Analysis of Equity, Cash Flow and Corporate Income Tax of Commonwealth and Westpac Banks in Australia

The report analyzes the equity, cash flow and corporate income tax of Commonwealth and Westpac banks in Australia. It provides insights into the working of these two organizations and helps investors and other users of financial statements. The report includes a discussion on each item of equity, debt and equity, cash flow statement, comparison of cash flow of three years, and analysis of corporate income tax.

Corporate Accounting
1

Executive Summary
The following discussion is made on two listed companies belonging to the same industry in
Australia. We have chosen Commonwealth and Westpac banks in order to conduct an
analysis on various parts of a financial report. This analysis can also be done for other parts
not discussed in the report. The following discussion will help the investors and other users of
the financial statements to have an insight into the working of these two organisations.
2

Contents
Introduction................................................................................................................................5
Analysis of Equity......................................................................................................................6
Discussion on each item of equity for both the companies....................................................6
Discussion and debt and equity of both the companies..........................................................7
Analysis of Cash flow statement................................................................................................9
Discussion on the cash flow statement of both the companies..............................................9
Comparison of cash flow of three years of both the companies...........................................10
Description of analysis of cash flow of both the companies................................................11
Analysis of comprehensive income statement.........................................................................13
Items reported in the other comprehensive income statement.............................................13
Reasons for not reporting these items in the profit and loss statement................................13
Comparative analysis of the items of the other comprehensive income statement..............13
Use of other comprehensive income in evaluation of performance of managers................14
Analysis of corporate income tax.............................................................................................14
Tax expense for the companies for the current year.............................................................14
Effective income tax rate......................................................................................................14
Deferred tax liabilities and assets.........................................................................................14
Increase in DTA and DTL....................................................................................................15
Calculation of cash tax using the book tax...........................................................................15
Calculation of cash tax rate..................................................................................................17
Difference in cash tax and book tax.....................................................................................17
Conclusion................................................................................................................................18
Bibliography.............................................................................................................................19
3

Introduction
The financial reports of the companies comprise of many parts. It is important that we learn
about the nature and characteristics of such pieces of the financial report (Alvarez, 2013). In
our discussion below we have discussed about few financial parts of companies in Australia
that belong to same sector. The following discussion is done on Commonwealth group and
Westpac group of Australia.
Commonwealth bank of Australia is the biggest bank of Australia which has its business
spread across Australia, New Zealand, Asia, United sates and United Kingdom. This is not
only the largest bank in Australia, but also in the whole of southern hemisphere. The bank is
involved in providing a lot of services such as insurance, superannuation, fund management,
institutional banking, retail, broking services, etc. this bank was first established in 1911, and
later in 1991 it was listed in the Australian stock exchange. The bank has more than 1100
branches spread across the world along with 51800 people working for it.
Westpac bank is an Australian based bank which has its headquarters located in Sydney. The
bank is one of the top four banks in Australia. The bank has been consecutively for four years
ranked as the most sustainable bank globally. The bank was first established in 1817 as Bank
of New South Wales, later it in 1982, t was remained Westpac. They got listed on the
Australian stock exchange in 1970. The bank has about 1490 branches with 32620
employees. The vision of the company is set as to be the world great service company which
helps customers and communities and helps them to prosper and grow. The bank has about
14 million people being associated with it.
In the following discussion we have discussed few parts of the financial statements of both
these companies in order to have a better understanding (Bragg, 2015).
4

Analysis of Equity
The equity shareholders fund represents the monies raised by the company by issuing equity
shares and other kinds of shares, along with reserves and retained profits (Donohue, 2015).
Discussion on each item of equity for both the companies
The equity portion of Commonwealth bank consists of share capital, reserves and retained
earnings. The share capital of the company comprise of ordinary share capital for $35266
and treasury shares of $295, which makes the total share capital of $34971 for 2017. The
share capital of the company for 2016 was $33845. The increase in the share capital was a
result of issue of shares under dividend reinvestment plan of the company. The retained
earnings of the Commonwealth group increased to $26330 million from $23435 million. The
increase in the retained earnings was due to addition of the operating profit of the company
for 2017. The reserves of the Commonwealth group decreased from $2734 million to $1869
million in 2017. The reason for decline in the reserves of the company was majorly due to
changes in foreign currency rate and loss on disposal of few investments. The total equity of
the company increased to $63170 million in 2017 from $60014 million in 2016.
Commonwealth Bank
Shareholder’s Equity 2017 2016
Share capital 34,971 33,845
Reserves 1,869 2,734
Retained earning 26,330 23,435
Total 63,170 60,014
2017 2016
58,000
59,000
60,000
61,000
62,000
63,000
64,000
Commonwealth Bank
Shareholders
Equity
5

