HI5020 Corporate Accounting Assignment: Bank Performance Analysis

This report provides a comparative analysis of the corporate accounting practices of Commonwealth Bank and Westpac Bank, both listed on the Australian Securities Exchange (ASX). The analysis, conducted from an investor's perspective, examines various financial components, including equity, cash flow statements, comprehensive income statements, and corporate income tax. The equity section discusses share capital, retained earnings, and reserves, highlighting the debt-equity ratios of both banks. The cash flow statement analysis explores operating, investing, and financing activities, comparing trends and providing graphical representations. The comprehensive income statement section addresses items reported under other comprehensive income (OCI) and their implications. Finally, the report delves into corporate income tax, calculating effective tax rates, deferred tax assets and liabilities, and the difference between cash and book tax, concluding with an overview of the key findings.

Corporate accounting

EXECUTIVE SUMMARY
We get the industry overview by analyzing the performance of each company belonging to that
industry. The following discussion is the comparative analysis of two listed companies of
Australia operating within the same industry. For such an analysis, we have chosen
Commonwealth and Westpac banks. The analysis has been made from an investor's point of
view as such stakeholders have an interest in knowing about the internal environment of an
organization so that useful decisions can be made accordingly.

Contents
ANALYSIS OF EQUITY................................................................................................................6
Discussion on each item of equity for both the companies..........................................................6
Discussion regarding debt and equity of both the companies......................................................7
ANALYSIS OF CASH FLOW STATEMENT...............................................................................9
Discussion regarding Cash Flow Statement:...............................................................................9
Description of Analysis of Cash flow of both the companies....................................................13
ANALYSIS OF COMPREHENSIVE INCOME STATEMENT.................................................14
Items reported in other comprehensive income statement.........................................................14
Reasons for not reporting this item in income statement...........................................................14
Comparative Analysis of OCI statement items..........................................................................14
Use of OCI in evaluation of performance of managers.............................................................15
ANALYSIS OF CORPORATE INCOME TAX...........................................................................16
Tax expense for the companies for the current year..................................................................16
Effective income tax rate...........................................................................................................16
Deferred tax asset and liabilities................................................................................................16
Increase in DTA and DTL.........................................................................................................17
Calculation of cash tax using book tax......................................................................................17
Calculation of Tax rate...............................................................................................................19
Difference in cash tax and book tax...........................................................................................19

CONCLUSION..............................................................................................................................20
Bibliography..................................................................................................................................21

INTRODUCTION
The financial & non financial measures and statistics together sums up as various components of
the financial reports. Such components differ from each other in terms of characteristics and their
nature. The following discussion focuses on comparison of various such components between
Commonwealth group and Westpac group working under the same industry.
The Australian multinational bank, Commonwealth Bank, is engaged a number of activities such
as Institutional banking , retail and business management of funds, superannuation facilities,
investment, insurance and such other financial services such as brokerage services. It has its
businesses spread all over the world such as New Zealand, US, UK and Asia. As of 2015, this
company had turned out to be the largest listed company on Australian Securities Exchange
(ASX) with brands such as Commonwealth securities & insurance, ASB Bank, Bankwest, etc.
This company is also the Southern Hemisphere's largest bank (Armstrong, 2015).
Westpac Banking Corporation, also known as Westpac, having headquarters at Sydney is a
provider of financial services and is considered as one of the 'big four' banks of Australia. It's
name is formed by the combination of 'Western' and 'Pacific'. Considering its current status, it
has 14 million customers with 40,000 employees under it. It looks forward to prosper in terms of
growth, customers, communities and great service provider. It was consideded as one of the most
sustainable bank as per Dow Jones Sustainability Index in 2017 which was for the fourth time in
a row (Atkinson, 2012).
For a better picture of both the companies, we have discussed the following financial aspects of
both the companies’ along with a comparison analysis between the two.

