Evaluation Essay On Accounting Treatment Of CSL And Cochlear Limited.

Evaluation of Owner's Equity of CSL and Cochlear Limited

(i) From your companies’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past year articulating the reasons for the change.

(ii) Provide a comparative analysis of the debt and equity position of the two firms that you have selected.

(iii) From the financial statement of your chosen companies, list each item reported in the cash flows statement and write your understanding of each item. Discuss any changes in each item of cash flows statement for your companies over the past years articulating the reasons for the change.

(iv) Provide a comparative analysis of your companies’ three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years.

(v) Also provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis.

(vi) What items have been reported in the other comprehensive income statement for each company?

(vii) Why have these items not been reported in Income Statement/Profit and Loss Statements?

(viii) Provide a comparative analysis of the items shown in the other comprehensive income statement section for the two companies. If these items were included in the income statement / profit and loss statements of each company, how would the profit attributable to shareholders of the company be affected?

(ix) Should other comprehensive income be included in evaluating the performance of managers of the company?

(x) What are the tax expenses shown in the latest financial statements of the two companies that you have selected?

(xi) Calculate the effective tax rate for both companies that you have selected.Effective tax rate is calculated as (income tax expense / earnings before tax).Which one of the companies has the higher effective tax rate?

(xii) Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.

(xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies?

(xiv) Please calculate the cash tax amount for both companies using the book tax amount, changes in the deferred tax assets and deferred tax liability (please do your  own research for your better understanding of these concepts and the method of calculating the cash tax amount the book tax amount.)

(xv) Calculate the cash tax rate for both companies. Which company has higher cash tax rate? (Please do your own research to familiarise yourself with how to calculate cash tax rate).

(xvi) Why is the cash tax rate different from the book tax rate?

Evaluation on the accounting treatment of an organization is one of the essential aspects of the corporate finance. It is essential for an entity to follow the accouning standards and principle to recognize, record and present the accounting figures in the financial statement and annual report of the company so that a fair value could be conveyed to the stakeholders of the entity (Romney, Steinbart, Zhang and Xu, 2006). If an organization follows the proper rules of accounting standards then the comparison study could also be done in proper way among the company and the competitor company.

In the report, the main final financial statements of CSL limited and Cochlear Limited has been taken into the context to evaluate the study. The final financial statement, cash flow statement, balance sheet, comprehensive income statement and taxation recording process of the company has been evalauted and compared with each other to reach over a conclusion about the performance of the company and the importance.

CSL limited is an Australian multinational company which is specialized in biotechnology. The company mainly researches, develops, manufactures and marketing and sales the medical solution of various disease in the market. The main motto of the business is to prevent the serious medical issues. The product area of the company includes blood plasma, vaccines, derivatives, antivenin and the cell cultures which are used in various medical issues preventions (Our company, 2018). The company has been founded in the year of 1916 in order to prevent the serious medical issues.

Cochlear Limited researches, develops, manufactures and marketing and sales the pharmaceuticals grade cannabis and hemp based nutra-ceuticals treatment and products for the human and animal helath in the Australian market. It also provides its services in the Switzerland and Slovakia. The company mainly involves in the hemp growing operations, cannabidiol product sales activities etc. (Home, 2018). The company also offers branded premium cannabis chocolate and beverage in the market to improve the health issues in the market.

Owner’s equity of the business represent the total equity amount which has been generated and retained by the company for the long term investment and to run the business for a long period (Kaplan and Atkinson, 2015). The owner’s equity evaluation on CSL limited and COCHLEAR LIMITED is as follows:

1. Items of equity statement:

The annual report of both the companies has been studied and evaluated and the following result has been found:

Equity Items
	CSL limited			Cochlear Limited
AUD in million	2018-06	2017-06	Changes	2018-06	2017-06	Changes
Stockholders' equity
Share capital				173	169	2.37%
Contributed equity	-4634.5	-4534.3	2.21%
Reserves	224.2	294.2	-23.79%	-33.8	-12.9	162.02%
Retained earnings	8490.2	7403.9	14.67%	471.6	387.1	21.83%
Total stockholder's equity	4079.9	3163.8	28.96%	610.8	543.2	12.44%

Evaluation of Debt-Equity Position

(Annual report, 2018)

The above table represent the different items of both the companies which have been recorded to present the total equity fund of the company. Share capital is the total funds which have been raised by the company through issuing the shares in the capital market. The share capital of Cochlear limited has been improved by 2.37% in 2018. Further, the contributed equity depicts the total cash which has been raised. In case of CSL limited, the 2.21% decrement has been seen in the equity position because of internal changes.

