Analysis Of Shareholder Equity, Cash Flows And Accounting For Corporate Income Tax Of Two Public Limited Companies Listed On The Australian Securities Exchange (ASX)

December 21, 2023/

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Shareholder’s Equity

Commonwealth bank of Australia and the National Bank of Australia is the multinational bank with the businesses across New Zealand, Asia the United States. On the other hand National Bank of Australia is also the Australian based bank which is engaged in the business of the financial services and the investment services (National Bank of Australia, 2018). The current revenue of the commonwealth bank of Australia is $26.005 billion and that of the National Bank of Australia A$20.176 billion (Commonwealth Bank, 2018).

hareholder’s Equity
				Commonwealth bank	National Australian Bank
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	Ordinary Share capital	34971	34627
	Other Equity Instruments
Reserves				1869	237
Retained profits			26330	16442

I)Ordinary Share capital

Ordinary share capital is the capital which is provided by the owners of the business in return of shares. Ordinary shares are ranked after the preference shares. The ordinary share capital of the Commonwealth Bank of Australia is A$34971 and that of the National Australian Bank is A$34627 which is lower as compared to the previous bank. The shareholder capital of both the banks have been accelerated as compared to the previous year from the annual reports, possibly because the companies might have sold the shares which raised the revenue and decreased the expenses. The share capital of Commonwealth bank increased from A$33845 to A$34971 and that of the National Bnak of Australia is A$34285 to A$34627, which is still a slow raise.

Other Equity instruments are generally a document which serves as a legal evidence of the ownership right in a firm like a share certificate. They are issued to the shareholders of the company and are used to fund the business (Schaltegger, Etxeberria and Ortas, 2017).

Reserves are the money which has been kept aside by the company for the specific purposes. The reserves of the Commonwealth bank are A$1869 and on the other hand the National Australian Bank is having reserves of A$237. The reserves have been decreased in case of Commonwealth Bank of Australia due to payment of debts (Suzuki, 2015).

A portion of surplus always ends up in the retained earnings or retained profits. The retained profits of the company are the amount earned to date after any dividends or distributions are paid to the investors. It can be used by the company to pay the debts as well as the future dividends. The increase retained earnings means the companies are stable and profitable. The retained earnings of the National Australian Bank have increased from A$16376 to A$16442, whereas that of the Commonwealth Bank has also increased from A$23435 to A$26330 (Commonwealth Bank, 2018).

The comparative analysis of the shareholders equity of both the companies showcases the financial position of the company. The above factors determine how much the owners has invested in the business and how they are performing in comparison to the past years and the competitors as well. The share capital of Commonwealth bank increased from A$33845 to A$34971 and that of the National Bank of Australia is A$34285 to A$34627, which is still a slow raise (National Bank of Australia, 2018)

Operating activities are the operations of the business which are directly related to the supply of the goods and the services to the market. These activities are considered as the core activities of the company and examples of such activities are distributing, marketing and selling of a product or a service (Miao, Teoh and Zhu, 2016).

Other Comprehensive Income Statement

Funds from operations

Funds from operations are the amount which is used by the real estate investment trusts to define the cash flow from their operations. The funds from operations are calculated by adding back the depreciation value and subtracting any profit on sale (Collins Hribar and Tian, 2014).

Changes in the Working Capital

Net Working Capital is defined as the difference between the current assets and current liabilities. Therefore a change in the amount of the working capital will be reflected.

Net Operating Cash Flow

Net Operating cash flow refers to the cash amount generated by the company through the revenue it brings in, excluding costs which are in relation to the long term investment on capital items (Gordon, Henry, Jorgensen and Linthicum, 2017).

Investing Activities

Investing activities are those activities which will provide the future benefit to the company. The cash flow from the investing activities is an item which reports the change in the aggregate position of the company whether via investment in the assets and sale of the assets.

Capital Expenditures

The amount a company spends in order to attain the fixed assets, land, buildings and the equipment. It is understood that the expenditure on the capital items will provide the benefit to the company in the long run (Campbell, 2015).