ANALYSIS OF EQUITY
The equity of a company refers to shareholder's funds or monies invested by shareholders who
get the shares of the company. Such shares could be equity or preference shares or both. Also,
retained earnings and reserves and surpluses or deficits form a part of equity (Berry, 2009).
Discussion on each item of equity for both the companies
Let us discuss the equity portion of the two companies for past two years. Commonwealth Bank
consists of both ordinary as well as treasury shares worth $35,266 and $295 respectively giving a
total share capital value as $34971 in 2017 in comparison to $33,845 in 2016. We are seeing this
increase in equity due to issue of shares by the company during the previous year under dividend
reinvestment plan (Boyd, 2013). We see an increase in retained earnings too, that is, from $23,435
million to $26,330 million. This is due to addition of surplus profits in 2017. Also, due to changes in
foreign exchange rates as well as loss on sale of certain investments, we see a decline in the company's
reserves. However, the overall equity value increases from $60, 014 million in 2016 to $63,170 million in
2017.
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

Coming to Westpac Bank, the equity of the company consists of reserves, retained earnings and
obviously, share capital (Bragg, 2016). This capital is composed of ordinary shares and treasuries
worth $34,889 million and $495 million respectively. We see an increase in share capital, that is, from
$33,014 million in 2016 to $34,394 million in 2017. This happened because of new issue of shares by the
company. We also see an increase in retained earnings, that is, from $24,379 million to $26,100 million
due to addition of surplus profits during the year. We see an increase in reserves of the company from
$727 million to $794 million due to gains earned due to changes in fair value. The overall shareholder
funds of the company showed an increment of $3,168 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
Discussion regarding debt and equity of both the companies
The capital of the company comes in two forms, that is, either the company issues shares or raise
debts from potential third parties (Case, 2012). Both of these sources of funds have their own
advantages and disadvantages. It is just that the company chooses a particular source after
considering various factors such as the cost of capital, the industry average rates, etc.

The debt-equity ratio calculation shows how much the debts form the part of shareholder's funds
or in other terms, it shows the dependence of the company on debts (Dash, 2016). The following
list shows the debt and equity value of both the companies along with the debt equity ratio :
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
The above table shows that the Commonwealth bank has a debt equity ratio of 9.92 times while
that of Westpac bank is 8.71 times. This shows us that the company is dependent on the debts for
like 8-9 times more than the equity. Both of the companies have a high debt equity ratios. This is
usually because banks prefer having more debts than the equity. Therefore, on comparison of
both the companies, we see an almost same capital structure (Datar, 2015).

ANALYSIS OF CASH FLOW STATEMENT
There are two bases to prepare the cash flow statement, either on the cash basis or the accrual
basis. The two companies prepare their cash flow statements on the accrual basis. It is important
for a company to prepare this statement to know the actual inflow or outflow of cash in the
company and thereby, let the users know about the liquidity status of the company (Donanldson,
2012).
Discussion regarding Cash Flow Statement:
In case of Commonwealth bank:
 Operating activities consists of investment incomes and Interest payments as those are the
main activities of the business.
 Investing activities consists of cash flows from sale and acquirement of associates or
subsidiaries, investments, fixed assets and investment incomes in the form of dividend.
 Financing activities consists of repayments and proceeds of leverage funds (debts) and
equity.
The outflow of cash from the operating activities in $807 million in 2017 in comparison to
$4,561 million in 2016. Such a decline is visualized due to increase in inflow from interest
incomes and investments incomes. We see a decline in cash flowing out from investment
activities, that is, from $2,032 million in 2016 to $677 million in 2017. This decline took place
due to non payments for acquiring of certain entities that are under control, less purchases of
property, plant and equipment & intangible assets. We see an increment in cash inflows in case
of financing activities which is due to lesser outflow from redemption of debt instruments.
On an overall basis, we see a positive result as there is an increase from the negative balance of
$4,973 million in 2016 to the positive balance of $8,988 million in 2017.
In case of Westpac bank :
 Operating activities consists of cash flowing from proceeds of insurance, interest and
income tax.

 Investing activities consists of cash flows from sale and acquirement of associates or
subsidiaries, investments, both intangible & tangible assets and various other securities.
 Financing activities consists of repayments and proceeds of leverage funds (debts) and
equity.
As we can see, Westpac shows a decline in the cash flowing due to operating activities, that is,
from $5,497 million in 2016 to $2,820 million in 2017 which happened due to losses incurred
from valuations of the investments according to fair value method. It shows a decline in cash
outflows too from $7,245 million in 2016 to $1,698 million in 2017 which took place majorly
due to increase in proceeds from sale of associates and securities. Similarly, we again see a
decline in inflows in case of financing activities from $4,573 million to $552 million in 2017.
This took place due to increase in out flowing of cash in the form of redemption of loans and
issue of debts in lower proportions (Flood, 2017).
On an overall basis, we see a decline in net cash flow by approximately $1,151 million in the
current year 2017.
Comparison of Cash flow statement of both the companies for the past 3 years.
The comparison can be better presented through charts and table as illustrated below :
 Operating Activities
Cash flow from operating Activities
Particulars 2017 2016 2015
Commonwealth -807 -4561 7183
Westpac 2820 5497 -541

