Elements of Financial Statements: Analysis of Commonwealth Bank and National Australian Bank

This report analyses the financial statements of Commonwealth Bank and National Australian Bank, covering equity analysis, debt and equity, cash flow analysis, and other comprehensive income analysis. The report discusses the components of equity, debt and equity of both the banks, cash flow from operating, investing and financing activities, and other comprehensive income statement. The report also provides a comparative analysis of cash flow for the past three years.

ACCOUNTING

EXECUTIVE SUMMARY
In this report, we will discuss about few elements of financial statements. The companies
whose financial statements will be analysed are two largest banks of Australia. They are
Commonwealth Bank and National Australian Bank. The information used in this report is
derived from the annual reports of the company.

Contents
INTRODUCTION......................................................................................................................3
Equity Analysis..........................................................................................................................4
Understanding the components of equity...............................................................................4
Discussion on debt and equity of both the companies...........................................................6
Cash flow analysis......................................................................................................................8
Understanding each item of cash flow statement...................................................................8
Comparative analysis of cash flow for the past three years...................................................9
Other comprehensive income analysis.....................................................................................12
Reasons of not reporting these items in the income statement.............................................12
Comparative analysis of the items of other comprehensive income statement....................12
Evaluation of manager’s performance on the basis of other comprehensive income
statement...............................................................................................................................13
Analysis of Corporate income tax............................................................................................14
Tax expenses of the current year..........................................................................................14
Effective tax rate calculation................................................................................................14
Deferred tax assets and liabilities.........................................................................................14
Change in deferred tax assets and liabilities.........................................................................15
Calculation of cash tax amount for both the companies.......................................................15
Calculation of cash tax rate..................................................................................................17
Difference in cash tax rate and book tax rate.......................................................................17
Conclusion................................................................................................................................18
Bibliography.............................................................................................................................19

INTRODUCTION
Financial reports are prepared by all the companies in order to provide information to the
investors about the performance and position of the company. The few elements that are
discussed in this report are cash flow, equity, other comprehensive income and equity. The
financial reports of two of the largest banks are taken into consideration. The name of the
banks is Commonwealth Bank and National Australian Bank.
Commonwealth bank is one of the multinational banks which is widespread in Australia,
United Kingdome, United States and New Zealand. It is considered to be the largest bank of
the entire Southern hemisphere. There are various headquarters of this bank which is located
in different areas such as Sydney, Australia and Diamond Harbour. The services that are
offered by this bank include fund management of the retail sector, insurance and brokerage
services, institutional as well as business banking (Alvarez, 2013). This bank was establishes
in the year 1911 by the government and the banks got listed in the same year. However, this
bank was later privatised in the year 1996.
In the year 1982, two banks merged together which led to the establishment of National
Australia Bank. In regards to market capitalisation, this bank is considered to be the 21st
largest bank in the whole world. There are 8 major divisions of this bank which is divided in
two different geographical areas. The customer base is huge which is nearly 12.7 million.
Also, there are about 15900 branches and 4412 ATM. The major business activities that are
carried out by this bank is wealth management, wholesale banking as well as insurance
services (Datar, 2015).

Equity Analysis
The shareholders fund in the balance sheet of a company comprises of the share capital that
has been raised by the public to carry out operations along with the profits that has been set
aside over the years. These funds are set aside to meet the capital expenses of the company.
Understanding the components of equity
Commonwealth Bank
The shareholder’s equity in the balance sheet of the company comprises of ordinary share
capital along with certain reserves and retained profits.
Commonwealth Bank
Shareholder’s
Equity 2017 2016
Share capital 34,971 m 33,845 m
Reserves 1,869 m 2,734 m
Retained earning 26,330 m 23,435 m
Total 63,170 m 60,014 m
2017 2016
58,000
59,000
60,000
61,000
62,000
63,000
64,000
Commonwealth Bank
Shareholders
Equity
As we know, ordinary share capital is the amount that has been raised from the general public
to carry out operations (Easton, 2010). The amount of ordinary share capital amounts to $
33845 million in the year 2016 whereas it amounted to $34971 in the year 2017. The reasons
that resulted in the increase of shareholders equity was issue of shares, dividend reinvestment
plan set up by the company and also minimal purchases of treasury.