Capital Expenditures (Fixed Assets)

A capital expenditure is considered as an asset rather than treating it as an expense. The fixed assets are then charged over their useful life with the assistance of the depreciation.

Capital Expenditures (Other Assets)

The other assets include the current assets and probably the advance from the customers and the deposits. The cost or the values of an asset is adjusted for the purpose of the tax.

Net Assets from Acquisitions

The net assets from acquisitions are basically the amount which is arrived after adding up all the above assets and expenditures.

Sale of Fixed Assets & Businesses

The sale of the fixed assets is a normal process which is undertaken either to gain an advantage when the price is right and can enables the earnings and profits or when the part of the asset or an entire asset becomes useless. The sale of the business also involves transfer of the ownership to the other party (Weber, 2018).

Purchase/Sale of Investments

Generally the investment transactions are made through the brokers and the purchase of the investment is done basically to secure the company. The right market price or the favourable market price when arrives the company sells the investment.

Financing Activities

The financing activities involve the transactions with creditors or investors. These activities help in either expansion of the operations of the company or help the existing operations. These transactions are the third set of the activities which are used while forming the cash flow statement.

The examples of the financing activities are Cash Dividends Paid – Total, Common Dividends, Cash Dividend Growth, Change in Capital Stock, Repurchase of Common & Preferred Stock, Sale of Common & Preferred Stock, Proceeds from Stock Options, Issuance/Reduction of Debt, Net, Change in Long-Term Debt, Issuance of Long-Term Debt, Reduction in Long-Term Debt, Other Funds and sources (Huang, Lin and Raghunandan, 2015).

Accounting for Corporate Income Tax

Net Change in Cash

The net change in the cash reflects the increase or decrease in the cash and the cash equivalents from the starting point to the end point of a year. The net change is calculated as a result of cash from operating, investing and the financing activities (Graham and Lin, 2018).

Free Cash Flow

The free cash flow is measured by how much amount of the cash the company is able to generate after paying off for all the expenses and can be used for the expansion, dividends, reduction of the debts and for other purposes (Free cash flow, 2017).

From the cash flow below it can be analysed and observed that in case of the Commonwealth bank the net cash from operating activities has been improved and reached to 2.651 from 0.841 as compared to the previous year mainly because of the increase in the funds from operations and that of the National Australian Bank have been reduced to 569 from (2327), the company is trying to improve (Talebnia, Jaberzadeh and Salehi, 2015)

Net cash flow from the investing activities

Cash flow Statement	Commonwealth Bank		National Australian Bank
Fiscal year is July-June. All values AUD Millions.	2018	2017	2016	2018	2017	2016
Funds from Operations	15800	12389	17215	12648	16787	-13818
Funds from Operations Growth	0.2753	-0.2803	0.3469	-0.2466	2.2149	-1.4251

Changes in Working Capital	-14623	-13102	-21698	569	-2327	728

Net Operating Cash Flow	1177	-713	-4483	13217	14460	-13090

Net Operating Cash Flow Growth	2.6508	0.841	-1.618	-0.086	2.1047	-0.809

Net Operating Cash Flow / Interest Income	0.0341	0.0214	0.1314	0.4818	0.523	0.4614
Investing Activities

Capital Expenditures	-980	-1097	-1768	-1028	-875	-976

Capital Expenditures (Fixed Assets)	-477	-602	-1259	-1028	-875	-976

Capital Expenditures (Other Assets)	-503	-495	-509	–	–	–

Net Assets from Acquisitions	–	-31	-857	–	-11782	-33

Sale of Fixed Assets & Businesses	181	382	515	2269	52	382
Purchase/Sale of Investments	-271	-25	–	-1554	2635	-1203

Purchase of Investments	-271	-25	–	-23396	-22084	-25174
Sale of investments				21842	24719	23971
Other Sources	–	–	–
Net Investing Cash Flow	-1070	-771	-2110	-313	-9970	-1830