We do not see any trend being followed in case of operating activities of both the companies.
 Investing activities
Cash flow from Investing Activities
Particulars 2017 2016 2015
Commonwealth -677 -2032 -1215
Westpac -1698 -7245 -18715
In case of Commonwealth bank, we do see any trend being followed or created. However, in
case of Westpac bank, the cash outflows are declining since past three years (Freeman, 2011).
 Financing Activities
Cash flow from Financing Activities
Particulars 2017 2016 2015
Commonwealth 10472 1620 -7875
Westpac 552 4573 5513

In case of Commonwealth bank, we see an increasing trend since last three years. However, a
decline is evident in the case of Westpac bank.

Description of Analysis of Cash flow of both the companies:
Let us first have a clear picture of both the situations through a chart or graphical presentation :
Cash flow from Activities
Particulars 2017 2016 2015
Commonwealth 8988 -4973 -1907
Westpac 1674 2825 -13743
From the above figures and graph and comparing both the companies in terms of cash flow
statement, we visualize no fixed trend for cash inflow/outflow for the individual activity. But
from an overall viewpoint, we see increasing cash flows in case of Commonwealth bank over a
period of last three years. On the other hand, Westpac shows an increase and a decrease over the
same period of time (Girard, 2014). It is advisable for the companies to keep a check on the cash
being used in operating activities so that they can smoothly operate their organization.

ANALYSIS OF COMPREHENSIVE INCOME STATEMENT
There are certain incomes of the company that aren't realized by the companies yet but would be
realized. So, it is recognized as profit or loss under the head 'Other Comprehensive Income'
presented just below the income statement in the annual reports (Gow, 2016).
Items reported in other comprehensive income statement
In case of Commonwealth bank, the other comprehensive statement includes items such as cash
flow changes in hedging instruments, differences in exchanges due translations in foreign
currency, changes due to fair value measurement, differences in actuarial valuation of stated
superannuation benefit plans, property revaluations net of tax and changes coming due to credit
risk (Holtzman, 2013).
In case of Westpac bank, the items forming a part of such an income comprises of changes in fair
value measurements of investment available for sale, cash flow hedging instruments, differences
in exchange on foreign operations translations, changes accounted due to credit risk changes,
measurement changes and effect of tax on all the above.
Reasons for not reporting this item in income statement
There are certain incomes, expenses, assets and liabilities that aren't under the control of the
management. The changes in such items usually do not have a direct impact on the surplus or
deficit of the company in the current year, but do have an impact on the future profits and losses.
So, in order to update the effect of changes in the value of such items in the current year's books,
we record these items under the head 'Other Comprehensive Income'. On actual realization of
these assets & liabilities, then the changes in values already recorded in OCI statement would be
later transferred and recognized in the income statement. Companies opting accrual basis of
accounting usually makes OCI statement (Horngren, 2012).
Comparative Analysis of OCI statement items
Both the companies have almost similar item recorded in OCI statement. They both record the
changes due to fair value measurement of certain items along with tax effects. If these items are
recorded in the income statement, then the company would be recording incomes or expenses not
yet realized.

Use of OCI in evaluation of performance of managers
It is irrelevant to consider the items recorded in other comprehensive statement because such
items are a result of changes in forces of market and that is why, they are beyond the control of
the management of the entity. We usually consider those items, which has an impact on the
operating profits of the company, to evaluate the performance of managers effeciently and
effectively (Hubig, 2013).