Further, the reserves are the amount which is keep by the business aside for the betterment of the business and to save from any sudden consequences. In both the companies, the reserve amount has bee decreased because of the better industry level. Further, the retained earnings depict the retained amount from the profit level for the future uncertainties of the business (Fernandes, Lynch and Netemeyer, 2014). This level has been improved by both the companies through reducing the dividend payout %.

Further, the study has been done on capital structure level of both the companies. In order to identify the capital structure position, debt equity level has been compared. The below table depict about debt/ equity position of the companies:

Equity Items
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Long term debt	4779.9	258.4
Equity	4079.9	610.8
Debt / Equity	117.16%	42.31%

(Annual report, 2017)

The table represent the 11.7.16% debt against the equity position of CSL limited and 42.31% debt level in case of Cochlear Limited. The CSL limited is focusing on the debt level more to improve the funds. It impacts higher risk position of the company. Though, the cost position of the company gets lower (Du and Girma, 2009). Further, in case of Cochlear Limited, the company mainly focuses on the equity funds to reduce the risk level of the company. It represents that Cochlear Limited is required to improve the debt level a bit and CSL limited is suggested to reduce the debt level.

Cash flow statement:

Cash flow statement of the business represents the total cash inflow and cash outflow position which has been generated by the company in particular time period (Deegan, 2013). The evaluation on cash flow statement on CSL limited and COCHLEAR LIMITED is as follows:

3. Items in cash flow statement:

Both the companies are operating in the same industry and thus the most of the items of the cash flow statement of both the companies are similar. Below are the screenshot of annual report of both the companies which represent the cash flow items of the company:

Evaluation of Cash Flow Statements

Figure 1: Statement of cash flow of CSSL limited

(annual report, 2017)

Figure 2: Statement of cash flow of Cochlear

(annual report, 2017)

Both of these images represent the different items of cash flows of both the companies. The cash receipts from customers, interest received and paid, cash paid to suppliers, income taxes paid, grant received etc are few items which are related to the daily activities and main operations of the business and thus it has been represented under the operating cash flows of the company. In case of Cochlear, the revenue level has been improved along with that the supplier amount and the taxes of the company has also been improved with a great level which has affected the operating level of the business. In case of CSL limited, the huge increment has been seen in the receipts from the customers due to which the payment has also been improved but the growth rate on revenue is higher because of the huge demand of the products in the market (Kieso, Weygandt and Warfield, 2010).

Further, the payment for the new PPE, sales of PPE, payment for acquisition and intangible assets, payment for other financial liabilities and assets are few items which are related to the resources and the investment of the business because it affect the business for long term and thus it has been represented under the investing cash flows of the company. In case of Cochlear and CSL limited, the great changes have been seen in the cash flows because of the less investment by Cochlear and huge investment by CSL limited.

Lastly, the issue of new shares in the market, payment of dividend, repayment of borrowings, issue of debt, share brought back etc are few items which are related to the capital position and investment position of the company in the market and thus it is represented in the financial activities head of cash flow statement (Annual report, 2017). In case of Cochlear and CSL limited, the great changes have been seen in the cash flows because of fewer changes into the capital structure position of the companies.

Further, the study has been done on the main categories of the cash flow statement of both the companies. In case of Cochlear Limited, great increment has been seen in operating cash flows of the business with an improved growth rate in last 2 years because of higher turnover and great demand of the products in the market. The investment level has been improved by the company because of investment in new PPE (Annual report, 2017). The financial activities of the business have been compared further and an increment in the cash outflow of the business has been seen.

	CSL limited
AUD in million	2018-06	2017-06	2016-06
Net cash used for operating activities	1902.1	1246.6	1090.9
Net cash used for investing activities	-1534.1	-862.9	-965.4
Net cash provided by (used for) financing activities	-371.5	-103.4	-115.8

Conclusion

(Annual report, 2017)

In case of Cochlear Limited, great increment has been seen in operating cash flows of the business because of higher turnover. The investment level has also been reduced by the company to manage the cash position and reduce the liquidity level of the business. The financial activities of the business have been compared further to identify the changes into company and a great decrement has been seen in the company because of repayment of borrowings and huge dividend to the shareholders.

