CSL Limited’s Operations and Key Strategies
CSL Limited is regarded as a global leader in biotechnology that is involved in developing and delivering innovative medicines for saving lives, protecting public health and helping people with life-threatening medical condition to live their full lives. The two main businesses of CSL Limited are CSL Behring and Seqirus. CSL Behring develops and delivers high-quality medicines that treat people with serious and rare diseases; and it is considered as a global leader in this area. On the other hand, Seqirus is involved in developing and delivering influenza vaccines in the world, and it is regarded as a major contributor to prevent influenza globally and a pancontinental partner in pandemic preparedness.
The senior management of CSL Limited has developed certain key strategies for maximizing the company’s capabilities and advantages in a competitive and changing business environment. The adopted strategies are as follows:
- CSL Limited continues investing in its organizational capacity, process improvements and technology in order to ensure that it can supply the patients’ needs.
- The key growth platforms considered by the company are plasma, cell and gene therapy, influenza vaccines and recombinants.
- It strives to transform its business model for driving efficiency and supporting innovation all over its businesses.
- A key strategy is to target those areas where the company has strong asset expertise and opportunities for creating sustainable franchises.
- It pursues creating an environment that enables innovation to flourish.
Requirement (a)
Analysis of the 2021 Annual Report of CSL Limited shows that the company has applied different types of accounting policies in order to account for different elements in the financial statements. Amongst these accounting policies, the management has applied material judgements and estimates in certain areas which makes these accounting policies significant to its financial reports. Therefore, the three key significant accounting policies in CSL Limited are the accounting policies for revenue, inventories and intangible assets.
Revenue – CSL Limited recognizes revenue when a performance obligation is satisfied by the group through the transfer of the promised goods or services to a customer at an amount reflecting the considerations which expect to entitle the group in exchange for the goods or services.
Inventories – CSL Limited carries its inventories at the lower of cost and net realizable value. The key judgments and estimations involved in inventory valuation include in the assessment of the recoverability of the inventories’ carrying value.
Provisions – It should be considered as a key accounting policy in CSL Limited because of the use of estimates of the required expenditure for settling the present obligation at the reporting date by its management. It requires discounting the expected future cash flows.
Requirement (b)
Certain accounting standards and rules are applicable to these key accounting policies, and they are as follows:
Revenue – The accounting standard applicable to this accounting policy is AASB 15 Revenue from Contracts with Customers (AASB 15). The key rules for applying this standards include the identification of the contract, identification of the performance obligation, determination of transaction price, allocation of transaction price, and recognition of revenue. The revenue is recognized when the performance obligation is satisfied.
Inventories – AASB 102 Inventories (AASB 102) is the accounting standard applicable to this accounting policy. As per AASB 102.9, an entity shall measure the inventories at the lower of cost and net realizable value. As per AASB 102.28, the inventories shall be written down if their realisable value is less than the cost value.
Provisions – The accounting standard applicable to this accounting policy is AASB137 Provisions, Contingent Liabilities and Contingent Assets (AASB 137). As per AASB 137.14, an entity shall recognize a provision when it has a present obligation due to a past event, when there is probability of the outflow of resources, and when the entity can reliably estimate the amount of obligation.
Significant Accounting Policies in CSL Limited
Flexibility in accounting offers the financial statements preparers the ability of making acceptable adaptations or variations that include the utilisation of estimates, different types of measurements and judgments. In the presence of accounting flexibility, the management gets the opportunity of exercising professional judgements and discretion to ascertain the proper recording of financial transactions that the accounting standards offer. The financial statements of CSL Limited follow the International Financial Reporting Standards (IFRS), and hence, these financial statements are largely based on judgments, estimates and models instead of precise representation of reality. Since the key accounting numbers of the company are estimates, it provides the managements with a remarkable opening of manipulating the accounting numbers that consistently incorporate estimates. The presence of flexibility in selecting and applying the key accounting policies in the company should not lead to deceptive financial statements. Certainly, a genuine fear is there that the permitted flexibility will be abused by the management as an opportunity to management earnings for achieving the pre-set targets which can ultimately contribute to earnings fraud. Instead of utilising this flexibility to deceit the users of the financial statements, the management should use them for providing a fair presentation of its financial position and financial results.
