Analyzing Annual Reports Of Cochlear Limited And CSL Limited In Essay Form.

Prepare a business report analyzing the latest annual report of the ASX listed company allocated to your group by your lecturer from the list below.  Your report should address each of the following: 

1. Company- Introduction, Business & operating activities, Finances and Financial performance

• Describe the core business of the company. Provide full details of its different activities and or business segments.
• Discuss the industry that the chosen company operates in.  For example, is it a growing or declining industry; which are the main competitors of the company and what are they doing, etc.  Ensure you discuss the implications of these factors.
• Critically analyse the financial structure of the company.  How the company is funded vis-à-vis internal or external sources?
• Describe key elements of Financial Performance reported by the company in the annual report.
• Has this company reported any event that occurred after the reporting date? If so, describe the event.
• Were there any changes in accounting policies disclosed in the annual report? If yes, describe those changes.

2. Assets – PPE and Intangibles

• Analyse the carrying amount of each class of Property, Plant, and Equipment, at reporting date, of your company.
• Describe the accounting policies relating to Property, Plant, and Equipment adopted by your company.
• Analyse the intangible assets reported by the company. Discuss their composition and relevance to the company’s business.
• Describe the accounting policies relating to Intangible Assets adopted by your company.
• Are any items of Property, Plant, and Equipment, and/or Intangible Assets of your company impaired?  If so, identify which assets are impaired and analyse how the impairment was determined.

3. Leases

• What are the values of the leased assets and liabilities? What information is disclosed in the notes to the accounts in relation to leased assets and lease liabilities?

4. Voluntary Disclosures

• Identify any two voluntary disclosures made by the company in its annual report or other information. Explain their relevance to company’s business.

5. Accounting for Tax

• What are the values of Deferred Tax Assets and Deferred Tax Liabilities disclosed by the company?   Explain their rationale using the information provided by the company in the notes to financial statements. 
  
  

The discourse of the report aims to analyse and compare the latest annual report published by Cochlear Limited and CSL Limed which are listed in ASX. It has been further discerned that both the companies contribute to the healthcare industry and hence recognized from the same industry. Some of the main interpretations of the study will describe the core business of the company and provide complete details of the business segments. It further aims to discuss the industry in which it operates and give the rationale whether it is growing are declining in nature. It further aims to critically analyse the financial structure and address how the company is funded with its internal and external sources. Some of the main research aspects has further described about the key elements of financial performance report. The next section has included interpretations about assets such as PPE and Intangibles. This section has analysed and compared the “carrying amount of each class of Property, Plant, and Equipment, at reporting date” for both the companies. The discourse of the study has further included the policies associated to “Property, Plant, and Equipment”. Some of the other depictions of the report has stated on the composition and relevance of intangible assets. The next section of the study has determined the real event disclosures associated to the value of lease assets and liabilities. In this section the study has disclosed the accounts in relation to the lease liabilities and assets. The fourth section of the report has included assessment for identification of two voluntary disclosures made by the company in its annual report and this has been also stated with relevance to the company’s business. The final section has determined the values of “Deferred Tax Assets and Deferred Tax Liabilities” which are disclosed by the company. This section has further explained the rationale of using the information provided by the company in the notes to financial statements (Weygandt, Kimmel and Kieso 2015).

Cochlear Limited headquartered in Sydney is recognized as a medical device company is designs, supplies and manufacturers “Nucleus cochlear implant, Baha bone conduction implant and Hybrid electro-acoustic implant”. The operating activities of the company includes producing three implants for varied range of medical situations. The nucleus is a system which is a combination of electrical stimulation instrument which is surgically implanted in the backside of patients ear. This device is able to process the captured sound and sends the signal to the brain via electrode array. This product is further identified to be a direct descendent of original cochlear implant. Nucleus was recognized as the first cochlear implant which was approved by “U.S. Food and Drug Administration”. Hybrid is identified as it electroacoustic system which is a combination of Cochlear implant with an acoustic hearing aid and appropriate for patients having residual hearing at lower frequencies (Millo, Barman and Hall 2016). They implant of hybrid system is considered as the smaller variant for Nucleas with an electrode which relays oily high-frequency sounds. Whereas, the acoustic device amplifies the newer frequency sounds and transmits the same to the brain. Baha is depicted as a bone conduction system which comprises of small titanium implant which is integrated with the bone behind a patient's ear. The depictions of the financial performance as per the annual report has shown that the company successfully increasing both sales revenue and net profit in the last three years. This is evident with sales revenue of 821 million in 2014, 942 million in 2015 and 1158 million in 2016. The improvement in the net profit is depicted with adjusted net profit of 110 million in financial year 2014, 146 million in 2015 and 189 million in 2016. As per the depictions of the annual report it is understood that the company relies on internal sources for finance. The changes in the changes in accounting policies disclosures are identified with "Note 4.2 – Employee benefit liabilities, Note 4.3 – Share based payments, Note 5.3 – Intangible assets, Note 5.4 – Business combinations, Note 5.6 – Provisions, Note 5.7 – Contingent liabilities and Note 6.4 – Financial risk management" (Warren 2016).