	Cochlear Limited
AUD in million	2018-06	2017-06	2016-06
Net cash used for operating activities	258.1	259.8	185.1
Net cash used for investing activities	-55.4	-135.6	-50.1
Net cash provided by (used for) financing activities	-232.7	-108.3	-130.89

(Annual report, 2017)

5. Comparative analysis among the companies:

On the basis of the comparison on both the companies, it has been found that the increment in the operating cash flow of CSL limited is 52.58% which is quite higher than cochlear limited. Further the investing level explains the better position of Cochlear limited in order to improve the cash level of the company and the financing activities brief increased cash outflow of both the companies (Annual report, 2018). Though, the level of Cochlear limited is lower. It explains that the overall cash position of CSL limited is better.

	CSL limited			Cochlear Limited
AUD in million	2018-06	2017-06	Changes	2018-06	2017-06	Changes
Net cash used for operating activities	1902.1	1246.6	52.58%	258.1	259.8	-0.65%
Net cash used for investing activities	-1534.1	-862.9	77.78%	-55.4	-135.6	-59.14%
Net cash provided by (used for) financing activities	-371.5	-103.4	259.28%	-232.7	-108.3	114.87%

(Annual report, 2017)

Comprehensive income statement of the business represents the items which have not been shown in the income statement of the business. The evaluation on Comprehensive income statement on CSL limited and COCHLEAR LIMITED is as follows:

Both the companies are operating in the same industry and thus the most of the items of the comprehensive income statement of both the companies are similar. Below are the screenshot of annual report of both the companies which represent the comprehensive income statement items of the company

Figure 3: statement of comprehensive income CSL

(Annual report, 2018)

Figure 4: statement of comprehensive income Cochlear

(Annual report, 2018)

7. Reasons for not adding them in profit and loss a/c:

The comprehensive income statement items are those items which cannot been represented in the income statement of the business because of the fact that those items have not taken place because of the daily operations and main activities of the business as well as the business is not responsible for such expenses (Higgins, 2012). Though, these factors affect the financial statement and profitability level of the business at huge level.

The comparison study has been performed on both the companies in order to measure the overall changes into the profitability position of the company. Through identify the items and figures of the both the companies, it has been found that CSL limited’s profit position has been affected much.

Comprehensive income statement  Items
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Defined benefit plan actuarial		-0.2
Foreign currency translation differences	-96.9	3.7
Effective portion of changes in fair value of cash flow hedges, net of tax		-19.4
Net change in fair value of cash flow hedges transferred to the income statement, net of tax		-8.6
Net change in fair value of available for sale financial assets, net of tax	29.6	0.1
Other comprehensive loss, net of tax	-67.3	-24.4

(Annual report, 2018)

If the above items were added in the income statement of the company then it could affect on the performance of the managers of the company and the overall financial performance of the company while measuring the internal performance.

9. Comprehensive income involvement:

The items and figures of the comprehensive income statement should not be added while measuring the manager’s performance because managers do not play any role in the profits and losses from the comprehensive income statement item and the involvement of these items could manipulate the overall result of the company.

The corporate income tax is the amount which is paid by the company for the government against their operations in the country. The corporate income tax rate of Australia is 30%. However, because of various internal operations, the cash tax rate and effective tax rate of the business get affected.

10. Tax expenses in financial statement:

The two companies, CSL limited and COCHLEAR LIMITED’s annual report has been studied and it has been found that the income tax paid by the company for the financial year 2018 is as follows:

Tax amount
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Income tax expenses	552.3	94.7

(Annual report, 2018)

It expresses higher income tax expenses of CSL limited because of higher profits and turnover of the company.

11. Effective tax rate:

The effective tax rate of the business represents the actual tax which has been paid by the company against the earnings before tax of the company. The effective tax rate of Cochlear Limited is higher than the CSL limited. The below table describe the effective tax rate of both the companies:

Effective tax rate
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Income tax expenses	552.3	94.7
EBT	2281.2	340.5
Effective tax rate	24.21%	27.81%

(Annual report, 2018)

12. Deferred tax liabilities and assets:

Deferred tax assets and liabilities represent the difference among the actual tax expenses of the business and the amount which has been paid by the business to the government. Deferred tax assets represent the higher amount which has been paid to the government than the actual incurred expenses of the business and the deferred tax liabilities represent the lower amount which has been paid to the government than the actual incurred expenses of the business (Morris, 2017). In case of both the companies, Cochlear Limited is higher than the CSL limited, the deferred tax liabilities and assets of the business are as follows:

Deferred tax assets and liabilities
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Deferred  tax assets	401.3	80.7
Deferred  tax liabilities	193.7	8.1

The changes have occurred into both the businesses because of the difference among the actual tax expenses of the business and the amount which has been paid by the business to the government.

