Cochlear Ltd. – Introduction, Business Activities, Financial Performance

Company Overview

Cochlear Ltd. is a Sydney based medical device company which manufactures designs and supplies different types of hearing implants. The organization was incorporated in 1981, with the financial support from Australian Government. Cochlear now holds a huge share of the worldwide market of hearing implants. The company has been entitled with the name of the most innovative company over the years. With the main motive of improving customer’s life, Cochlear has strived to deliver products which make their lives easier. Technologies which reflect the life style of people are the main focus for the company. With continuous investment in R&D, Cochlear’s ongoing commitment to demonstrate its capability to be the technology leader in our industry is very well reflected in its performance (Cochlear Annual Report.2016).

The broad range of activities of Cochlear includes production of three implants for a range of medical situations-

The nucleus can be specified as electrical stimulation machine system which is surgically entrenched behind the ear of the human body. The same contains a processor which is capable of capturing sound, and it consists an electrode range which sends the sounds to the brain. This device was the first device produced by the company.

Hybrid is a device which combines a cochlear implant with an earshot aid that is appropriate for patients who are having issues relating to hearing at low frequencies.

Baha (bone anchored hearing aid) can be specified as a device which involves a titanium implant which is integrated with the bone at the back the ear of the human body. This device contains a sound processor which captures sounds and passes to the embed which is transferred  to the innermost ear part through the skull (Cochlear Annual Report.2016).

Healthcare industry in Australia can be said as complicated as it is very open to a new product. This industry had evidenced a constant demand for a range of medical devices. The medical device market in Australia is in its maturity stage, with a regulatory system which is well-formed. There is an increasing demand for equipment that manages disability (Adibah Wan Ismail, AnuarKamarudin, van Zijl and Dunstan 2013). This serves as a great opportunity to Cochlear which is indulged into providing victims of hearing loss with growing age or even to the ones which are disabled by birth. Though the majority of the medical device market is ruled by various importers from UK and Japan, Cochlear has managed to out beat all the competitors by offering a wide range of products for various medical situations. However, as a whole the market is experiencing a slow growth and fierce competition, Cochlear has managed to earn a good market share with its excellent services.

Product Offerings

As per Barth (2013), periodic reviews must be undertaken to assess the financial metrics and to ensure that the financial structure is appropriate to meet the company’s long and short term strategic requirements.  The same has been done by the Board of Cochlear. For this purpose, the company adjusts the paid dividend and capital which was to be returned to the shareholders, issued new shares or sell assets. Cochlear Ltd is not subjected to capital requirements which are externally imposed. The reports do not reflect any major changes in the capital management of the company during the year. The main source of external finance includes the issue of shares and loans and borrowing. The net gearing ratio at the end of 2016 was 21% which included a debt of $448,557 and equity of $117,821. During the year 2016 Cochlear purchased shares worth $134,041 to satisfy the exercise of options. Internal sources of finance include various types of reserves held by the company like

• Treasury- this comprises the cost of shares at the date of purchase by the trust.
• Translations- this records differences in the foreign currency from foreign operations and serves as a hedge against net investments done by the company in the foreign subsidiary.
• Hedging- this contains that part of the change in the fair value of cash flow regarding the transactions which have still not occurred.
• Share based payment reserve- this includes the cost of share granted to executives under various schemes.

Loans and borrowings are primarily recorded at fair value and cost relating to the same transaction are included in it. Further, they are devalued at amortised cost, and the variance is same is recognised in the income statement. According to Carey, Potter and Tanewski, (2014), the establishment costs of debt are recognised and capitalised as a reduction in loans and borrowing, which has been thoroughly followed by the company. Other external sources of finance include secured bank loans, unsecured bank overdrafts and bank guarantees (Weil Schipper and Francis, 2013).

Figure 1: Debt Structure of Cochlear

(Source: Cochlear Annual Report.2016)

Cochlear recorded a net profit of $189 million which was 30% more than the previous year. The EPS also increased to $3.31 per share which 29% higher than the FY2015. The growth of the company also resulted in an increase in dividend from $1.20 per share in 2015 to $2.30 in 2016. This target has met the Board’s target of the Dividend Payout Ratio which was set at 70% of net profit. The positive drive that the company saw in FY15 has been continued through FY16 with strong growth has been noticed in all regions and categories of product.In the words of Deegan (2013), a major milestone can be achieved by any business with increased sales revenue. The same of reflected in the company’s accounts which stated an increase in revenue by 23% which exceeded $1 billion for the first time. The revenue growth was 21%, and unit growth was 12%. The company performed well in emerging markets including China, India and the Middle East, which strengthened their market-leading position.

Healthcare Market in Australia

Figure 2: Cochlear- 10-year Financial Performance

(Source: Cochlear Annual Report.2016)

A final dividend of $68646000, i.e. $ 1.2 to each shareholder has been declared in the F.Y. 2016, and same is  provided after 30 June 2016. Thus, due to the same reason, this event has been treated as event subsequent to the reporting date. Further, no more transactions of same nature exist which affects the operations or results of Cochlear in the future financial year.