Financial Performance

CSL Limited is recognized with Global specialty in biotechnology and marketing products to treat and prevent various types of serious human medical conditions. Some of the operating line of the production unaffected by the company includes “blood plasma derivatives, vaccines, antivenom, and cell culture reagents”. These are mainly required for various medical and genetic research and applications. The company standouts out to its promise for being a global pioneer in delivering biotechnology solutions and innovative medicines which protects public health and helps the individuals in life-threatening medical conditions live full life. CSL commenced its operations in vacant “Walter and Eliza Hall Institute building at the Melbourne Hospital in 1918”, prior to which it operated in Parkville premises. Some of the major achievements of the company includes, early production of insulin, development of tetanus vaccine, developing combined vaccine for diphtheria, whooping cough auntie Dennis. The companies often known for its collaboration with world's first human “papillomavirus vaccine, Gardasil, building on the pioneering work by Professor Ian Frazer (1994-2005)”. The depictions based on the financial performance it has been identified that the company has been able to significantly improve in areas of operating revenue, sales revenue, R&D investment, profit before income tax expenses, net profit after tax, net cash inflow from operating activities, capital investment, return on invested capital and basic earnings per-share. The total net profit after tax has increased from $ 1242 million in 2015 to $ 1337 million in 2016. In addition to this, CSL awning per-share has improved from $ 2.69 in financially year 15 to 16 to $ 2.94 in financial year 16 to 17. It has been further discerned that the total operating revenues of the company has significantly improved in the last five years. This is evident with total operating revenue of $ 5100 million in 2012, 5504 million in 2013, 5612 million in 2014, 6115 million in 2015 and 6923 million in 2016. As per the depictions of the annual report it is understood that the company relies on internal sources for finance. Some of the applicable accounting policies in the year ended June 2019 has been identified with “AASB 9-Disclosures to financial instruments” and “AASB 15- Revenue from contracts with customers” (Cataldo and Anthony 2017).

The interpretations of annual report of Cochlear Limited has suggested that the subsequent costs in relation of replacing the asset and complement of property plant and equipment is capitalized as per carrying amount of the future economic benefits. It has been depicted that the carrying amount for plant and equipment in 2016 was $ 69425, which increased to $ 73995 in 2017. The value of the “Property, Plant, and Equipment” is measured as the cost of asset, minus accumulated depreciation and impairment loss. The cost of asset is considered as per the incidental costs which are directly attributable to the acquisition. The intangible assets such as goodwill is accounted by applying acquisition method at the time of business combination. In addition to this, the goodwill represents the difference among the “cost of acquisition and fair value of the net identifiable assets acquired”. System costs are also regarded as intangible assets where the company controls future economic benefits because of the cost incurred. The composition of the intangible asset is identified with $ 339976 in 2017 and $ 224338 in 2016 out of total assets of $ 923,196 in 2017 and $ 816,734 in 2016. This is forming a percentage of 36.8% intangibles in 2017 and 27.4% in 2016 respectively. The intangible assets for the company with indefinite useful life are systematically tested for impairment on an annual basis (Maynard 2017).

Funding Sources

In case of CSL Limited, the value of “Property, Plant, and Equipment” such as land and buildings, the capital work in progress are recorded at historical cost less the applicable amortization and depreciation. The depreciation is charged on the useful life of the assets based on straight-line method. Buildings are depreciated 5-40 years as per “straight-line method”, plant and equipment are depreciated 3-15 years “straight-line method” and lease improvements are depreciated 5-10 as per “straight-line method”. The impairment testing of PPE is done when the impairment trigger is identified (McGuire, Wang and Wilson 2014). Intangible assets are considered with goodwill, intellectual property and software. The excess of fair value of the purchase consideration for goodwill is identified with net assets minus incidental expenses which are recorded as goodwill. It needs to be further understood that goodwill is allocated to the individual as generating units which represents the lowest value within the group in which goodwill is monitored. The company believes in amortizing and reviewing for impairment for those assets which have finite lives. The intangible assets having indefinite useful life are not subject to amortization and henceforth not tested for impairment. The carrying amount of the goodwill allocated to the business is seen as $ 688.3 in 2017. It has been further discerned that goodwill is not amortized but measured at cost less any accumulated impairment losses. The composition of the intangible asset is discerned with $ 1055.4 million in 2017 and 942.6 million in 2016 out of total assets of $ 9122.7 in 2017 million and 7562.7 million in 2016. This is forming a composition percentage of 11.5% intangibles in 2017 and 12.4% in 2016 respectively.