The equity portion of the Westpac bank consists of share capital, reserves and retained
earnings. The share capital of the company comprises of ordinary share capital of $34889
million and treasury for $495 million, which makes the total share capital of Westpac for
$34394 million. The share capital of the company for 2016 was $33014. The increase was
due to increase in issue share capital of the company. The retained earnings of the group
increased from $24379 million to $26100 million. The increase in retained earnings was due
to addition of operating profit for the current year. The reserves of the company increased
from $727 million to $794 million. The increase was due to increase in gains from changes in
fair value. The shareholder’s fund for the company increased from $58120 million in2016 to
$61288 million in 2017.
Westpac Bank
Shareholder’s Equity 2017 2016
Share capital 34,394 33,014
Reserves 794 727
Retained earning 26,100 24,379
Total 61,288 58,120
2017 2016
56,000
57,000
58,000
59,000
60,000
61,000
62,000
Westpac Bank
Shareholders
Equity
Discussion and debt and equity of both the companies
There are two ways to raise capital for a company, issue of shares or raise money in from of
debt from the third parties (Easton, 2010). Both the sources of funds have their respective
pros and cons. The companies choose the type of fund to be raised based on various factors
such as the cost of capital, industry of the company, etc (Elaine, 2015).
The debt and equity of both the companies have been listed in the following table:
6

Particulars Equity Share Cap Debt Debt Equity ratio
Commonwealth Bank 63,170 6,26,655 9.92
Westpac Bank 61,288 5,33,591 8.71
Commonwealth Bank Westpac Bank
8.00
8.50
9.00
9.50
10.00
10.50
Debt Equity ratio
Debt Equity ratio
From the above we have calculated the debt equity ratio of both the companies. We see that
the debt equity ratio of Commonwealth bank is 9.92 times and that of Westpac bank is 8.71
times. This indicates that the companies have been using 8-10 times more capital from debt
than that of equity.
The debt equity ratios for both the companies are very high (Fisher, 2012). It may be that
using more debt in the capital for the banking sector is more preferable. Therefore, we see
that the both the companies have similar capital structure (Fridson & Alvarez, 2012).
7

Analysis of Cash flow statement
The books of accounts of the companies are made on accrual basis. In order to identify the
cash flow of the company from various functions, the cash flow statement is prepared. The
cash flow of the company plays a very important role in maintaining the liquidity of the
company (Girard, 2014).
Discussion on the cash flow statement of both the companies
The cash outflow from operating activities of the Commonwealth bank declined from $4561
million in 2016 to $807 million in 2017. The major decline in cash outflows of the company
was due to increased inflow from investment and interest incomes. The cash flows from
operating activities of the bank mainly comprise of income from investments and payments
for interest as they form the core part of the business activities of the bank.
The cash flow from investing activities of Commonwealth bank mainly comprise of cash
flows from acquisition and sale of associates and subsidiaries, fixed assets, investments and
dividend incomes on the investments made. The cash outflow from investment activities of
the bank declined from $2032 million in 2016 to $677 in 2017. The major decline in cash
outflow from investing activities was a result of declined payments for acquisition of
controlled entities, fewer purchases of plant and property and intangible assets.
The cash flow from financing activities of the Commonwealth bank mainly comprised of
cash flow relating to proceeds and repayments of equity and debt instruments. The cash flow
from financing activities of the bank increased from $1620 million to $10472 million in
2017. The increase in cash inflow from financing activities of the bank was due to lower
outflow form redemption of debt securities.
The overall cash flow of the Commonwealth bank increased for negative $4973million to
positive $8988 million in 2017.
The cash flow from operating activities of the Westpac bank mainly comprise of cash flows
from interest, insurance proceeds and income tax. The cash inflow from the operating
activities of the company declined from $5497 million to $2820 million in 2017. The major
decline in the cash from operating activities was due to losses from the fair value valuations
of the investments.
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The cash flow from the investing activities of the Westpac bank comprise of cash flows for
purchase and sale of various securities, assets- tangible and intangible and that in associates
and subsidiaries. The cash outflow from investing activities of the bank declined from $7245
million to $1698 million. The major decline in cash outflow was due to increased proceeds
from sale of securities and associates.
The cash flow from the financing activities of the Westpac bank comprises of proceeds and
repayment made in connection with equity and debt securities. The cash inflow from
financing activities of the group declined from $4573 million to $552 million. The major
reason for decline in cash inflow was due to increased outflows of redemption of loan capital
and lower debt issues during the year.
The net cash flow of the Westpac group declined from $2825 million in 2016 to $1674
million in 2017.
Comparison of cash flow of three years of both the companies
The cash flow from operating activities of both the companies is provided under:
Cash flow from operating Activities
Particulars 2017 2016 2015
Commonwealth -807 -4561 7183
Westpac 2820 5497 -541
2017 2016 2015
-6000
-4000
-2000
0
2000
4000
6000
8000
Commonwealth
Westpac
There is no trend in the operating cash flows of both the companies.
The cash flow from investing activities of both the companies is provided under:
Cash flow from Investing Activities
9