In selecting the key accounting policies, the management of CSL Limited has flexibility in four specific areas. The first area is the estimates in the financial statements. The carrying amount of assets, liabilities and income or expenses, where it is not possible to precisely measure such amounts, are ascertained through the use of accounting estimates. Moreover, estimates are required or allowed by the IFRS in almost all standards. Therefore, the management gets the opportunity of manipulating the amounts of these assets, liabilities and income or expense through the use of accounting estimates. More precisely, the provisions for estimates in these key accounting policies can be used by the management for inflating or deflating the reported cash flows and earnings. The second area is the measurement bases in accounting. Even though the historical cost is the main convention for measurement in accounting, flexibility in measurement is allowed by the International Accounting Standards Board (IASB) in accounting. The revaluation of the assets like inventories and others is permitted by the IFRS. The range of measurement methods available in the IASB’s Conceptual Framework are historical cost, current cost, realisable value, and present value. The presence of these measurement bases provides the management with the required flexibility in setting the key accounting policies.
The third area is the flexibility around accounting choices. Traditionally, the accounting standards have given the management with the freedom of exercising discretion and judgment. More recent accounting standards allow the management to apply increased levels of preference regarding how to portray the information in the published financial statements. It implies that the IFRS leaves it up to the management to make any accounting choice which do not breach the principles recognised in the financial statements. As a result, the management receives the flexibility in selecting the key accounting policies. The last area is materiality which is of major significance in preparing the financial statements. It is a key factor that the managements use to adjust earnings to the anticipated level. The permitted flexibility related to materiality is grounded on the idea that some items may have so little significance that they are not worth measuring with rigorous accuracy. Therefore, it provides the management with the flexibility in recognizing the minor inconsistencies that do not have any reporting significance. However, this flexibility can be abused by the management by not recording small errors deliberately as they are immaterial.
Applicable Accounting Standards and Rules
Selection of the accounting strategies are impacted by the two reasons; they are the efficiency choices by the management and opportunistic choices by the management. It is not possible for the external users of financial statements to differentiate between these two, and this is the reason why the accounting regulations are there for limiting the accounting policy choices available to the management. The following discussion assesses the accounting strategies adopted by the management of CSL Limited regarding each key accounting policy and suggest the potential incentives behind choosing those strategies.
Figure 1
It can be seen from the above figure that the management of CSL Limited recognizes the revenue from sales when performance obligations are either met over a time or at a point of time, and this accounting policy is in line with the requirements of AASB 15. The aspect that revenue can be recognized over time or at a time provides the management of with the flexibility to recognize future revenue at the present time. Furthermore, the management applies significant estimates on Seqirus sales returns regarding the influenza season expected to be subject to return. Apart from the consolidated statement of comprehensive income, details on revenue has only been provided under Note 2. Hence, it can be considered as an opportunistic choice by the management. The possible incentive behind this strategy is to manipulate profit by increasing earnings from revenue. The possible reasons of this include meeting or beating the analysts’ earnings forecasts, avid violating debt covenants, issue of new equity, and management compensation contracts.
Inventories
Figure 2
Figure 2 demonstrates that the strategy adopted by CSL Limited’s management regarding the accounting for inventories is to thoroughly comply with the requirements of AASB 102. In accordance with AASB 102.9, inventories have been carried out at the lower of cost and net realisable value. In accordance with AASB 102.10, cost comprises of labour and direct materials and a suitable proportionate of fixed and variable overheads. However, estimation has been applied in determining the net realisable value. Moreover, the management has also applied key judgments and estimates in assessing the recoverability of the inventories’ carrying value. However, aspects like inventory expenses, write downs, reversal of write downs and circumstance around write downs have not been disclosed. The possible incentive is the manipulation of this asset account for the reasons like attaining bonus targets, closeness to debt covenants, and others.
