Bacc16 Accounting-Commonwealth Bank And National Assessment Answers

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:

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:

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:

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:

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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