We can also observe from the table provided above that the retained earning has increased
from $23435 to $26330 in two years. The profit earned in the current year that has
contributed to such increase amounts to $9928 (Elaine, 2015).
There was a decline in the total reserves on the company which happened because of the fall
in the foreign currency translation reserve and also the cash flow hedge of the company. this
declined the total reserves of the company from $2734 million to $18967 million.
National Australian Bank
The components of the equity section of National Australian bank are contributed capital,
reserves and the retained profits (Fridson & Alvarez, 2012).
National Australia Bank
Shareholders’ Equity 2017 2016
Share capital 34,627 34,285
Reserves
23
7 629
Retained earning 16,442 16,378
Total 51,306 51,292
2017 2016
51,285
51,290
51,295
51,300
51,305
51,310
NAB
Shareholders
Equity
As we can see in the above table, the contributed capital of the company in the year 2016
amounted to $ 3425 million but in the year 2017 it increased to $34627 million. The company
reinvested the dividend which increased the share capital by $ 569 million and also the
company made a transfer from equity based compensation reserve of $170 million.

There was a decline in the reserves of the bank from $629 million to $ 237 million because of
the decline in the foreign currency translation reserve, general reserve and cash flow hedge
reserve (Horngren, 2012).
However, the retained earnings of the company showed a considerable increase from $16378
million to $ 16442 million. This reason for this increase was the profits earned by the
company in the current year along with the lower changes in the fair value of the investments
that the company holds.
Discussion on debt and equity of both the companies
A company has to raise funds from different sources in order to carry out its business
operations. There are two major sources of raising funds- raising capital from public by
issuing shares or by raising debt from third parties.
On observing the balance sheet of Commonwealth bank we found that the company has
equity of $63170 million and debt of $626655 million in 2017 whereas the National Bank has
a share capital of $51306 million and debt of $ 500604 million (Ittelson, 2009).
In order to analyse the capital structure of the company, we have calculated the debt equity
ratio for both the companies which are as follows:
Particulars Equity Share Cap Debt Debt Equity ratio
Commonwealth Bank 63,170 6,26,655 9.92
National Australia
Bank 51,306 5,00,604 9.76
Commonwealth Bank National Australia Bank
9.65
9.70
9.75
9.80
9.85
9.90
9.95
Debt Equity ratio
Debt Equity ratio

We can conclude from the table given above that the debt equity ratio of Commonwealth
Bank was 9.92 times and for National Australia bank it was 9.76 times. The ratio for both the
companies is almost similar.
A company has to plan for its capital structure so that it can hold the correct ratio of debt and
equity ratio. This plan helps the company to analyse the cost of capital and various other
factors also (Jensen & Meckling, 1976).

Cash flow analysis
The amount of cash outflow and inflow in the current year is recorded in the cash flow
statement of the company. There are three major sources of cash transactions which are
divided as-
 Cash from operating activities- The cash that is received or paid in relation to the
principal business activity or the activities that are carried out to fulfil the objectives
of the company is recorded under this head.
 Cash from investing activities- Cash received or spent on the selling or purchasing of
any investments is recorded under this head. Also, if there is dividend received from
such investments then it is recorded under this head.
 Cash from financing activities- Cash flows that relate to raising funds or repaying
them are usually recorded under this head (Lerner, 2009).
Understanding each item of cash flow statement
Commonwealth Bank
In the year 2016, the cash flow from operating activities amounted to $(4561) million but
the loss reduced to $(807) million in 2017 due to decrease in the interest payment in the
current year in comparison to the previous year.
Now let us talk about the cash flow from investing activity which amounted to $(2023)
million in 2016 and $677 million in 2017. This increase in the cash flow resulted because
of the decreased amount of investments that were made in certain tangible and intangible
assets (Menifield, 2014).
There was a decrease in the cash flow from financing activities from $1620 million to
$10472 million. Such increase in the cash flow from financing activity was because of the
fall in the funds that were present for the purpose of redemption of the debt securities,
purchase of treasury and also loan capital.
However, the net cash flow of the company increased from $(4973) million to $8988
million in the year 2017.
National Australian Bank

