Novartis: Company Mission, Management Strategy, And Consolidated Financial Statements

Mission of Novartis

Novartis AG is a pharmaceutical company which is located in Basel, Switzerland. It was incorporated in 1996 and since then it has been involved in provision of healthcare solutions. The company undertakes various activities in the medical field as a part of its business such as research & development activities, manufacturing and the marketing of a variety of healthcare products. The range of the Novartis products includes pharmaceutical medicines, generic and bio-similar medicines and some eye care devices (Novartis, 2018).

The mission of the Novartis is to explore new and innovative ideas and ways to improve and enhance human lives.  The company uses science-based innovation to meet some of the medical challenges prevailing in the society. Novartis also aims at offering a sound return to the shareholders who invest their funds, time and ideas to the company. Also, the company discovers and develops advanced treatments and find innovative ways to serve as many individuals as possible. 

The strategy of Novartis is to make use of science based innovation so as to deliver its patients best outcomes in the healthcare areas.  The company has a clear vision and mission and also it has focused strategies towards the achievement of the mission. It also has a strong culture which supports its value creation mechanism in long run in the interest of company, its shareholders and the society in which it operates (Novartis, 2018).

Novartis believes that innovation that helps in producing advanced medicines and products is and will remain an important factor in the success in the healthcare industry. The research strategy of the company aims at enhancing the collaboration throughout the scientific and organisational boundaries and to focus on the new and powerful technologies which can enable the company to produce therapeutic success.

The company invests substantial amount in its research and development activities to meet the unmet demand of the society in the healthcare areas. Novartis product line is being fed by its R&D approach which deploys the latest science to undertake the success promising projects.  

In the areas of drug development Novartis follows therapies where it make user of its its scale and expertise to develop advanced treatments of the patients across the world. Novartis aims at developing such medicines and other medical products which can contribute to bring positive real world.

The company also focuses on patented and generic medicines which can help it to compete effectively in the market. The company is expanding its business in the countries such as Asia, Africa and America as these nations have rapidly growing demands for the high quality healthcare facilities and products.

Financial statements are prepared and presented to the stakeholders of the company to enable them to assess the financial position of the company. These statements cover the financial information relating to the events and transactions that are undertaken by the reporting entity in a given period of time. When an entity has certain units it has an option to prepare the financial statements either in the consolidated manner or on the individual manner.  Generally consolidated financial statements are preferred over stand-alone financial statements by both the managers and the intended users of financial reports such as investors, providers of finance, regulatory bodies etc.

Management Strategy of Novartis

Consolidated financial statements are the documents in which the financial information of different units of an organisations such as its divisions, subsidiaries etc. is merged to be presented in the single statement. Consolidated financial statements are the statements containing the financial information of a group of companies and are presented in such a way that such financial statements of a single economic entity (No, 2007).  According to the Generally Accepted Accounting Principles (GAAP), parent company must prepare and present consolidated financial statements at the end of each year to report the financial position of both parent company as well as that of its subsidiaries. There are various advantages of preparation of consolidated financial reports. Few of them are discussed as below:

• Provides complete overview:

Consolidated financial statements provide holistic view of the financial performance of the company as a whole. They allow the users such as investors, financial analysts, managers and owners as well the other interest parties to get the complete picture of the financial health of the parent company. These statements also help them to determine the impact of each subsidiary on the overall performance of the company whereas the stand-alone financial statements of each unit of the entity create complexity for the users to understand the complete picture of the business (Accounting Tools, 2017).

• Reduces the paper work:

As the financial statements of all the units are presented in a single report the paper work reduces to a single report whereas in case of stand-alone financial statements, the financial report of each entity is prepared separately and it gets cumbersome for the users to assess the full financial information related to the business of the entity.

• Simplicity:

As all the transactions that take place between the subsidiaries and the parent company are eliminated, the financial information of the company is presented in a simplified manner. Resultantly, the consolidated financial statements give simple view of overall business performance. The stand-alone financial statements are difficult to be assessed completely by the interested audience due to bulky reports and extremely large volume of the data (Fridson & Alvarez, 2011). 

MEMO

From: Accountant

To: Managing Directors

Regarding: Lease Accounting

Date: 25^th November 2018

This is written in relation to the lease accounting. Generally, there are two types of lease that are accounted for in the books of accounts of the entity: operating lease and capital lease. Lease is a legal agreement in which asset’s owner allows another party to the agreement to make use of the property in return of some consideration.

Operating lease is the type of lease agreement under which all the risks as well as rewards related to the leased property remain with the original owner of such property i.e. the lessor. Financial lease which is also termed as capital lease is the lease agreement under which the risks and rewards of the leased property are transferred to the lessee (Beattie, Goodacre & Thomson, 2006).

The US GAAP on classification of lease requires the lessee to classify a lease transaction as capital lease when or more criteria are met:

• The lessor transfers the title of the asset to the lessee at the termination of lease period.
• There is a bargain option in lease agreement.
• Lease term is at-least 75% of the total estimated economic life of the asset.
• The present value of all the minimum lease payments is at-least 90% of the asset’s fair value (Altamuro, Johnston & Zhang, 2014)

Consolidated financial statements and their advantages

If none of the above criteria are fulfilled, the lease has to be categorised as operating lease.

The annual report of the Novartis for the year 2017 depicts that the financial statements are prepared on the basis of compliance with the international accounting standard on lease accounting.

