Non-GAAP Financial Measures
CASH EARNINGS
Cash earnings is defined as follows:
| Net profit |
 |
| Less: |
| Outside equity interest |
| Distributions |
| Revaluation profit/(loss) after tax |
| Add: |
| Goodwill amortisation |
|
| Cash earnings |
|
Cash earnings is a key performance measure and financial target used by the Group. Dividends paid by the Company are based on after-tax cash earnings (adjusted for significant items).
Cash earnings is a key performance measure used by the investment community, as well as by those Australian peers of the Group with a similar business portfolio.
Cash earnings does not refer to, or in any way purport to represent the cash flows, funding or liquidity position of the Group. It does not refer to any amount represented on a Cash Flow Statement.
Adjustments are made between net profit and cash earnings as follows:
- Outside equity interest - this reflects the allocation of profit to minority interests in the Group, and is adjusted from net profit to reflect the amount of net profit that is attributable to ordinary shareholders
- Distributions – this reflects payments to holders of National Income Securities, Trust units and Trust Preferred Securities, and is adjusted from net profit to reflect the amount of net profit that is attributable to ordinary shareholders
- Revaluation profit/(loss) – relates to the movement in net market value (including the value of intangible assets) of investments in life insurance controlled entities recorded on the balance sheet in accordance with Australian Accounting Standards. As it relates to an intangible asset, management believes it is prudent to isolate this amount from the underlying operating result. It is separately identified and discussed in detail. Management further wish to separate this, as the method for accounting for the value of life insurance controlled entities is not comparable on an international basis.
- Goodwill amortisation - relates to the straight-line method of amortising goodwill (an intangible asset recorded on the balance sheet) in accordance with Australian Accounting Standards. Financial statement users generally do not regard goodwill amortisation expense as being useful information in analysing investments. As it relates to an intangible asset, management believes it is prudent to isolate this amount from the underlying operating result.
Cash earnings before significant items (and net profit before significant items)
Under Australian Accounting Standard AASB 1018(5.4) "when a revenue or an expense from ordinary activities is of such a size, nature or incidence that its disclosure is relevant in explaining the financial performance of the entity for the reporting period and its disclosure is not otherwise required by this or another Standard, its nature and amount must be disclosed separately either on the face of the statement of financial performance or in the notes in the financial report".
The Group has identified such items as 'significant items' on its Performance Summaries.
Management believe that the inclusion of these items distorts the underlying operating results of the Group and cause difficulty in identifying underlying performance trends and issues. Through the clear separation and identification of these items the Group ensures that they are identified and discussed in full, as well as ensuring that the underlying performance is highlighted and discussed in full.
COST TO INCOME RATIO
The cost to income ratio for the Banking divisions is calculated as total costs (defined in table below) divided by total income (defined in table below):
| Total expenses |
| Less: |
| Interest expense |
| Life insurance expenses |
| Goodwill amortisation |
| Charge to provide for doubtful debts |
| Significant expenses |
|
| Total costs for purposes of cost to income ratio |
|
| Total revenue |
| Less: |
| Interest expense |
| Life insurance income |
| Significant revenue |
|
| Total income for purposes of cost to income ratio |
|
The cost to income ratio calculated on this basis is a standard efficiency measure used widely across the Australian banking industry. In the above income calculation, National's does not include net life insurance income and the pre-tax equivalent gross up of certain structured finance transactions.
ECONOMIC VALUE ADDED (EVA ®)
EVA® is a measure designed to recognise the shareholder requirement to generate a satisfactory return on the economic capital invested in the business. If the business produces profit in excess of its cost of capital then value is being created for shareholders.
To align management's interests with those of shareholders, senior management is required to place a significant percentage of their total remuneration at risk, dependent upon performance against EVA® annual growth targets.
In order to encourage longer term management decision making and sustained value creation, the Group sets EVA® growth targets for 3 year periods. The Group's EVA® target of 5% compound growth per annum was set in 2000, for the 3 years ending September 2003.
SALES (WEALTH MANAGEMENT)
Includes sales for Retail and Corporate Investment products and Risk products. Investment product sales represent the initial application amount and any additional contributions made. Inflows into cash products and reinvestment of distributions are excluded. Risk sales represent first year annual premiums for new business, CPI increases and one-off increases in the sum insured.