Figure: Comparison of Composition of Intangible Assets in Cochlear Limited and CSL Limited

(Source: Cochlear.com. 2018) 

The various types of payments made under the operating leases are expensed as per straight-line method over the lease term for Cochlear Limited. This however follows the exception where alternative basis is more representable with the pattern of benefits which are derived from leased property. The minimum lease payments consist of fixed-rate interests. The company has been further depicted with number of operating leases over its offices which requires the premises to be returned to the lessor as per of their initial condition. It needs to be further discerned that the operating lease payments does not include repairs and overhauls. Cochlear is identified to lease property under “noncancelable operating leases” expiring over 15 years. The leases are generally provided with the right of renewal at which the terms are renegotiated. The future noncancelable leases for not later than one year is seen as $ 22142 in 2017 and $ 22372 in 2016. In addition to this, future noncancelable leases later than one year but not later than five years is depicted to be $ 70016 in 2017 and $ 82528 in 2016. The lease is later than five years is determined as $ 58897 in 2017 and 65312 in 2016. The total operating lease commitments for Cochlear is seen to be $ 151055 in 2017 and 170212 in 2016. Some of the new standards which are yet to be adopted for leases includes the adoption AASB 16 leases which is mandated for the company to follow in 2020 (Warren and Jones2018).

Assets and Disclosures

The total lease improvement cost is depicted as $ 275.9 million in 2017 and 223.3 million in 2016 for CSL Limited. The total lease “property, plant and equipment” is determined to be $ 35.4 million in 2017 and 32.8 million in 2016. The lease of the “property, plant and equipment” in which the group is determined with substantial risk and reward of ownership are segregated as financial leases. Finance lease is capitalized at the leases inception at “fair value of the minimum lease payments”. Each of the lease payment is depicted to be allocated between liability and finance cost. The finance cost is further seen to be charged to the statement of comprehensive income over the lease period in order to produce a constant periodic rate of interest on the remaining balance of the needs for each period. The various types of “property, plant and equipment” acquired as per the finance lease is depreciated over the shorter assets useful life and leased term. Used to be further understood that the cost of improvement for the leasehold properties are amortized over the unexpired cost ranging for the lease or estimated useful life of improvement whichever is depicted to be shorter in nature. The financial instruments comprise of the “cash and cash equivalents, receivables, payables, lease liabilities and other derivative instrument”. The operating lease are determined to have a varying for renewal rights. The different types of rental payments under the leases are predominantly fixed however they are generally consist of inflation escalation clauses. It needs to be understood that no operating or financier lease consists of restrictions over leasing activities for the company. Similar to Cochlear Limited, some of the new standards which are yet to be adopted for leases includes the adoption AASB 16 leases which is mandated for the company to follow in 2020 (Henderson et al. 2015).

Based on the significance of the exchange rate movements, the directors of Cochlear Limited decided to present the non-IFRS financial measure which is applied to the underlying financial performance of the business. The non-IFRS financial disclosure is completely voluntary nature and are not subject to review our audit. The first disclosure is identified with constant currency. The constant currency eliminates the impact of any sort of exchange rate movements which is required to facilitate comparability of the operational excellence for Cochlear. This is applied with converting the prior comparable period net profit of entities with the use of currency other than Australian dollar (Bartlett and Beamish 2018). The company is further depicted to make voluntary disclosure in area of key management personal. This is in particular has been maintained with disclosing the short-term employee benefits, postemployment benefits, other long-term benefits, director retirement benefits and share-based payments. The information associated to the individual KMP remuneration is considered to be plummeted by section 300A of the “Corporation’s Act 2001”. It needs to be also understood that KMP has not received any loans from Cochlear and there has been no related party transaction with the company (McGuire, Wang and Wilson 2014).

Intangible Assets

The interpretations made for CSL Limited shows that the main voluntary disclosure is identified with executive KMP ammunition received in 2017. The table 5 clearly states about the actual take-home pay of executive KMP. The main difference between the actual take-home pay disclosure and stated disclosures is considered with the inclusion of “opportunity to earn performance-based achievement”. The second important voluntary disclosure for the company is identified with statutory remuneration disclosure of nonexecutive director’s remuneration. This has included the enumeration for the nonexecutive director and segregated the same with short-term and postemployment benefits (Macve 2015).