Particulars 2017 2016 2015
Commonwealth -677 -2032 -1215
Westpac
-
1698 -7245 -18715
2017 2016 2015
-20000
-18000
-16000
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
Commonwealth
Westpac
The cash outflows from investing activities of Westpac group have been declining whereas
that of commonwealth group has no trend.
The cash flow from financing activities of both the companies is provided under:
Cash flow from Financing Activities
Particulars 2017
201
6 2015
Commonwealth 10472
162
0 -7875
Westpac 552
457
3 5513
2017 2016 2015
-10000
-5000
0
5000
10000
15000
Commonwealth
Westpac
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The cash inflows from financing activities of Westpac group have been declining whereas
that of commonwealth group has been increasing over the period of three years.
Description of analysis of cash flow of both the companies
Cash flow from Activities
Particulars
201
7 2016 2015
Commonwealth
898
8 -4973 -1907
Westpac
167
4 2825 -13743
2017 2016 2015
-15000
-10000
-5000
0
5000
10000
15000
Commonwealth
Westpac
From the above comparison of the cash flows of both the companies we can see that there are
no specific trends for the cash flow for the individual functions (Girard, 2014). But the
overall cash flows of the Commonwealth group have been increasing and that of Westpac
have been increasing and decreasing over the period of three years. The companies need to
keep their cash from operating activities in check in order to ensure smooth functioning of the
enterprise
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Analysis of comprehensive income statement
The other comprehensive income statement of the companies presents such data relating to
profit and losses that have not yet been realised by the companies. These are presented just
below the income statement in the annual financial statements (Ittelson, 2009).
Items reported in the other comprehensive income statement
The other comprehensive income statement of the Commonwealth group include items such
as foreign currency translation reserve, changes in the cash flow hedging instruments,
changes in the value of investments held for sale, actuarial valuation differences of defined
benefit superannuation plans, changes in fair due to change of credit risk and revaluations of
properties net of tax (Lerner, 2009).
The other comprehensive income statement of the Westpac group includes items such as
changes in the values of the investments available for sale, cash flow hedging instruments,
exchange differences on translation of foreign operations, changes in values due to change in
credit risk, re-measurement of defined benefit obligation and tax effect on all the above.
Reasons for not reporting these items in the profit and loss statement
There are certain assets and liabilities of the company whose value is beyond the control of
the management (Parrino, 2013). The changes in the values of these items may not affect
direct affect on the profits of company for the current year, but it may affect the profit and
loss in the future. In order to incorporate the effect of changes in the value of such item in the
books today, we record the changes in the values in the other comprehensive income
(McLaney & Adril, 2016). When these assets and liabilities are actually realised, then the
changes in values which were recorded in the other comprehensive income are later re-
classified to the income statement. Since, these profits and losses are realised and the income
statement is made on accrual system, we recorded these items in the other comprehensive
income statement (Penman, 2012).
Comparative analysis of the items of the other comprehensive income statement
The item recorded in the other comprehensive income statement of both the companies report
similar items. Both the statements report on changes in the fair value of certain items net of
tax effect. If these items are recorded in the profit and loss stamen then the profit of the
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company will be incorporate the profits and losses from changes in the fair value of assets
and liabilities which are not yet realised (Piper, 2015).
Use of other comprehensive income in evaluation of performance of managers
As discussed earlier, the changes in the values of the assets and liabilities are beyond the
control of the entity and its management. The points which should be considered to evaluate
the performance of the mangers should affect the operating profits of the company. Since
these items are totally based on the market forces, any comprehensive incomes should not be
considered while evaluating the performance of the managers (Robinson, 2014).
Analysis of corporate income tax
Corporate Income tax refers to the taxes paid by the corporate on the profits earned
(Siciliano, 2015).
Tax expense for the companies for the current year
Both the companies have reported profits for the year ending 2017. This makes them liable
for payment of income tax. The income tax charges recorded by the Commonwealth bank for
the given financial year are $3992 million, and that for Westpac group is $3518million.
Effective income tax rate
The effective income tax rates of the companies are calculated by dividing the income tax
expense by the earnings before tax (Simpson, 2012). Using this we have calculated the
effective income tax rates for the companies:
Effective tax rate
Particulars Commonwealth Westpac
Income tax expense 3,992 3,518
Earnings before
Tax 13,944 11,515
Effective tax rate 28.63 30.55
From the calculations above we can see that the effective income tax rate for Commonwealth
group is 28.63% and that for the Westpac group is 30.55%.
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Deferred tax liabilities and assets
Deferred tax assets and liabilities arise in the books because of temporary differences arising
due difference in accounting and tax provisions (Skonieczny, 2012).
The deferred tax assets and liabilities recorded in the books of commonwealth group relate to
provision for employee benefits, provision for impairment loss, other provisions, financial
instruments, defined benefit superannuation plan, unearned income, lease financing,
intangible assets, insurance, investment in associates and other miscellaneous items.
The deferred tax assets and liabilities recorded in the books of Commonwealth group relate to
provision for impairment charges on the loans, Provision for long service leave, annual leave
and other employee benefits, Financial instruments, Property and equipment, Other
provisions, Other liabilities, finance lease transactions, life insurance assets, and other
miscellaneous items.
Increase in DTA and DTL
Deferred tax assets and liabilities arise due to the temporary differences which are expected
to reverse in the future. When the company pays more tax due to taxable provisions, this
results in deferred tax assets and vice versa (Taillard, 2013). Credit for excess tax paid by the
company is revered in the future.
The Commonwealth group reported deferred tax assets of $389 million in 2016 which
increased to $962 million in 2017. The deferred tax liabilities reported in 2016 was $340
million and this declined to $332 million in 2017.
The Westpac group reported deferred tax assets of $1351 million in 2016 which decreased to
$1112 million in 2017. The deferred tax liabilities reported by the group in 2016 was $36
million, which reduced to $10 million in 2017.
Calculation of cash tax using the book tax
Book tax refers to the tax calculated on the book profits of the company (White, 2015). The
book profits are subject to 30% corporate tax rate in Australia. Using this we have book tax
of both the companies as follows:
Book tax calculation
Particulars Commonwealth Westpac
Income as per books 11,515
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13,944
Tax rate 30% 30%
Book tax 4183.2 3454.5
Using the book profits of Commonwealth group was $4183 million, we have made the
adjustments of the various deferred tax assets and liabilities and other permanent differences
in this in order to arrive at the cash tax for the company:
Calculation of Cash tax for Commonwealth
Tax as per book profits 4,183
Adjustments made for the following:
Taxation offsets and other dividend adjustments -11
Tax adjustment referable to policyholder income 22
Tax losses not previously brought to account -56
Offshore tax rate differential -76
Offshore banking unit -42
Effect of changes in tax rates 4
Income tax (over) provided in previous years -66
Other 34
Cash Tax 3,992
Therefore we see that the cash tax for the company results in $3992 million for the year 2017.
Using the book profits of Westpac group was $3455million, we have made the adjustments of
the various deferred tax assets and liabilities and other permanent differences in this in order
to arrive at the cash tax for the company:
Calculation of Cash tax for Westpac
Tax as per book profits 3,455
Adjustments made for the following:
Hybrid capital distributions 64
Life insurance:
Tax adjustment on policyholder earnings 8
Adjustment for life business tax rates -1
15

