Analysis of CBA Annual Report

This analysis covers income tax, foreign currency, intangible assets, and accounting standards used in the CBA annual report. It includes information on the functional currency, foreign currency risk, and impairment losses. The report also discusses the adoption of AASB 16 and its impact on the company's reporting. The subject is finance and accounting, and the course code is not mentioned. The college/university is not mentioned.

Running head: ANALYSIS OF CBA ANNUAL REPORT
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Analysis of CBA Annual Report
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ANALYSIS OF CBA ANNUAL REPORT 2
Analysis of CBA Annual Report
Question 1
a) The income tax included in the income statement comprises of corporate income tax
expense which is $ 3,960 million and the policyholder tax expense which is $ 32 million
b) The income tax expense has been reported by CBA bank as a current liability. This is
because it is an expense which is supposed to be paid in a period which is less than one
year ("Annual reports", 2018).
c) The temporary difference in accounting can be brought about by differences in the
amount of tax expenses in a particular income statement. Temporary accounts occur as a
result of differences between the taxable income and the pretax book income. The
difference is referred to as the timing difference (Abdallah, 2017). Items which have
resulted to temporary accounts can be attributed to be the rental income and deferred tax
liability.
d) Income tax is reported in the income statement as an expense. CBA bank in the financial
year 2017 paid total income tax of $3992 million ("Annual reports", 2018).
e) Deferred tax assets arise when revenue for the tax has already been paid but has not been
used. Deferred tax liability arises when the company has to pay tax which is due. In the
year 2017, CBA had the deferred tax asset of $ 962 million and the deferred tax liabilities
of $ 1780 million.
f) Current tax liability may not be equal with income tax expense for the period because
current tax liability may have been settled partly with the deferred tax assets hence
reducing the total amount of the tax liability. Income tax expense, on the other hand,
comprises of all the income tax that has been incurred by a company in the particular

ANALYSIS OF CBA ANNUAL REPORT 3
period of income (Shirkar, 2018). In the case of CBA bank, the current tax liability is $
1450 million and the income tax expense is $ 3960 million.
Question 2
a) The functional currency is the currency of the economy in which a company operates.
CBA's functional currency is in Australian dollars. The guidelines a company will
consider in determining its functional currency includes: the currency that is influences
the prices of products and services, consider the currency which influences labor, raw
material and other costs that are used in providing goods and services, consider the
currency by which the financing operations are generated, Consider the currency that
affects the economic transactions of an entity and lastly consider the currency of the
country which determines prices of goods through its competitive prices and also
regulations.
b) The foreign currency is expressed in the form of functional currency where the entity
operates at the date by which the translation is made using the prevailing market
exchange rates in the exchange market and is the recorded in the statement of
comprehensive income. The assets and liabilities which resulted from the translation of
currency by CBA were reported using the spot rate and the difference was reported in the
income statement. CBA recorded all the translation exchange difference in the translation
reserve account. It also translated the revenues and expenses using the average rate of
exchange for the period that ended 30th June 2017.
c) Foreign currency risk is the risk that there is a possibility of a difference between the
actual amount in the financial statements and the translated figures hence affect the cash
flows of a given reporting entity (Adams & Hartsfield, 2010). Steps taken by CBA to

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manage the foreign exchange risk includes; Foreign currency is being translated by
managers using prevailing rates in the dates in which transactions take place, managers’
report the gains and losses from those translations in the statements of comprehensive
income and lastly the exchange differences that arise from such translations are
accounted for as distinct commodities of equity.
d) The balance of the foreign currency translation reserve arises from either loss or gain
from the statement of cash flow. CBA bank reports this as reserves and recognized those
gains or losses in the statement of cash flows.
e) Investment in subsidiary was A$ 310000
ONOYOKO LTD
Statement of financial position
As at 30th June 2017
S$
A $
Current assets
Inventory 205000 15375
Monetary assets 195000 146250
Total current assets 400000 161625
Noncurrent assets
Land 100000 85000
Buildings 120000 10200
Plant and equipment 110000 93500

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Accumulated depreciation (10000) (8500)
Deferred tax asset 10000 8500
Total noncurrent assets 330000 188700
Total assets 730000 350325
Dividends paid 29750
320575
Current liabilities
Current tax liability 70000 59500
Borrowings 50000 42500
Payables 100000 85000
Total current liabilities 220000 187000
Noncurrent liabilities
Borrowings 150,000 127500
Total liabilities 370000 314500
Net assets 360000 331287.5
Equity

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Share capital 310000 263500
Retained earnings 50000 42500
Total equity 360000 306000
ONOYOKO LTD
Statement of profit or loss and other comprehensive income
For the year ended 30th June 2017
S $ S $ A $
Sales revenue 1200000 1558442
Cost of sales:
Purchases 1020000
Ending inventory 20500 815000 627550
Gross profit 385000 930891
Expenses:
Selling 120000
Depreciation 10000
Interest 20000
Other 90000 240000 184800

ANALYSIS OF CBA ANNUAL REPORT 7
Profit before income tax 145000 746092
Income tax expense 60000 4260
Profit for the period 85000 741832
Question 3
a) Intangible assets are those assets which are non-monetary for example patents, customer
lists, licensing, mortgage servicing, important quotas among others. Intangible assets do
not have any physical substance. They are usually measured at cost using the revaluation
method. By 30th June 2017, the intangible assets of CBA bank were $ 10,024 million
which represent a portion of 10.27 per cent of the total assets that are owned by CBA.
CBA recognizes the intangible assets only if it is probable that the asset will produce
economic benefit. The bank tests the impairment value of intangible assets when they
indicate to have higher carrying value than their actual recoverable value.
b) According to the CBA annual report for the year 2017, the issues of impairment are only
raised in circumstances where the bank does not expect to receive all its expected Cash
inflows. In this case, CBA bank conducts an assessment of those equipment’s either
individually or collectively. In this bank, the credit losses are brought about majorly by
loans and some of the credit losses which arise from some other credit instrument offered
by the bank, for example, the bank acceptances, contingent liabilities among others. CBA
bank in the financial year 2017 reported an impairment loss of $ 38744 million
("Commonwealth Bank | CBA | Depreciation", 2018). The assets which contributed to the
impairment loss include the following.

