The two companies that have been chosen for the exercise in this document are Cogstate Limited and Cochlear Limited. Both these companies are listed in the ASX and are in Health care equipment and services industry. Both the companies have made a significant name in Health care equipment and services industry.
cochlear Limited
In Health care equipment and services industry Cochlear has made a significant name for itself by providing top quality medical implants known as Cochlear implants. Based in Sydney the company was established back in 1981 with financial support from coming from Australian Government. The objective behind formation of the company was to commercialize the implants pioneered by Dr Clark. It is with great pride the company now claims to hold more than two third of worldwide market of hearing implant (Dhaliwal et. al. 2014). The company also received the award of most innovative company by the Australian government in 2002 and 2003 for its continuous drive towards innovation.
Cogstate Limited:
Founded in 1999 the company is in the industry of Health Care Equipment and Services. Since its formation the company has taken large strides towards its objectives of capturing the Health care equipment and services market. However, compared to Cochlear Limited the company’s operations is limited to the local market in the country (Alin-Eliodor, 2014).
Owners’ equity:
Different items in equity:
In case of Cochlear Limited the owners’ equity of the company includes the following items:
Share capital: This is accumulated balance of amount received from issue of ordinary shares to the public. The company is a listed entity and has issued ordinary shares to the public to arrange necessary funds for business. In the financial year ending on 30th June, 2018 the company has an issued and subscribed share capital of $173 million. In the corresponding previous year the balance in share capital account of the company was $169.40 million (Grant, 2016).
Reserves: The accumulated amount of all specific reserves reported as reserves under equity of the company. However, in both 2017 and 2018 the balance in the reserves accounts are in negative. In 2018 the balance in reserves account I is ($33.8 million) and in the year 2017 it was ($12.9 million).
Retained earnings:
It is the accumulated profit transferred by the company to general reserves. This amount is free reserves and can be distributed as dividend. The balance in retained earnings on 30th June 2018 is $471.60 million whereas in the previous year it was $387.10 million (DeFusco et. al. 2015).
Overall the equity shareholders’ funds for the financial year ending on June 30, 2018 is $610.80 million. Or was merely $543.60 million a year before on 30th June, 2017. The reason for the change in the amount of equity is mainly due to the amount of profit earned by the company in the year and transferred to retained earnings. Apart from that around $3.6 million was also raised from issuing share capital to the public in the financial year 2017-18 (Yohn, 2015).
Equity of Cogstate Limited:
Contributed equity: Contributed equity is the amount of money the company has collected from issuing its shares in the market. It represents the share of owners in the company. In 2017 the balance in contributed equity was around $29 million, $28,511,980 to be precise. The company has issued significant amount of shares to the public in 2018. The balance in contributed equity as on June 30, 2018 is around $33 million (Weygandt, Kimmel and Kieso, 2015).
Other reserves: These are the reserves created by the company for specific purposes and not free reserves thus not available for distribution to the shareholders. In 2017 the company had $1,371,916 in other reserves. In 2018 it has increased to almost $3 million (Zeff, 2016).
Retained earnings: This is the amount of profit transferred to free reserves after providing for necessary expenditures and provisions. The retained earnings generally reflects the amount of accumulated profit and other free reserves that a company has. In 2017 the company had a negative balance of $15 million that has increased to $16 million in the year 2018 (Penman, S.H. and Penman, 2007).
The total equity of shareholders in the company has changed over the previous year. In 2017 the owners’ equity was around $14 million that increased to $16 million in 2018. The reason for the change is issue of additional shares to the public as well as the operating loss that resulted in increase in negative balance of retained earnings of the company.
Comparison of debt and equity position:
Let’s have the table containing details about debt and equity position of two companies over the last five years before comparing the debt and equity position of these two companies.
Cochlear Limited:
|
All amounts are in $ million |
2014-06 |
2015-06 |
2016-06 |
2017-06 |
2018-06 |
|
Long-term debt |
234.00 |
45.00 |
189.00 |
134.00 |
144.00 |
|
Total stockholders’ equity |
329.00 |
355.00 |
449.00 |
544.00 |
611.00 |
|
Debt to equity ratio |
0.71 |
0.13 |
0.42 |
0.25 |
0.24 |
Cogstate Limited:
|
$ million |
2014-06 |
2015-06 |
2016-06 |
2017-06 |
2018-06 |
|
Long term debt |
0 |
0 |
0 |
0 |
0 |
|
Total stockholders’ equity |
13 |
10 |
14 |
14 |
16 |
As is clear from the above table that there is significant size difference between the two companies. Cochlear Limited is the leader in hearing implants across the globe whereas Cogstate is yet to establish its place in Health Care Equipment and Services industry. The debt to equity position of Cochlear is very strong as can be seen in the table above. The company has now a seriously strong debt to equity ratio of 0.24 for the year ended on June 30, 2018. Compared to that Cogstate does not even have long term debt (Robinson et. al. 2016). Hence, there is no comparison between the two companies.