The cash flow from operating activity fell from $14460 million to $13217 million in
2017. Such decline was observed because of the lower interest and premium that was
received by the bank when compared to the previous year.
There was an increase in the cash flow from investing activity from $(9970) million to
$(313) million because there was less purchase of securities and more inflow from the
sale of controlled entities (Penman, 2012).
Now let us talk about cash from financing activity which declined from $9496 million to
$(313) million in 2017. This decline was observed because there was a huge amount of
repayments made and also cash inflows from instruments were lower.
The net cash of the company declined from $13986 million in 2016 to $12573 million in
2017 (Picker, 2016).
Comparative analysis of cash flow for the past three years
The cash flow from operating activities for both the companies are shown in the table
below:
Cash flow from operating Activities
Particulars 2017 2016 2015
Commonwealth -807 -4561 7183
National Australia 13217 14460 -13090
2017 2016 2015
-15000
-10000
-5000
0
5000
10000
15000
20000
Commonwealth
National Australia
Commonwealth bank has larger operations when compare to National Australian Bank
still the volume of cash flows are higher for National Australian Bank.

The cash flow from investing activities for both the banks are shown below:
Cash flow from Investing Activities
Particulars 2017 2016 2015
Commonwealth -677 -2032 -1215
National Australia -313 -9970 -7830
2017 2016 2015
-12000
-10000
-8000
-6000
-4000
-2000
0
Commonwealth
National Australia
We can observe in the graph provided above that the trend followed by both the banks is
the same. There has been a decrease in the cash flows in 2016 and increase in the cash
flows in 2017 for both the banks (Piper, 2015).
The cash flow from financing activities for both the banks are shown in the table provided
below:
Cash flow from Financing Activities
Particulars 2017 2016 2015
Commonwealth 10472 1620 -7875
National Australia -331 9496 1326

2017 2016 2015
-10000
-5000
0
5000
10000
15000
Commonwealth
National Australia
The cash flows under this head are following an opposite direction for both the banks.
There has been increase in the cash flows for Commonwealth bank whereas there has
been a decline in the cash flows for National Australian Bank (Ramírez, 2018).

Other comprehensive income analysis
It shows the adjustment in the fair value of the assets that are recorded in the books of
accounts of the company.
Items that are reported in the other comprehensive income statement
The following items were recorded in the other comprehensive income statement of
Commonwealth Bank:
 Any gain / loss on available for sale securities.
 Property revaluation.
 Profit/ loss on cash flow hedging instruments.
 Foreign currency translation reserve.
 Actuarial gains derived from defined benefit superannuation plan.
The following items were recorded in the other comprehensive income statement of National
Australian Bank:
 Revaluation of land and building.
 Profit/loss on cash flow hedging instrument.
 Currency adjustments of other contributed equity on translation.
 Currency adjustments on translation of foreign reserves after deducting hedging.
 Debt instruments at fair value (Robinson, 2014).
Reasons of not reporting these items in the income statement
There are few items that are held by the companies whose value changes because of the
change in circumstances and is determined by the market forces. The initial value of such
item is compared with the value as on the end of the financial year. Such change in the value
of the items must be recorded in the books in order to provide a true picture of the company’s
financial position (Siciliano, 2015). The profit and loss of these items cannot be recorded in
the income statement because these items are still held in the books of account.
Comparative analysis of the items of other comprehensive income statement
The items that are recorded in the other comprehensive income statement can be divided into
two parts. One part gets classified in the income statement of the company in the later periods
and the other parts do not get classified even in the later periods. There are some items which

is related to the change in the fair value of reserves, investments, employee superannuation
fund etc. The tax effect on the profits of the company is reflected in this statement.
Evaluation of manager’s performance on the basis of other comprehensive income
statement
The changes in the value of items occur due to changes in the economy or due to the changes
in the market forces. So, we cannot judge the operating efficiency of the company on the
basis of other comprehensive income statement. We should ignore the profits and losses that
the company has on account of change in the fair value of the assets because the management
does not play any role in it. Hence, we can conclude that the managers performance cannot be
evaluated using the other comprehensive income statement.

