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Topic: This assignment covers the in-depth theoretical concepts with some practical accounting task application.

This assignment requires a consideration of accounting theory concepts with critical analysis with application to General Purpose Financial Reporting by corporations. Students are required to prepare a comprehensive report directed to an Australian ASX Top 100 listed corporation detailing a critical analysis of the effectiveness of the corporation to meet the obligations of the conceptual framework of accounting. the corporation is sonic healthcare from the ASX 100 list

1. Provide a critical analysis of the annual report of the corporation. Consideration of the adherence to AASB, true and fair, conceptual framework, corporations law etc should be considered.

2. Provide a comparison with other corporations listed on the ASX and how well you think your corporation has performed.

3. In summary, please consider if you were given $10,000 whether based on your company and it's annual report information provided whether you would be likely to invest in your company. Construct your summary to support your conclusion.

Company Profile

The main objective of this report lies in the analysis and evaluation of the compliance of different standards of accounting conceptual framework and general purpose financial reporting by one Australian company. For the progress of this report, Sonic Healthcare Limited (Sonic Healthcare) is taken into consideration for the purpose of analysis and evaluation. On a broader note, the report aims at the analysis of the importance of conceptual framework for the preparation and presentation of the financial statements of the selected organization (Nobes, 2014). It can be seen that Australia has a well developed conceptual framework provided by the Australian Accounting Standard Board (AASB) for the Australian organizations to get assistance in the process of financial reporting. Moreover, AASB has put the obligation on the Australian companies to adhere to the regulations and standards of AASB conceptual framework in the process of their financial reporting (Hope, Thomas & Vyas, 2013). This report consists of some specific parts that analyze various dimensions of the conceptual framework and general purpose financial reporting for Sonic Healthcare. Based on the outcome of the overall analysis, the appropriate suggestion for the investors is provided in the conclusion part.          

Sonic Healthcare is considered as one of the leading companies in Australia involved in providing laboratory services, pathology services and radiology services. The company was established in the year of 1987 and it is headquartered at Macquarie Park, Sydney, New South Wales, Australia. The worldwide reputation of Sonic Healthcare can be seen in laboratory, medicine, radiology and other diagnostic services. Apart from Australia, Sonic Healthcare has its presence in the countries like USA, Switzerland, Germany, Belgium, United Kingdom, New Zealand and New Zealand (sonichealthcare.com, 2018).

The following table shows the summary of the financial performance of Sonic Healthcare for last five years from 2013 to 2017:

(Source: sonichealthcare.com, 2018)

The above table shows that there is decrease in the major financial parameters of Sonic Healthcare. Decrease can be seen in EBITDA and net profit after tax. However, increase in revenue is visible in above. The following figure shows the movement of share price of the company for last five years:

(Source: asx.com.au, 2018)

It is visible from the above table that the share price of Sonic Healthcare has been in the upward way as compared to 2014 to 2018. All these aspects indicate towards a mixed financial performance of Sonic Healthcare where both increase and decrease in major financial parameters can be seen.

As per the earlier discussion, the main role of AASB conceptual framework can be found in providing the needed guidelines and principles for the preparation and presentation of the financial statements of the Australian companies (aasb.gov.au, 2018). At the same time, it provides great assistance in the aspects of general purpose financial reporting of the companies. Moreover, AASB conceptual framework works as a major mechanism to International Accounting Standard Board (AASB) for developing new standards and principles for making financial reporting more effective (aasb.gov.au, 2018). The following extracts from the 2017 Annual Report of Sonic Healthcare shows the adherence of the company with the principles of conceptual framework:

Conceptual Framework

(Source: sonichealthcare.com, 2018)

It is visible from the above extracts that Sonic Healthcare fully adheres to the standards and guiding principles of AASB conceptual framework in order to prepare and present their financial statements. At the same time, compliance of the company with the regulations of Corporations Act 2001 can be seen from the annual report. Apart from all these, Sonic Healthcare also adheres to the standards of International Financial Reporting Standards (IFRS) and IASB in the process of their financial reporting (sonichealthcare.com, 2018).

In this context, it needs to be mentioned that the AASB conceptual framework has some specific contribution towards promoting as well as maintaining the introduced principles, standards and regulations of financial reporting (Pannicke, Berlinger & Dopf, 2013). At the same time, this conceptual framework also has a specific role to play towards the Generally Accepted Accounting Principles (GAAP) in order to review the standards and principles of financial reporting. Thus, the underlying objective of AASB conceptual framework is to provide the investors and users of the financial statements with the required financial information for the process of investment decision-making. It is also considered as a useful tool for the auditors to review the financial statements of the companies (Henderson et al., 2015).    