Provisions
Figure 3
As per Figure 3, the management of CSL Limited has recognized the provisions when the conditions mentioned under AASB 137.14 are satisfied by the company. However, the extensive use of estimates in accounting for different elements of provision provides the management with a greater flexibility reduce this liability. Estimates have been used in determining the future expenditure and future cash flows. In addition, the management has made the required disclosures of provisions as per AASB 137.84-85. However, the extensive use of the estimates provides the management with the opportunity to nor disclose or recognise the future obligations or to recognize these obligations as equity instead of debt. The possible incentive is the reduction of liabilities or debts because higher debt will make the company highly leveraged. There is less likelihood that highly leveraged company will get future investment. In addition, higher leverage leads to the risk of violating debt covenants and reduction in net profit.
- Large increase in inventories from $3509.5 million to $3780.6 million raises question because of the possibility of classifying certain spending as asset instead of classified them as expense. However, analysis of Note 4 explains that the increase in raw materials led to the increase in overall inventories. Other elements of inventories are work in progress and finished goods.
- Intangible assets have increased to $2669.7 million from $2291 million. It represents the possibility of classifying spending as assets to increase profit, or increasing the asset base to increase the return on assets (ROA) for obtaining target bonus. However, assessment of Note 7 demonstrates that the amount was increased because of increase in intellectual property due to global commercialisation and licencing agreement with UniQure and business combination.
- Another aspect which raises question is the decrease in interest-bearing liabilities and borrowings from $5790.5 million to $5333.1 million. This could be an attempt of CSL Limited’s management to deliberately reduce this liability in order to reduce the overall leverage. However, analysis of the consolidated statements of cash flows shows that a certain portion of borrowings was repaid by the company which eventually led to the decrease in this liability account.
- Deferred government grants have significantly increased to $49.7 million from $3.2 million, and such huge increase raises question. However, assessment of Note 9 depicts that the company recognizes the government grants at fair value in the presence of a reasonable assurance that the company will receive the grant. This provision has led to the increase in this account.
On 18 August 2021, CSL Limited made a press release to the Australian Securities Exchange (ASX) and this press release includes discussion on the results and financial performance of the company for the full year ended 30 June 2021. As per this document, CSL Limited registered a 10% increase in both revenue and profit after tax. Revenues of CSL Behring, Immunoglobulins, Albumin, Haemophilia, Speciality Products and Seqirus were increased by 6%, 3%, 61%, 4%, 2% and 30% respectively. Net profit after tax increased from $2103 million in 2020 to $2375 million in 2021 and it was increased by 13%. In term of the whole CSL Group, total revenue, gross profit, EBIT, NPAT, cash flow from operations, EPS and DPS were increased by 10%, 9%, 11%, 10%, 46%, 10% and 10% respectively. In terms of the reported expenses, research and development, sales and marketing, general and administrative and finance expenses were increased by 5%, 7%, 5% and 7% respectively. In terms of inventory, increased plasma cost led to higher raw material components and the finished goods were actively managed. Despite dynamic environment, inventory as a percentage of revenue was relatively steady.
“AASB 102 Inventories”. Aasb.gov.au, 2022. Online. Internet. 13 Jan. 2022. . Available: https://aasb.gov.au/admin/file/content105/c9/AASB102_07-15_COMPmar20_07-21.pdf.
“AASB 137 Provisions, Contingent Liabilities and Contingent Assets”. Aasb.gov.au, 2022. Online. Internet. 13 Jan. 2022. . Available: https://aasb.gov.au/admin/file/content105/c9/AASB137_08-15_COMPmar20_07-21.pdf.
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