ANALYSIS OF CORPORATE INCOME TAX
Corporate income tax refers to the tax calculated on the net profits of the company and paid by
the company as required to the government.
Tax expense for the companies for the current year
We see profits in case of both the companies for the year ending 2017. Thus, a liability for
payment of taxes arises. Such liability has been recorded at $3,992 million and $3,518 million
for the Commonwealth bank and Westpac bank respectively for the given financial year (Kuhn,
2013).
Effective income tax rate
The effective income tax rate is calculated by dividing the income tax amount by the earnings
before tax. For the calculation of such a rate in case of both the companies, we have represented
it in a better way through a chart as shown below :
From the above calculations, we see an effective income tax rate as 28.63% and 30.55% in case
of Commonwealth bank and Westpac bank respectively (Mattessich, 2016).
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
Deferred tax asset and liabilities
Such assets or liabilities arise in the books of accounts due to temporary differences arising in
taxation and accounting provisions. In case of Commonwealth bank, the deferred tax assets and
liabilities includes provisions for employee benefits, defined superannuation plan benefits,
provisions for losses due to impairment, unearned income, intangible assets, lease financing,
financial instruments, insurance provisions, investment in associates, other provisions and
miscellaneous items (McLaney & Adril, 2016). In case of Westpac bank, the items included are
provisions made for impairment of loan charges or long service leave, annual leave and other

employee benefits. It also includes provisions related to fixed assets, financial instruments,
financial leases, life insurance assets, other provisions or other liabilities and such other
miscellaneous items.
Increase in DTA and DTL
Such deferred assets and liabilities are arising due to temporary differences which might reverse
in the future. For example, if a company is paying tax more than what it was liable to pay
according to taxation provisions, this results in creation of deferred tax assets and vice versa. The
company gets a reversal credit for excess tax paid in the future (Paul, 2014).
In case of Commonwealth bank, the deferred tax assets shows an increase, that is, from $389
million in 2016 to $962 million in 2017. However, a decline is being seen in case of deferred tax
liabilities which was $340 million in 2016 but $332 million in 2017.
In case of Westpac bank, the deferred tax assets shows a decrease that is, from $1,351 million in
2016 to $1,112 million in 2017. Similarly, the bank shows a decrease in case of deferred tax
liabilities, that is, from $36 million in 2016 to $10 million in 2017.
Calculation of cash tax using book tax
Book tax refers to the calculation of tax on the profits booked for the company. Such book profits are
subjected to 30% corporate tax rate in Australia. Such information can be better represented through
the following chart :
Book tax calculation
Particulars Commonwealth Westpac
Income as per books 13,944 11,515
Tax rate 30% 30%
Book tax 4183.2 3454.5
With the above calculations, we see book profits of $4,183 million in case of Commonwealth
bank (Pratt, 2009). With this value, we make several other adjustments of deferred tax liabilities
and assets and such other differences, being permanent in nature, so as to derive 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, from the above calculations, we see that the company has a cash tax of $3,992 million
for the current year 2017.
In a similar way, we will consider the book profits of Westpac bank, that is, $3,455 million and
make adjustments of various other deferred tax assets and liabilities and other permanent
differences in order to calculate the cash tax of the company (Pratt, 2009):
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
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
Thus, from the above calculations, we see that the company's cash tax is being valued at $3,518
million for the current year 2017.
Calculation of Tax rate
The cash tax rate is calculated by dividing the cash tax amount by the EBT (Earnings Before Tax). This can
be better represented for both the companies through the following chart :
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
From the above calculations, we see that in case of Commonwealth bank, the cash tax rate is
28.63% while in case of Westpac bank, the cash tax rate is 30.55%. As clearly visible, such a
rate is higher in case of Westpac bank. This took place majorly due to adjustments made in
relation to deferred tax assets and liabilities (Rogers, 2015).
Difference in cash tax and book tax
Usually, the company calculates two kinds of profits, one which is according to accounting
norms and the other one is calculated as per taxation provisions. This is because for accounting
profits, all the expenses are considered. But, for a taxation based profits, certain expenses are
disallowed such as penalty for breach of contract. Thus, the differences in such profits results in
differences in tax amount.
Book tax is the tax calculated on the basis of book profits while cash tax is the tax which is
actually paid by the company. The differences arising temporarily because of differences in
provisions results in differences in the cash tax rate and book tax rate. However, the differences
in case of both the tax rates are reversed when such temporary differences are reversed in the
future (Seal, 2012).

CONCLUSION
The above discussed comparative analysis brought the attention of the intended users to financial
items such as cash flow statement, other comprehensive income, equity of the company and
corporate income tax. The above two banks were used as an example to clear the understanding
regarding certain concepts practically. A better understanding of the organization is obtained
through understanding of its financial statements. The intended users also called stakeholders
makes use of such evaluations for making various decisions such as investment decisions, or
sanctioning of loans, etc. Also, to analyze the proper functioning of an industry, the regulators
uses such information. After all, industry average is a contribution from all the organizations
working within it (Taillard, 2013).

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