Analysis of Corporate income tax
Corporate tax can be defined as the tax paid by the companies on the profits earned by them.
Tax expenses of the current year
The tax expense of Commonwealth bank and National Australian Bank for 2017 is $3990
million and $2480 million respectively.
Effective tax rate calculation
The formula for calculating tax rate is as follows:
Effective tax rate= Income tax for the current year/ Earnings before tax
The above formula has been used to calculate the effective tax rate of both the companies
which are as follows:
Effective tax rate
Particulars Commonwealth National Australia
Income tax expense 3,992 2,480
Earnings before
Tax 13,944 8,661
Effective tax rate 28.63 28.63
Deferred tax assets and liabilities
The profits of the companies differ under the provisions of accounting and taxation (Simpson,
2012). These differences arises the concept of deferred tax asset and liabilities. The tax that
is charged on these items is known as deferred tax.
The items that are recorded as deferred tax assets in the balance sheet of Commonwealth
bank are as follows:
 Unearned income
 Financial instruments
 Defined benefit superannuation plan
 Provision for employee benefit
 Provisions for impairment on loans, bills discounted and other receivables

The items that are recorded as deferred tax liabilities in the balance sheet of Commonwealth
bank are as follows:
 Financial instruments
 Intangible assets
 Insurances
 Lease financing
 Investment in associates
The items that are recorded as deferred tax asset in National Australian Bank are as follows:
 Tax losses
 Employee entitlements
 Collective provisions for doubtful debts
 Specific provisions for doubtful debts
 Unrealised revaluations on funding vehicles
The items that are recorded as deferred tax liabilities in National Australian Bank are as
follows:
 Intangible assets
 Depreciation
 Defined benefit superannuation plan assets
Change in deferred tax assets and liabilities
It has been observed from the financial statements that the deferred tax asset of the
Commonwealth bank has increased from $2361 million in 2016 to $2499 million in 2017
whereas the deferred tax liability of the company reduced from $1465 million in 2016 to
$1275 million in 2017.
In case of National Australian Bank, the deferred tax assets amounted to $2254 million in
2016 and increased to $2292 million in 2017. Also, the deferred tax liabilities reduced from
$329 million to $304 million in 2017.
Calculation of cash tax amount for both the companies
The tax that is calculated on the book profits of the company using the provisions of GAAP is
known as book tax whereas the tax that has been paid by the company in actual is known as
the cash tax (Skonieczny, 2012).

If we tax the tax rate to be 30% then the book tax of Commonwealth bank will amount to
$4183 million.
The cash tax for the year after using the adjustments for deferred tax items is shown below:
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
Offshore tax rate differential (76)
Offshore banking unit (42)
Tax losses not previously brought to account (56)
Effect of changes in tax rates 4
Income tax (over) provided in previous years (66)
Other 34
Cash Tax 3,992
We can see in the above table that the cash tax for Commonwealth bank amounts to $3992
million in 2017.
The cash tax of National Australian bank taking into consideration the adjustment of deferred
tax items are shown below:
Calculation of Cash tax for National Australia
Tax as per book profits 2,598
Assessable foreign income 7
Foreign tax rate differences (43)
Losses not tax effected 11
Foreign branch income not assessable (78)
Offshore banking unit income (62)
Restatement of deferred tax balances for tax rate changes 1
(Over) / under provision in prior years (17)
Non-deductible hybrid distributions 70

Other (7)
Cash Tax 2,480
The cash tax of National Australian bank for 2017 is $2480 million.
Calculation of cash tax rate
The cash tax rate of both the companies is calculated in the table provided below:
Cash tax rate calculation
Particulars Commonwealth National Australia
Cash tax 3,992 2,480
Earnings before
Tax 13,944 8,661
Cash tax rate 28.63 28.64
The cash tax rate of Commonwealth bank and National Australian bank is 28.6%. It is just a
co incidence that the cash tax rate for both the companies is the same (White, 2015).
Difference in cash tax rate and book tax rate
The book tax for both the companies is taken at 30% and the cash tax rate of both the
companies is taken at 28.6%. These differences in both the rates are because of he provisions
of accounting and taxation as discussed earlier.

Conclusion
In this report, we have discussed about few elements of the financial statements and the ways
to analyse them. A proper analysis of these financial elements helps us to get a clear picture
about the performance and position of the company. Such analysis also helps the investors in
the process of decision making. It is important for the company to provide true information
about its workings in order to survive in the long run.

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