if a generate amount has been generated by the business through its activities, than the performance of the manager would be marked as good (Higgins, 2012). If the comprehensive income statement items are take into concern then these items must not been added into the evaluation process because it is not related to managers and the direct activities of the business.

Accounting for corporate income tax:

Accounting for corporate income tax is a crucial element of an entity which represents the recording and the presentation of the taxation system of the company (Gapenski, 2008).

10. Tax expenses of companies:

The tax expenses of CBA and Westpac has been studied under the head to identify that how many expenses have been paid by the business to the government, the tax expenses of the company are as follows:

Effective tax rate
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Income tax expenses	3146	2620

(Annual report, 2017)

It explains that CBA has paid more tax amount to the Australian government against the operations and the turnover of the business.

11. Effective tax rate:

Effective tax rate represent the tax which has been paid by the company from the available earnings before tax (Bradley, 2017). The effective tax rate calculations explain that the effective tax rate of CBA is higher as CBA has paid 25.95% amount of EBT as tax to the Australian government.

Effective tax rate
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Income tax expenses	3146	2620
EBT	12125	10463
Effective tax rate	25.95%	25.04%

(Annual report, 2017)

12. Deferred tax assets or liabilities:

The deferred tax assets and liabilities are shown in the annual report of the business to depict the different of the taxation amount paid and the actual amount which has been occurred (Gorry, Hassett, Hubbard and Mathur, 2017). The DTA and DTL of CBA and Westpac are as follows:

Deferred tax assets and liabilities
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Deferred  tax assets	1380	1053

(Annual report, 2017)

It explains that the CBA has paid extra amount to the government which will be compensate in the next year of the business as well as the Westpac has paid extra amount to the government.

13. Changes in the figures of Deferred tax assets or liabilities:

The changes into both the banks have been identified against the last year in order to identify that whether the extra amount is paid by the business. Still few amount if held by the business for the future operations of the business. the below table describes that the deferred tax assets of CBA has been improved by 74.02% while the DTA of Westpac bank has been reduced because of the fact that the amount has been compensated by the business in current payment.

Changes in Deferred tax assets and liabilities
	Commonwealth bank of Australia			Westpac Bank
AUD in million	2017	2016	Change	2017	2016	Change
Deferred  tax assets	1380	793	74.02%	1053	1399	-24.73%

(Annual report, 2016)

14. Cash tax amount:

The cash tax amount is the value which is calculated through measuring the DTA, DTL and the book tax rate of the business. The cash tax amount is adjusted through adding the DTA amount in book tax rate and deducts the DTL amount from the same (Lord, 2007). The cash tax amount of both the companies have been evaluated and presented in the below table:

Cash tax amount
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Book Income tax expenses	3146	2620
ADD: Increment in the deferred  tax assets	587	-346
unleveraged cash taxes	3733	2274

On the basis of the above table, it has been found that the cash tax paid by the CBA is higher and due to which the deferred assets of the company has also been higher.

15. Cash tax rate:

Further, the cash tax rate of the business has been evaluated on the basis of the above calculated cash tax amount of the company and it has been found that the cash tax rate of CBA is higher in the industry.

Cash tax rate
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Book Income tax expenses	3146	2620
ADD: Increment in the deferred  tax assets	587	-346
unleveraged cash taxes	3733	2274
EBT	12125	10463
Cash tax arte	30.79%	21.73%

16. Book and cash tax rate:

Lastly, the book rate has been compared with the cash tax rate of the business to identify the differences.

Tax rate changes
	Commonwealth bank of Australia	Westpac Bank
AUD in million	2017	2017
Book tax rate	30%	30%
Cash tax rate	30.79%	21.73%

It explains that the CBA has paid even more than the book tax rate to the bank. It expresses that the credibility of CBA is better.  

Conclusion:

To conclude, it has been found that the corporate accounting offers a great purpose to the business and the stakeholders of the business. The study has been performed on Commonwealth bank of Australia and Westpac bank and it has been identified that the overall position of the business in an organization in order to present, record and evaluate the final financial statement items and figures of the business. On the basis of the report, it has been concluded that the annual report of an organization must be transparent enough for the shareholders to make better decisions.

References:

Annual report. 2016. Commonwealth bank of Australia. [online]. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/2016_Annual_Report_to_Shareholders_15_August_2016.pdf (accessed 20/9/18).

Annual report. 2016. Westpac Bank. [online]. Available at: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2016_Westpac_Annual_Report (accessed 20/9/18).

Annual report. 2017. Commonwealth bank of Australia. [online]. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf (accessed 20/9/18).

Annual report. 2017. Westpac Bank. [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 20/9/18).

Bradley, S., 2017. Inattention to Deferred Increases in Tax Bases: How Michigan Home Buyers Are Paying for Assessment Limits. Review of Economics and Statistics, 99(1), pp.53-66.

Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.

Gorry, A., Hassett, K.A., Hubbard, R.G. and Mathur, A., 2017. The response of deferred executive compensation to changes in tax rates. Journal of Public Economics, 151 (2), pp.28-40.

Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.

Home. 2018. Commonwealth bank of Australia. [online]. Available at: https://www.commbank.com.au/ (accessed 20/9/18).

Home. 2018. Westpac Bank. [online]. Available at: https://www.westpac.com.au/ (accessed 20/9/18).

Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of financial accounting [J]. Accounting Research, 5, p.003.

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3 (2). P. 17.

Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson, London.