Discuss about the Accounting Financial Analysis of Cochlear Limited.
Cochlear Limited is a biotechnology company serving globally and designing, producing, and delivering the Cochlear implant and the Baha bone conduction implant. Cochlear was founded in 1981 and took help from Australian Government. Cochlear produces three different products for different situations in medical (Skrivan and Drevinek 2016). First is a Nucleus system combining an dynamic stimulant accessory is implanted by surgery behind a person’s ear. Hybrid is an electric hearing system with a combination of Cochlear embedded and an audio hearing device (Cochlear.com 2016).
After critically analyzing the annual report of Cochlear Limited, the disclosure requirements are examined relating to Property, Plant and Equipment as per AASB 116 and the fair view of financial record and the qualitative features of helpful financial data according to the Conceptual Framework for Financial Reporting covering OB1-OB21 and QC1-QC39 are analyzed.
Conceptual Structure for Financial Reporting
Investors, creditors & lenders are the users of the financial reporting. The information is relevant for the transaction of the debt or equity products to assess the management's resource handling capabilities. According to International Financial Reporting Standards (IFRS) Framework, market regulators may find it useful, but it cannot provide detail information to make any economic decision. However, objectives of financial regulation and general purpose financial planning may not be consistent. Therefore, the general purpose financial planning report is not for the regulators, as they are not considered as primary users. Future cash flow inflow and outflow ability of an entity influenced by the general economic events may be understood from the information about an entity’s financial performance in a quarter (Macve 2015). To understand the total change in an entity's claims and economic resources, it is important to analyze the impact of the change on financial performance to shareholders. [OB1-OB21]
Users find qualitative characteristics of useful financial reporting very helpful while making decisions about an entity. Qualitative characteristics also apply to financial records. Financial data can be very helpful if it is verified, compared, and fairly represented. Authentic financial data can make a difference in the decision taken by the users. The confirmatory value and predictive value are internally related in the financial information. Understandability, comparability, timeliness, and verifiability are essential characteristics of financial reporting. Enhancement of qualitative characteristics is necessary. Cost exists in every part of financial information. The assessment of benefits and costs are done by the International Accounting Standards Board (IASB). The International Accounting Standards Board has the authority to judge whether the reporting requirements are justified by the different entities or not (Aasb.gov.au 2016). [QC1-QC39]
Requirements for PPE as per AASB
The objective of the Accounting Standard AASB 116 is to recommend treatment of accounting for Property, Plant and Equipment so as financial statement user ascertains information about the investment and changes made by the company in Property, Plant and Equipment. Key problems in Property, Plant and Equipment accounting are the realization of assets, determining their carrying amounts, depreciation charges and loss by deterioration to be recognized (AASB 2015). The cost of owned Property, Plant and Equipment of Cochlear Limited is calculated as the price of the asset minus depreciation minus loss by damage (Hu, Percy and Yao 2015). The self-constructed asset value includes material cost and direct labor and any other cost which is related to asset maintenance for usage purpose. Cost related to replacement of a portion of Property, Plant and Equipment are funded in the transfer measure if it’s credible that monetary gain of the future will move to Cochlear Limited. All values are recognizable in the income statement. Payments being made under performing sublets are charged on straight line method a term of lease. Minimum rent amount includes fixed rate increase. Reduction is applied because the fixed assets used for business have a cost and the property is useful only for few years. It is calculated as the value of property, plant and machinery minus the predicted surplus amount on the straight-line method over their estimated use. The estimated life of leasehold improvement is one to fifteen years and plant and equipment between three to fourteen years. Depreciation is mentioned in the income statement from the date of acquiring the asset and held ready for use. Depreciation is checked at every balance sheet date and adjustments are made.
Table 1: Total Property, Plant and Equipment at Net Book Value
On 30th June 2014, plant and equipment were damaged because the product value was reexamined. Out of the $14 million damage expense, $6.3 million was destroyed reversal that is utilized with the Cochlear implant. Cochlear added on the equipping amount to hedge unpredictable result. For the year ended 30th June 2015, no damage turnaround was recorded (Mayorga and Sidhu 2012).
Fundamentals and Characteristics of PPE as per AASB 116
The value of Property, Plant and Equipment are identified as a credit if the future economic gain will move to the company and value of the item is measured accurately. From the annual report of Cochlear Limited it is found that the cost related to replacement of a portion of Property, Plant and Equipment are funded in the transfer measure if it’s credible that monetary gain of the future will move towards Cochlear Limited. All values are recognizable in the income statement (Yao, Percy and Hu 2015).
A company evaluates the value of Property, Plant and Equipment when it is obtained. It is the value to obtain Property, Plant and Equipment and the expense charged to change or service a portion of it. From the annual report of Cochlear Limited, it is found that the value of owned assets includes material cost and direct labor cost and other charges which turned the asset into a useful condition mode for the purpose of using it (Valuation 2013).
Objectives of Financial Reporting Relating to PPE
The purpose of the accounting standard AASB 116 is to suggest treatment for Property, Plant and Equipment so that the financial statement end user can ascertain data regarding the contribution and changes made by the company in Property, Plant and Equipment. Key problems in Property, Plant and Equipment accounting are the realization of assets, determining their carrying amounts, depreciation charges and loss by deterioration to be recognized. On 30th June 2014, plant and equipment were damaged because the product value was reexamined. Out of the $14 million damage expense, $6.3 million was destroyed reversal that is utilized with the Cochlear implant. Cochlear increased the provision amount to hedge unpredictable result. For the year ended 30th June 2015, no damage reversal was recorded. The reduction amount is applied on the Property, Plant and Equipment on the straight-line method. The estimated life of leasehold improvement is between one to fifteen years and plant and equipment three to fourteen years (Laing and Perrin 2014).
By the objectives of the accounting standard AASB 116, Cochlear Limited is following the accounting standard objectives. For the financial year ended 30th June 2015, 88% of sales revenue was from Cochlear Nucleus products and 12% from Baha products. The launch of Nucleus sound processor in Financial Year 2014 led to an increase in the upgrade sales in Financial Year 2015 as customers are upgrading to new technology.
AASB, C.A.S., 2015. Investment Property.
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Skrivan, J. and Drevinek, P., 2016. A case report of a cochlear implant infection–A reason to explant the device?. Cochlear Implants International, pp.1-4.
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