The main aim of GPFR is to provide assistance to the investors and other users of the financial statements in the process of investment decision-making by delivering the needed financial information about the business organizations. There are four components of GPFR in the companies; they are income statement or profit or loss statement; balance sheet or the statement of financial position; statement of change in equity and the statement of cash flows (Lawrence, 2013). It is the responsibility on the business entities to prepare and present all the components of GPFR so that the investors and users can gain required information. It needs to be mentioned that the different components of GPFR consider the interest of both the existing as well as potential shareholders of the business entities. As per the conceptual framework, financial information of GPFR must have both the fundamental and enhancing qualitative characteristics in order to make them more purposeful and acceptable to the users. The fundamental qualitative characteristics are Relevance and Faithful Representation. The enhancing qualitative characteristics are Comparability, Verifiability, Timeliness and Understandability. The analysis of the financial statements of Sonic Healthcare shows the presence of all of these characteristics in the financial information of different financial statements (Hail, 2013).

The analysis of the 2017 Annual Report of Sonic Healthcare states that the remuneration committee of the company adheres to the guidelines of Corporations Act 2001 to calculate different components of the executive remuneration. As per the remuneration policy of Sonic Healthcare, the executive remuneration must reflect the roles and responsibilities of the executive directors. There are three parts in the remuneration structure of Sonic Healthcare for their executive directors. They are Fixed Remuneration, Short-Term Incentives (STI) and Long-Term Incentives (LTI). Fixed remuneration is provided as per the base level of remuneration, but the payment of STI and LTI is based on the performance of the executive directors (sonichealthcare.com, 2018). The following extract shows the company’s performance as an outcome of executive remuneration in 2017:

General Purpose Financial Reporting (GPFR)

(Source: sonichealthcare.com, 2018)

It is visible from the above figure that the year 2017 has witnessed less percentage of growth in underlying EBITDA and EBITDA as compared to 2016; at the same time, decrease in the net profit attributed to the members can also be seen from the above figure. It indicates towards the failure of the executive directors to achieve the desired financial performance of the company for 2017 (sonichealthcare.com, 2018).

Property, Plant and Equipment (PPE)

According to the AASB conceptual framework, all the regulations and guidelines for the recognition and reporting of business PPE can be seen in the standards of AASB 116 Property, Plant and Equipment under Section 334 of the Corporations Act 2001 and all the companies must adhere to this standard for the accounting of PPE (aasb.gov.au, 2018). The obligation on the companies is to determine the carrying value of PPE along with the depreciation. The following abstract from the 2017 Annual Report of Sonic Healthcare shows the recognition and reporting of PPE by the company:

(Source: sonichealthcare.com, 2018)

It is visible from the above that Sonic Healthcare has adhered to all the provided guidelines of AASB conceptual framework for the accounting of PPE.

Liabilities are a major portion of the business of Sonic Healthcare and contingent liability is one of them. Contingent liability refers to the obligation of the business entities occurred from any past event. The entities are needed to maintain all the information about their business contingent liabilities; and it is obligation on them to follow all the principles and guidelines of AASB 137 Provision, Contingent Liabilities and Contingent Assets under section 334 of the Corporations Act 2001 (aasb.gov.au, 2018). The investors and users must be able in verifying the contingent liability of the businesses. The following abstract from the 2017 Annual Report of Sonic Healthcare shows the recognition and reporting of contingent liability:

(Source: sonichealthcare.com, 2018)

According to the principles of AASB conceptual framework, it is required for all the business entities in Australia to adhere to the standards and principles of AASB 102 Inventories under section 334 of the Corporations Act 2001 (aasb.gov.au, 2018). In this process, the entities have the obligation to recognize the expenses and write downs to the net realizable value. The following abstract from the 2017 Annual Report of Sonic Healthcare shows the recognition and reporting of inventories:

(Source: sonichealthcare.com, 2018)

As per the AASB conceptual framework, it is needed for the business entities of Australian to adhere to the principles of AASB 118 Revenue under Section 334 of the Corporations Act 2001 for the recognition and accounting of their business revenues (aasb.gov.au, 2018). In this process, the companies are needed to take into account the revenue from their day-to-day business activities. The following abstract from the 2017 Annual Report of Sonic Healthcare shows the recognition and reporting of revenues:

(Source: sonichealthcare.com, 2018)

As per the principles of AASB conceptual framework, companies are needed to comply with the principles and guidelines of AASB 132 and AASB 137 for the reporting of dividends; and the businesses are obliged to provide all the information about their dividend payment (aasb.gov.au, 2018). The following abstract from the 2017 Annual Report of Sonic Healthcare shows the dividend payment:

Remuneration Report

(Source: sonichealthcare.com, 2018)

According to recent news, the insiders of Sonic Healthcare have divested from more than 12.03 million shares in the stocks of large cap with a period of last three months. It needs to be mentioned that it sends a clumsy signal when inside traders sell shares in their own companies. In the recent time, it can be seen that there has been a drop by 2.7% in the prices of stocks that the insiders have been following. However, only this cannot be considered as the sufficient signal for the decisions of the diversification of shares. In the past three months, the insider traders of Sonic Healthcare have sold more shares than buying (simplywall.st, 2018). In Sonic Healthcare, the insider traders own more than 7.88 million shares that makes up around a total outstanding share of 1.85%. The name of the business entity that sold on the open market in the last three months is The Vanguard Group Inc. Veritas Asset Management LLP. According to the analysts, Sonic Healthcare is expected to provide 18.76% of return over the next three years. However, inconsistency can be seen between this aspect and the behavior of the insider traders to sell the shares in their own company. Revenue growth initiatives and improved cost management can lead to higher earnings growth in the near future for the company (simplywall.st, 2018).     