13. Changes in  deferred tax liabilities and assets:

The changes into the Deferred tax assets and liabilities have been compared with the past year data of that particular company to identify the level of changes of both the companies. On the basis of the evaluation, it has been found that the deferred tax asset of CS has been lowered and liability has been improved in 2018. And in case of cochlear limited, both the assets and liabilities has been improved (Bradley, 2017).

Changes in Deferred tax assets and liabilities
	CSL limited			Cochlear Limited
AUD in million	2018-06	2017-06	Change	2018-06	2017-06	Change
Deferred  tax assets	401.3	496.5	-19.17%	80.7	66.6	21.17%
Deferred  tax liabilities	193.7	138.2	40.16%	8.1	5.8	39.66%

14. Cash tax amount:

The cash tax amount of both the companies has been calculated through identifying the exact amount which has been paid by the company for that particular period in cash to the government (Brigham and Ehrhardt, 2013). In order to identify the cash tax amount of the companies, the changes into the deferred tax assets have been added and the changes into the deferred tax liabilities have been deducted from the actual income tax expenses of the business. The calculations of both the companies of cash tax amount are as follows:

Cash tax amount
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Book Income tax expenses	552.3	94.7
ADD: Increment in the deferred  tax assets	-95.2	14.1
Less: Increment in the deferred  tax assets	55.5	137.7984
unleveraged cash taxes	401.6	-28.9984

15. Cash tax rate:

Cash tax rate has further been calculated through dividing the cash tax amount by EBT level of the business to measure the total tax rate which has actually been paid by the business and it has been found that the cash tax rate of CSL is higher and cochlear limited has not paid any tax amount (Dagwell, Wines and Lambert, 2011).

Cash tax amount
	CSL limited	Cochlear Limited
AUD in million	2018-06	2018-06
Book Income tax expenses	552.3	94.7
ADD: Increment in the deferred  tax assets	-95.2	14.1
Less: Increment in the deferred  tax assets	55.5	137.7984
unleveraged cash taxes	401.6	-28.9984
EBT	2281.2	340.5
Cash tax rate	17.60%	-8.52%

16. Difference among the cash and book tax rate:

The book tax rate of both the companies are 30% while the cash tax rate of CSL limited and Cochlear Limited is 17.60% and -8.52%. It express that the actual amount which has been paid by the business is quite lower than the book tax rate of the business (Hu, Percy and Yao, 2015).

Conclusion:

The study has been presented on two Australian companies, CSL limited and Cochlear Limited to understand the concepts of the accounting treatment of various figures in the annual report of the company. After conducting the report, it has been found that both the companies are following the same standards and the policies to record the accounting figures the annual report and the financial statement of the business.

After conducting the research on various items of the annual report and their impact on the financial performance and position of the company, it has been concluded that the overall position of the business is CSL limited is better because of the higher turnover position and the better financial strategies of the business. It is important for each of the business to be transparent and follow the material concept to disclose all the relevant information in the annual report of the business.

References:

Annual report. 2017. Cochlear Limited. [online]. Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_COH_2017.pdf [accessed 19/9/18].

Annual report. 2017. CSL Limited. [online]. Available at: https://wcsecure.weblink.com.au/pdf/CSL/01896392.pdf [accessed 19/9/18].

Annual report. 2018. Cochlear Limited. [online]. Available at: https://www.cochlear.com/43d56bcc-d510-4a20-ab70-6208fa5af77e/en_annualreport2018_cochlear2018annualreport_5.69mb.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=ROOTWORKSPACE-43d56bcc-d510-4a20-ab70-6208fa5af77e-mkRS5RK [accessed 19/9/18].

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Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

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Fernandes, D., Lynch Jr, J.G. and Netemeyer, R.G., 2014. Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), pp.1861-1883.

Home. 2018. Cochlear Limited. [online]. Available at: https://www.cochlear.com/intl/home [accessed 19/9/18].

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Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

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Kieso, D. E., Weygandt, J. J., and Warfield, T. D. 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley and Sons.

Morris, J.L., 2017. Classification of Deferred Tax Assets and Deferred Tax Liabilities: An Evaluation of FASB's Attempt at Standards Simplication. Journal of Accounting and Finance, 17(8), pp.198-208.

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