Dividend adjustments -3
Other non-assessable items -3
Other non-deductible items 32
Adjustment for overseas tax rates -30
Income tax (over)/under provided in prior
years 4
Other items -8
Cash Tax 3,518
Therefore we see that the cash tax for the company results in $3518 million for the year 2017.
Calculation of cash tax rate
The cash tax rate of the companies is calculated using the cash tax amount by the earnings
before tax. Using this we have calculated the cash tax rate of both the companies.
Cash tax rate calculation
Particulars Commonwealth Westpac
Cash tax 3,992 3,518
Earnings before Tax 13,944 11,515
Cash tax rate 28.63 30.55
The cash tax rate of Commonwealth group is 28.63%, and that of Westpac group is 30.55%.
The cash tax rate of Westpac Is higher than the tax rate of commonwealth group. This is
because of the various adjustments made in connection with the deferred assets and liabilities.
Difference in cash tax and book tax
The profits of the companies are required to be calculated under the accounting provisions
and tax provisions separately. Due to differences in the profits, there is a difference in the tax
amount.
The profits which are calculated using the book profit is book tax and the one which is
catuallt paid by the company are cash tax. Due to the temporary differences arising because
of difference in provisions, there is difference in the book tax rate and cash tax rate. Any
16

differences in both the tax rates are reverse in the future when the temporary differences are
reversed.
17

Conclusion
The above discussion has helped us have an insight into the financial items like equity, cash
flow, comprehensive income and corporate income tax. Using the examples of the two top
banks in Australia has helped us understand these concepts practically. Comparison of the
financial statements based on various financial grounds helps to provide better understanding
of the organisations. This can be used by the investors in order to evaluate the value of the
shares. Also, this information may be used by the regulators in order to ensure proper
function of the entity.
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