Net Investing Cash Flow Growth	0.3878	0.6346	0.6407	0.9686	4.4481	0.7402

Net Investing Cash Flow / Interest Income	-0.031	-0.0231	-0.0619	-0.0114	-0.3606	-0.0645

Cash Dividends Paid – Total	-5366	-6084	-5827	-4750	-4593	-3624

Common Dividends	-5366	-6084	-5827	-4750	-4593	-3624

Cash Dividend Growth	0.118	-0.0441	0.0602	-0.0342	-0.2674	0.0878

Change in Capital Stock	-40	-64	4025	-400	–	5232

Repurchase of Common & Preferred Stk.	-95	-98	-1047	-400	–	-1014
Sale of Common & Preferred Stock	55	34	5072	–	–	6246
Proceeds from Stock Options	55	34	5072	–	–	6246
Issuance/Reduction of Debt, Net	–	–	3489	4819	14089	-1224

Change in Long-Term Debt	–	–	3489	4819	14089	-1224
Issuance of Long-Term Debt	–	–	102907	37318	43632	28717
Reduction in Long-Term Debt	–	–	-99418	-32499	-29543	-29941
Other Funds	27	61	-67	–	–	942
Other Uses	–	–	-67	–	–	–
Other Sources	27	61	–	–	–	942
Net Financing Cash Flow	-934	10472	1620	-331	9496	1326

Net Financing Cash Flow Growth	1.0892	5.4642	1.2057	1.0349	6.1614	1.4109

Net Financing Cash Flow / Interest Income	-0.027	0.3144	0.0475	-0.0121	0.3434	0.0467
Exchange Rate Effect	715	-318	150	-733	6554	7605

Net Change in Cash	-112	8670	-4823	11840	20540	-5989

Free Cash Flow	700	-1315	-5742	12189	13585	-14066

Free Cash Flow Growth	1.5323	0.771	-1.8601	-0.1028	1.9658	-0.6587

Free Cash Flow Yield	-0.0346	–	–	0.0822	–	–

V) From the comparative analysis of both the banking companies which are the Commonwealth Bank of Australia and the National Australian Bank, the comparative analysis is basically undertaken to measure the financial relationship between the variables over two or more reporting period. The best way to find out the position in the market is to do a comparative analysis over a definite period of time. Moreover there are many unscrupulous techniques through which the profit can be inflated but under the scenario of the cash flow statement it is not possible(Kahng, 2015).

The financial analysts not only have a look on the income statement, rather they also scrutinize the cash flow statements and each of the activity such as the cash flow from operating activities, cash flow from investing activities and at last cash flow from the financing activities (National Bank of Australia, 2018). The difference between the multiple years can be reported with the help of the comparison statement and the data is also presented in terms of the percentages. Since cash is tangible and it can be measured therefore the cash is the metric which will provide the apples to apples comparison between the two organisations (McInnis, Yu and Yust, 2018).

From the above analysis it can be observed that the cash flow statement of the three years have been compared for both the banks. The net cash flows from the operating activities in case of the Commonwealth Bank is 1177 and that of the National Australian Bank 1321. The net cash from the investing activities is negative in case of the Commonwealth Bank of Australia which is -1070 and in case of the competitive bank the same has been -313 which is less risky (Commonwealth Bank, 2018).

VI) In the other comprehensive statement of the banking companies chosen reflects the items that may be reclassified to the profits or loss subsequently and the vice versa case. The fair value changes on the financial liabilities have been turned into the positive figure from (113) to 11 in the financial year 2017. Moreover the tax apart from, on the normal income, has been transferred to the Equity(Merz and Overesch, 2016).