There are various new standards and amendments which are effective for FY2016 (Gomariz and Ballesta, 2014), but the same has not been applied in forming latest financial report. Out of all the amended standards, a few of them are expected to affect the statements of Cochlear. The company is not expecting any significant impact of these standards. AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers has become compulsory for 2019 financial statements whereas AASB 16 Leasesis mandatory for 2020 consolidated financial statements. However, for the current year, there were no changes in the accounting policies during .

Carrying value of each class of property, plant and equipment

Table 1: Table presenting net book value of PPE

The valuation of PPE is being ascertained by reducing accumulated depreciation and impairment from losses. Further, as per the words of Grossi (2015), the cost which is directly attributable to the acquisition is considered as a cost of the PPE and the value is increased by the same amount.

Cost of material and direct labour is applied to self-constructed assets directly relating to bringing asset in working condition in case of the self-constructed asset is included in the cost of the asset.

The cost relating to replacement of a part is capitalized only in case if the future economic benefits (Harrison, Horngren, Thomas and et al. 2014.) and cost of same can be evaluated on a reasonable basis.

Lease asset: Straight line basis pattern has been applied by the company to record payment made under operating leases.

Depreciation: Straight line basis depreciation method has been applied for calculating depreciation on the cost of PPE. As per the views of Hodgson and Russell (2014), under this method,the rates and method of depreciation are reconsidered at each balance sheet date and in case any changes, they are made prospectively manner.

 
Table 2: Table presenting net book value of total intangible assets

Goodwill

The acquisition method is used for accounting for all business combinations. The carrying amount of goodwill reflects the variation in the cost of acquisition and the fair value (Kafka, 2014).

Capital Management

Enterprise resource planning system

The costs associated with this system are fixed at cost less amortisation. As per the views of Knapp (2013), these costs include expenses regarding the expansion and execution and the direct labour.

Other intangible assets

This category comprised of patents and licences, acquired technology, customer relationships, and intellectual property (Macve, 2015)and is accounted at cost after deducting a number of impairment losses and accumulated amortisation.

According to Mulvey, Kim and Lin 2017, the value of PPE is the cost of the asset fewer impairment losses and depreciation. Impairment of all intangible assets which have an imprecise useful life is valued on an annual basis. In FY16, there were no impairments intangible assets. All the nonfinancial assets except inventory and deferred tax assets are tested for impairment and the losses, if any, are recognized in the prior year. In case the carrying value is more than the recoverable amount, the assets are considered for impairment (Reimers, 2014). The assets whose independent value cannot be generated are tested for impairment with cash generating unit (CGU). The losses thereto are recognized on the income statement. If there is a change in estimated realisable value, the losses are reversed, except in cases of goodwill.

Conclusion And Recommendations

The above report depicts that year 2016 has been of utmost importance to the company which is marked by superior performance and renewal at the top management with new CEO and President. This renewal has opened up many avenues for the company with continuing to achieve the goals with a sharp focus on customer satisfaction, Development and innovation.The company is recommended to closely monitor their competitors for maintaining a leading position in the market which will make them survive longer along with growth.

References 

Adibah Wan Ismail, W, AnuarKamarudin, K., van Zijl, &Dunstan, K. (2013). Earnings quality and the adoption of IFRS-based accounting standards: Evidence from an emerging market. Asian Review of Accounting. 21(1). 53-73.

Barth, M.E. (2013).Measurement in financial reporting: The need for concepts. Accounting Horizons. 28(2). Pp.331-352.

Carey, P., Potter, B. &Tanewski, G. (2014). AASB Research Report.

Deegan, C. (2013). Financial Accounting Theory. McGraw-Hill Education Australia.

Gomariz, M.F.C. &Ballesta, J.P.S. (2014). Financial reporting quality, debt maturity and investment efficiency. Journal of Banking & Finance. 40. Pp.494-506.

Grossi, G. (2015). Consolidated financial statements in the public sector. Public sector accounting. Pp.63-76.

Harrison, W.T., Horngren, C.T., &Thomas, C.B. (2014). Financial accounting: international financial reporting standards.

Hodgson, A. & Russell, M. (2014). Comprehending comprehensive income.Australian Accounting Review. 24(2). Pp.100-110.

Kafka, S. (2014). The classification of non-current assets for accounting purposes. –???. (01-02 (2). Pp.68-71.

Knapp, J. (2013). A Reconsideration of Consolidation Accounting Requirements and Pre?acquisition Dividends. Australian Accounting Review. 23(3). Pp.190-207.

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

Mulvey, J.M., Kim, W.C. & Lin, C. (2017). Optimizing a portfolio of liquid and illiquid assets. In Optimal Financial Decision Making under Uncertainty (Pp. 151-175). Springer International Publishing.

Reimers, J.L. (2014). Financial Accounting: Business Process Approach. Pearson Higher Ed.

Weil, R.L., Schipper, K. & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Online

Cochlear Annual Report. Innovation for life. (2016). (PDF). Available through < encorporateannualreport20162.3%20(1).pdf> Accessed on [13^th September 20

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