Equity, Cash Flows, And Tax Analysis Of Commonwealth And Westpac Banks

Discussion on each item of equity for both the companies

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).

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).

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

Comparative analysis of debt and equity positions

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

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:

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

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).

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).

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.

Discussion on cash flows statement

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.  

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.

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

There is no trend in the operating cash flows of both the companies.

Comparative analysis of three broad categories of cash flows

The cash flow from investing activities of both the companies is provided under:

Cash flow from Investing Activities
Particulars	2017	2016	2015
Commonwealth	-677	-2032	-1215
Westpac	-1698	-7245	-18715

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	2016	2015
Commonwealth	10472	1620	-7875
Westpac	552	4573	5513

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.

Cash flow from Activities
Particulars	2017	2016	2015
Commonwealth	8988	-4973	-1907
Westpac	1674	2825	-13743

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

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).

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.

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 two companies

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 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).

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).

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.

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%.

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.

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.

Discussion on other comprehensive income statement

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.

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	13,944	11,515
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
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.

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.

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

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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