ANALYSIS OF CBA ANNUAL REPORT 8
Loans and receivables, these items of the balance sheet were assessed collectively for
impairment purposes which were conducted in order to decrease the carrying amount of
comparable loans and receivables to values which the bank estimates it will be recovered.
The assessment of these two items in the balance sheet was done in a series of procedures,
estimates and also judgments. The bank also employed the use of statistics in coming up with
the exact recoverable values, they used the history of loan defaulters, the size diversity and
the design of the portfolios which were taken into account. The managers also put into
consideration the performance, economic environment and the quality in order to come up
with the impairment loss of loans and receivables.
Other financial assets were assessed for impairment individually and this was done by
taking the carrying amount of the asset subtracted from the expected cash flows and the
difference discounted using the effective interest method (Park, 2017). The short-term
differences were not discounted. Other impairment losses were as a result of financial
instruments and guarantees
The impairment costs are recognized in the financial statements expenses because they
result to cash outflows from the business. They are also reported as losses because the business is
not able to recover all its expected profit from loans and receivables hence making losses instead
of profits.
c) Revaluation is a technique which is used to calculate the level of depreciation in all the
parts of an equipment or types of equipment of a firm. Companies usually group together
the items that seem to have a single value and revalue them at the end of a particular
accounting period in order to come up with a certain specific depreciation amount. The

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revaluation amount is the difference between the fair market value of an asset and the
depreciation which mostly results in profits (Sohn, 2009). The CBA bank in the financial
report for the year ended 30th June 2017 did not report any assets revaluation amount. In
order to arrive at the depreciable value. Take the cost of valuation during the beginning of
the year then add to the purchases done during the year then subtract the valuations
during the year and the end value will be the revaluation amount. The journal entries will
be as follows.
Debit the asset account (with the revaluation increase) $ XX
Credit the revaluation account (with the same amount) $XX.
Question 4
a) The accounting standard that was used in the financial year 2017 by CBA bank was
the Australian Accounting Standards Board (AASB) 16. This standard amends
accounting for leases. This standard requires that all leases should be recorded in the
financial statements (Stevenson, 2012). Leases were classified as either operating
leases or finance leases. All the substantial risk and benefits of the lease were
transferred to the lessee with regards to the finance lease but in the operating lease,
the benefits and risks remain with the lessor. The income from the finance lease
reflected the (ROI) return on investments.
The main considerations while classifying a lease include; the transfer of possession of
the lease from the lessor to the lessee, the purchase of options in the lease agreements, consider
the remaining economic life of the leased asset, the anticipated terms of a particular lease, also

ANALYSIS OF CBA ANNUAL REPORT 10
consider the lease payments, the fair market value of the leased asset and lastly consider the lease
implicit rates (Hussey, 2017).
b) Adoption of AASB 16 is likely to have material effects to the company reporting
especially on the side of the lessee because this standard changes the rules of
reporting in the books of the lessee. In reporting the lease in the books of the lessor,
the accounting rules do not change hence the effect will be small (He, Evans & He,
2016). This standard removes the difference that exists between an operating lease
and finance lease hence this will bring about material effects in the company
reporting.

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References
Abdallah, A. (2017). The Conformity Level of Income Tax Accounting in Jordan with the
Requirements of the International Accounting Standard IAS (12) in Terms of Taxable
Temporary Differences’ Recognition. SSRN Electronic Journal. doi:
10.2139/ssrn.3221069
Adams, J., & Hartsfield, F. (2010). Foreign currency exchange rates and mutual fund cash flows.
Journal Of Asset Management, 11(5), 314-320. doi: 10.1057/jam.2009.37
Annual reports. (2018). Retrieved from
https://www.commbank.com.au/about-us/investors/annual-reportsv.html
Commonwealth Bank | CBA | Depreciation. (2018). Retrieved from
https://tradingeconomics.com/cba:au:depreciation
He, L., Evans, E., & He, R. (2016). The Impact of AASB 8Operating Segmentson Analysts’
Earnings Forecasts: Australian Evidence. Australian Accounting Review, 26(4), 330-340.
doi: 10.1111/auar.12132
Hussey, R. (2017). Accounting for Leases and the Failure of Convergence. Athens Journal Of
Business & Economics, 4(1), 7-24. doi: 10.30958/ajbe.4.1.1
Park, H. (2017). Intangible assets and the book-to-market effect. European Financial
Management. doi: 10.1111/eufm.12148

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Sohn, J. (2009). Consideration to the Depreciation Method using Accumulated Depreciation Rate
Function. The Journal Of The Korea Contents Association, 9(1), 304-311. doi:
10.5392/jkca.2009.9.1.304
Stevenson, K. (2012). The Changing IASB and AASB Relationship. Australian Accounting
Review, 22(3), 239-243. doi: 10.1111/j.1835-2561.2012.00182.x
Shirkar, W. (2018). Deferred Tax Assets and Deferred Tax Expense Against Tax Planning Profit
Management. Shirkah: Journal Of Economics And Business, 2(2). doi:
10.22515/shirkah.v2i2.166