The depictions of financial statement of Cochlear Limited have shown that the total deferred tax amounted to $ 66586 in 2017 and $ 77144 in 2016. In addition to this, the deferred tax liabilities that identified with $ 5837 in 2017 and 7122 in 2016. The present and the deferred tax are recognized in the income statement, however exceptions apply to the items which are directly a part of income or equity. The company recognizes deferred tax as the “temporary differences between the carrying amount of the assets and liabilities for financial reporting and taxation purpose”. It needs to be further understood that the measurement of deferred tax is recognized to the extent that it is probable that “future tax profits will be available against which they can be utilized” (Martin, X. and Roychowdhury 2015).

The total deferred tax asset for CSL Limited in 2017 has been depicted as $ 496.5 million and in 2016 as 389 million. Additionally, the total deferred tax liabilities have amounted to $ 138.2 million in 2017 and 119.2 million in 2016. The deferred tax liabilities are recognized with the temporary tax differences. These are determined as per the deductible temporary differences, unused tax losses and unused tax assets. The total getting amount of deferred income taxes reviewed at the reporting date in case it is no longer profitable. The deferred tax assets are measured using the tax rates and laws which are enacted with reporting date and expected to apply with related deferred income tax. These are offset with legally enforceable rights to set off “current tax assets against the current tax liabilities”. It needs to be understood that the deferred tax assets in respect of carry forward tax losses are principally recorded in the entities of CSL existing in Switzerland and the UK (Scott 2015).

Conclusion

Based on the depictions of the report the value of the “Property, Plant, and Equipment” for Cochlear is measured as the cost of asset, minus accumulated depreciation and impairment loss. The cost of asset is considered as per the incidental costs which are directly attributable to the acquisition. The intangible assets such as goodwill is accounted by applying acquisition method at the time of business combination. In addition to this, the goodwill represents the difference among the “cost of acquisition and fair value of the net identifiable assets acquired”. In terms of CSL Limited The depreciation is charged on the useful life of the assets based on straight-line method. Buildings are depreciated 5-40 years as per “straight-line method”, plant and equipment are depreciated 3-15 years “straight-line method” and lease improvements are depreciated 5-10 as per “straight-line method”. The impairment testing of PPE is done when the impairment trigger is identified. Intangible assets are considered with goodwill, intellectual property and software. The excess of fair value of the purchase consideration for goodwill is identified with net assets minus incidental expenses which are recorded as goodwill. It is further determined that payments made under the operating leases are expensed as per straight-line method over the lease term for Cochlear Limited. This however follows the exception where alternative basis is more representable with the pattern of benefits which are derived from leased property. The minimum lease payments consist of fixed-rate interests.The various types of “property, plant and equipment” acquired as per the finance lease is depreciated over the shorter assets useful life and leased term. Used to be further understood that the cost of improvement for the leasehold properties are amortized over the unexpired cost ranging for the lease or estimated useful life of improvement whichever is depicted to be shorter in nature.

References

Bartlett, C.A. and Beamish, P.W., 2018. Transnational management. Cambridge University Press.

Cataldo, I.I. and Anthony, J., 2017. CPA Yaeger Review-Financial Accounting and Reporting.

Cochlear.com. (2018). [online] Available at: https://www.cochlear.com/b0dffcb0-9826-4c99-9d58-ad7a760bddac/en_corporate_cochlear_annualreport2017_1.78mb.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=ROOTWORKSPACE-b0dffcb0-9826-4c99-9d58-ad7a760bddac-lTJByF- [Accessed 8 May 2018].

Csl.com. (2018). [online] Available at: https://www.csl.com/-/media/shared/documents/5/2017-fy-asx.pdf?la=en-us&hash=0AA5E03E5FCB98E184CC3116677BDD07741EF572 [Accessed 8 May 2018].

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Martin, X. and Roychowdhury, S., 2015. Do financial market developments influence accounting practices? Credit default swaps and borrowers? reporting conservatism. Journal of Accounting and Economics, 59(1), pp.80-104.

Maynard, J., 2017. Financial Accounting, Reporting, and Analysis. Oxford University Press.

McGuire, S.T., Wang, D. and Wilson, R.J., 2014. Dual class ownership and tax avoidance. The Accounting Review, 89(4), pp.1487-1516.

Millo, Y., Barman, E. and Hall, M., 2016. Accounting measurement tools and their impact on managerial decision making. economic sociology_the european electronic newsletter, 17(2), pp.17-23.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.