In order to analyze the financial performance of Sonic Healthcare, it is required to compare the performance of the company with another company of the same industry that is LabCorp.

(Source: phx.corporate-ir.net, 2018)

It can be seen from the above extracts of the annual reports of 2017 of both the companies that there has been increase in the revenue of both Sonic Healthcare and LabCorp. When considering the EBITDA, it can be observed that Sonic Healthcare has reported decrease in EBITDA in the year 2017 as compared to 2016, but increase in gross profit can be seen in 2017 as compared to 2016 for LabCorp. At the time to consider the final NPAT, it can be seen that Sonic Healthcare has registered decrese in NPAT in 2017 as compared to 2016 (sonichealthcare.com, 2018), but increase in operating income can be seen in 2017 as compared to 2016 for LabCorp (phx.corporate-ir.net, 2018).  

Conclusion

From the above discussion, it can be seen that Sonic Healthcare is one of the leading healthcare companies in Australia having operation in most of the region of the country along with the other countries like USA, UK and others. As per the analysis of the company, the recent financial performance of Sonic Healthcare is not good as compared to the previous year. However, it can be seen from the analysis of AASB conceptual framework that Sonic Healthcare has carried out all of their financial reporting related operations by adhering to the principles and guidelines of AASB conceptual framework. It can be seen that Sonic Healthcare has followed the principles of AASB 116, AASB 102, AASB 137 and others for the preparation and presentation of their financial statements. One important aspect can be seen from the analysis parts that the executive directors of Sonic Healthcare have failed in achieving the financial target for the year 2017 as the company has registered decrease in revenue, EBITDA and net profit after tax. At the same time, it can be observed that the insider traders of Sonic Healthcare have been involved in selling their shares in their own companies for last three months. In this situation, in case an investor is given $10,000 to invest in Sonic Healthcare, he/she needs to take into consideration the recent decline in the financial performance of the company. He/she needs to consider the fact that there is possibility of not getting the expected return from the investment. In this situation, it is suggested to him/her not to invest in Sonic Healthcare.

References

(2018). Asx.com.au. Retrieved 16 August 2018, from https://www.asx.com.au/asx/share-price-research/company/SHL

(2018). Investors.sonichealthcare.com. Retrieved 16 August 2018, from https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/FR/Annual-Report-2017.pdf

(2018). Investors.sonichealthcare.com. Retrieved 16 August 2018, from https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare-limited-2017-annual-report-online.pdf

Financial Instruments: Presentation. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB132_07-04_COMPoct09_02-10.pdf

Framework for the Preparation and Presentation of Financial Statements. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf

Hail, L. (2013). Financial reporting and firm valuation: relevance lost or relevance regained?. Accounting and Business Research, 43(4), 329-358.

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

Hope, O. K., Thomas, W. B., & Vyas, D. (2013). Financial reporting quality of US private and public firms. The Accounting Review, 88(5), 1715-1742.

Inventories. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-04_COMPjun09_01-09.pdf

Laboratory Corporation of America - Investor Relations - Financial Reports. (2018). Phx.corporate-ir.net. Retrieved 16 August 2018, from https://phx.corporate-ir.net/phoenix.zhtml?c=84636&p=irol-reportsannual

Lawrence, A. (2013). Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), 130-147.

Nobes, C. (2014). International classification of financial reporting. Routledge.

Pannicke, D., Berlinger, A., & Dopf, G. (2013). U.S. Patent No. 8,510,182. Washington, DC: U.S. Patent and Trademark Office.

Presentation of Financial Statements. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf

Property, Plant and Equipment. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf

Provisions, Contingent Liabilities and Contingent Assets. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf

Revenue. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPoct10_01-11.pdf

Smith, M. (2018). Should You Be Worried When Sonic Healthcare Limited’s (ASX:SHL) Insiders Sell?. Simply Wall St. Retrieved 16 August 2018, from https://simplywall.st/stocks/au/healthcare/asx-shl/sonic-healthcare-shares/news/should-you-be-worried-when-sonic-healthcare-limiteds-asxshl-insiders-sell/

Sonic Healthcare | Home. (2018). Sonichealthcare.com. Retrieved 16 August 2018, from https://www.sonichealthcare.com/#/

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