From the accounting viewpoint, operating lease is generally given the treatment like a renting transaction only. The lease payments are accounted as the operating expenses and the lease asset is not shown in the balance sheet. However, capital lease is treated as the loan only and the asset appears in the statement of financial position of the lessee (Pete, 2018).

Fair value of an item is the price which would be obtained if an asset is transferred or paid in case of transfer of liability under a systematic transaction that takes place at the measurement date, between some market participants. IFRS 13 seeks to enhance the consistency and comparability of fair value measurements and the disclosures related to it by way of fair value hierarchy (No, A.S., 2007).

The fair value hierarchy bifurcate inputs taken in the valuation techniques into 3 levels and it gives top preference to the quoted prices prevailing in the markets that are actively existing for the similar assets and liabilities and lowest preference to the inputs that are unobservable.

The 3 levels of inputs of fair value measurement are as follows:

Level 1inputs:

These are the quoted prices prevailing in the active market for the assets and liabilities that are identical in nature. A quoted market price of an active market gives the evidences of the existing fair values, that most reliable. These prices are used without making any adjustment for the purpose of measurement of fair value in cases when such prices are available with some exceptions.

If an entity possess the position in a particular asset or liability and that item is traded in the active market, the asset’s or liability’s fair value is measured at the level 1 as an item of quoted price for the specific item of asset or liability and the quantity as held by the company even in the circumstances when normal volume of regular trading is not enough to absorb the quantum of such item held.

Level 2 inputs:

Level 2 inputs are those inputs that are different from quoted market prices as included in the level 1 which are observable for an asset or liability in direct or an indirect manner.

Level 2 inputs includes following prices:

• Quoted prices for identical assets and liabilities prevailing in the markets that are being actively operated;
• Quoted prices for the similar assets and liabilities in the inactive markets;
• Inputs that are different to the quoted prices which are observable for some assets and liabilities, like for instance interest rates and the yield observable at the intervals that are commonly quoted or implied volatilities or the credit spreads.
• Inputs which are obtained mainly from an observable marketplace data by means of correlation or some other ways

Level 3 inputs:

These are the inputs that are unobservable for the assets or liabilities. Unobservable inputs are those inputs that can be used for the measurement of fair value to an extent that the observable inputs which are relevant for the given case are not available in the market (Fridson and Alvarez, 2011).

The marketable securities held by the company were initially recorded at their fair prices as prevailing on the trade dates other that the settlement dates. Quoted securities of the company were re-measured at each of the reporting date to value them at the fair prices on the current market values. If the market for a financial item (asset or liability) does not actively exist or there is no existence of such market, then the fair values are identified using different techniques of valuation.

Majority of the un-quoted investments are valued previously at the fair values using an established price between the willing parties i.e. the buyer and the seller. Those non-quoted investments are then adjusted on the basis of the values derived from the use of discounted cash flow analysis or any other method. The said investments are therefore falling under the level 3 category of fair value hierarchy. Hedge funds and the unquoted investments in the equity securities are listed as Level 3 hierarchy of fair value measurement.

The debts and equity securities that are listed in the active markets are categorised under Level 1 of fair value measurement hierarchy.

The foreign exchange as well as some interest rates derivative along with some debt securities are categorised in Level 2 of fair value measurement hierarchy as the data used to value these items is corroborated from the market (Novartis, 2017).  

Case study 2

References:

Novartis (2018) Our Company [online]. Available from https://www.novartis.com/our-company [accessed 24 November 2018]

Novartis (2018) Our Mission and Vision [online]. Available from https://www.pharma.us.novartis.com/about-us/who-we-are/our-mission-vision [accessed 24 November 2018]

Novartis (2018) Our Strategy [online]. Available from https://www.novartis.com/our-company/our-strategy [accessed 24 November 2018]

Novartis (2017) Annual Report [online]. Available from https://www.novartis.com/sites/www.novartis.com/files/novartis-annual-report-2017-en.pdf [accessed 24 November 2018]

Fridson, M.S., and Alvarez, F. (2011) Financial statement analysis: a practitioner’s guide 4^th ed. U.S: John Wiley & Sons.

No, A.S. (2007) An audit of internal control over financial reporting that is integrated with an audit of financial statements [online]. Available from https://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-c-00940.pdf [accessed 24 November 2018]

Beattie, V., Goodacre, A., and Thomson, S.J. (2006). International lease-accounting reform and economic consequences: The views of UK users and preparers. The International Journal of Accounting, 41(1), pp.75-103.

Pete (2018) The Two Types of Leases for under IAS 17 [online]. Available from https://www.charterededucation.com/ifrs/the-two-types-of-leases-under-ias-17/ [accessed 24 November 2018]

Accounting Tools (2017) The Criteria for a capital lease [online]. Available from https://www.accountingtools.com/articles/what-are-the-criteria-for-a-capital-lease.html [accessed 24 November 2018]

Altamuro, J., Johnston, R., and Zhang, H. (2014) Operating leases and credit assessments. Contemporary Accounting Research, 31(2), pp.551-580.

Murray, J. (2018) Difference Between a Capital Lease and an Operating Lease [online]. Available from https://www.thebalancesmb.com/capital-leases-versus-operating-leases-398034 [accessed 24 November 2018]

Accounting Tools (2018) Capital Lease Vs. Operating Lease [online]. Available from https://www.accountingtools.com/articles/capital-leases-vs-operating-leases.html [accessed 24 November 2018]

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