The currency adjustments in case of translation of the foreign operations have been fallen to the negative figure of (273) in case of the National Australian Bank, However in case of the Commonwealth Bank of Australia the foreign current translation tax is negative with the amount of (282) and the Equity holders of the bank have been reduced from 9510 to 9209 respectively in the year 2017. The total comprehensive income of the Commonwealth Bank of Australia is A9233 whereas, that of the National Australian Bank is A$4975 (Commonwealth Bank, 2018).

VII) The items of the Comprehensive Income statement is not recorded in the income statement or the profit and loss account of the company because a company’s profit and loss account has its own drawbacks. Comprehensive income statement is as advance statement and it gives an expansive view of how companies’ profits that were out of the core operations are provided with figures in Comprehensive Income Statement. It basically involves the foreign currency adjustment which helps to determine the fluctuations in the operations of the company (Faulkender, Hankins and Petersen, 2018).

VIII) From the above image it can be analysed that the total comprehensive income of the National Australian Bank is 4972 and that of the Commonwealth bank is 9233. The comparative analysis is carried out to reflect the changes adopted by implementing the accounting policies (Huang Wang and Tsai, 2016).

The Equity holders are getting the amount finally. The gain or loss on the hedging instruments is high in case of the Commonwealth Bank in comparison to National Australian Bank. If these items were included in the income statement there might be a change in the profit attributable to the shareholders as it would be added or subtracted from the total income (Harford, Wang and Zhang, 2017).

IX) No, the comprehensive income shall not be included in the evaluation of the performance of the managers as these incomes may happen and may not and therefore they are not the pure source or the determinants of the performance of the managers. The performance of the managers is reported through their ability to devise the strategies and to record the transactions correctly. But they will be liable for their recording and posting of the entry in the under the right head(Penman and Zhang, 2016).

Accounting for Corporate Tax	Commonwealth Bank of Australia	National Australian Bank
Tax Expense	3960	2480
Income tax expense	3960	2480
Earnings before Tax	13944	8661
Effective Tax rate	28%	29%
Deferred Tax Assets/Liabilities (17)	332	1988
2016	340	1925
Deferred tax assets increase	573
Increase/ Decrease	-8	63
Income tax provision	3960	2480
Increase/Decrease in Deferred Tax	565	63
Total taxes	4525	2543
Other income	5626	4842
Tax paid on other Income	16	14
Unlevered Taxes	4509	2529
Earnings Before Income tax	13944	8661
Cash Tax Rate	32%	29%
Income Tax Provision	3960	2480
Deferred Tax	332	1988
Total Taxes	4292	4468
Interest Income	17600	13182
Tax paid	50.0	37.7
Cash Tax Amount	4242	4430

X) The tax expenses that have been shown in the last year of both the companies are A$3960 and A$2480 respectively for the Commonwealth bank of Australia and National Australian Bank (National Bank of Australia, 2018)
XI) The calculation had been shown above and the effective tax rate of National Australian Bank is higher at 29% (Wong, Lo and Firth, 2015).

XII) The deferred tax can be used by the company to reduce the taxable income and it is shown in the balance sheet under the current assets head. On the other hand the deferred tax liability is recorded in order to find out how much liability the company is going to pay in future because of the current adjustments (Jaafar and Thornton, 2015).

XIII) The deferred tax asset of the Commonwealth Bank of Australia increased by A$573 and the liabilities decreased by A$8, however in case of the National Australian Bank, the deferred tax assets increased by A$63 (Creedy and Gemmell, 2017).

XIV) The cash tax amount for the Commonwealth bank is A$4242 and that of the National Australian Bank is A$4430 (Commonwealth Bank, 2018).

XV) The cash tax rate of the Commonwealth Bank of Australia is higher in comparison to the National Australian Bank at 32% (Commonwealth Bank, 2018).

XVI) The main reason that the cash tax rate is different from the book rate because the pre taxable income which is reported to the IRS generally does not equate to the pre-tax book and hence creates the temporary as well as the permanent differences. Temporary difference causes the deferred tax whereas the permanent causes the effective tax rate (Dyreng, Hanlon, Maydew and Thornock, 2017).

References

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