Cash flow statements:
Cochlear Limited:
Receipts of cash from customers: The amount receipt from customers is the amount received for credit sales effected by the company earlier. In 2018 the company has received $1,350 million whereas a year back the same was $1,221 million. The reason for the increase in receipts from customers is due to increase amount of credit sales effected by the company in the year 2017-18 (Sözbilir, Kula and Baykut, 2015).
Cash paid to suppliers and employees: This represent the payment made to the suppliers for materials purchased on credit and amount paid to the employees and workers as salaries and wages. In 2018 $987.8 million has been paid in cash to employees and suppliers compared to $878.6 million paid in last year. Again the increase in production has led to the increase in payment to the suppliers and employees (Badenhorst and Ferreira, 2016).
Grants and other income received: The increase in grant received is very minor and it is shown as and when the grant is received.
Interest received: $0.6 million interest income has been received in 2018 represents the amount of interest earned on investments. It was $0.7 million a year back.
Payment of interest: $8.5 million has been paid as interest in 2018 whereas in 2017 the company paid $8.6 million as interest (Johnston and Kutcher, 2015).
Income taxes paid: It is the amount of income tax paid for the profit eared by the company. In 2018 $101.3 million has been paid as income tax compared to $78.5 million of 2017. The increase is due to the increase in income of the company from previous year.
Cash used in investing activities:
The company has used $55.40 million in investment activities during the year 2017-18 compared to a significantly large amount of $135.6 million in 2016-17. The reason for such reduction in investments is that the company has invested in relatively less number of products (Yasseen, Jansen and Small, 2016).
Cash used in financing activities:
In 2018 the company has used $232.7 million for financing activities. Most of the payments are towards repayment of borrowings and payment of dividend. In 2017 the company merely used $108.3 million in financing activities as the repayment of borrowing was lower (Edwards, 2017).
Cogstate Limited:
Cash flow from operating activities:
The company has no cash flows from operating activities. This shows that the amount of cash flows from business operations was absolutely insignificant.
Cash flow from investing activities:
In 2018 the company has acquired intangible assets for $3 million and investment in other properties of $1 million. No such investments were made in the previous year (Mullinova and Simonyants, 2016).
Cash flow from financing activities:
In 2018 the company has received $4 million from issue of ordinary shares and no other payments or received has been made under financing activities in the year. In 2017 the company only collected $1 million from issue of ordinary shares (Yasseen, Jansen and Small, 2016).
Comparison of cash flows:
Cochlear: The following table contains the cash flows from three broad categories of cash flows these are, cash flows from operating activities, cash flows from investing activities and cash flows from financing activities (Morris, 2017).
|
2014-06 |
2015-06 |
2016-06 |
2017-06 |
2018-06 |
|
|
Net cash from operating activities |
111.00 |
188.00 |
185.00 |
259.80 |
258.00 |
|
Net cash used for investing activities |
(32.00) |
(28.00) |
(50.00) |
(136.00) |
(55.00) |
|
Net change in cash |
(108.00) |
(173.00) |
(182.00) |
(246.00) |
(286.00) |
Cogstate:
|
$ million |
2014-06 |
2015-06 |
2016-06 |
2017-06 |
2018-06 |
|
Cash Flows From Operating Activities |
1.00 |
2.00 |
2.00 |
3.00 |
3.00 |
|
Net cash used for investing activities |
(1.00) |
(1.00) |
(2.00) |
(1.00) |
(4.00) |
|
Net change in cash |
7.00 |
1.00 |
(1.00) |
(1.00) |
(4.00) |
As already mentioned earlier that the size of two companies is significantly different. Cochlear is the market leader whereas Cogstate is merely surviving in the market. The cash flow statement and cash flows and used under three broad headings as provided in the above table of two companies makes the point even more clear (Citron, 2015).
Comparative analysis of two companies:
Cochlear being the market leader in hearing implant in the world has a significantly high level of turnover as compared to the Cogstate which is struggling to even survive in the competitive market. The total comprehensive income of Cochlear Limited is $221.4 million in 2018 compared to the net operating loss of $1 million that Cogstate incurred in the same financial year. The amount of revenue earned by Cochlear in 2018 is $1,363.7 million and $1,253.8 million in 2017. Cogstate on the other hand only earned a revenue of $16 million $17 million in 2017 and 2018 respectively (Suryanto, 2016).
Other comprehensive income statement analysis:
The other comprehensive income statement of an organization generally includes items of income that have not been considered in the income statement for computation of net income of the company (Kraft, 2014). In Case of Cochlear Limited the other comprehensive income statement has reported the following items:
Actuarial gains / (losses) from defined benefit plan: In 2018 $0.2 million loses has been reported compared to a gain $2.7 million reported in 2017.
Foreign currency translation differences: $3.7 million income has been reported in 2018 from foreign currency translation whereas a year back it was $15.1 million.
Changes in fair value of cash flow hedges: In 2018 the company has reported $19.4 million of loss from changes in fair value hedges. In 2017 the company reported a gain of $20.9 million from same (Macve, 2015).
Net change in fair value of cash flow hedges transferred to income statement: The Company reported a loss of $8.6 million in 2018 whereas in 2017 the loss was $9.9 million.
In case of Cogstate Limited there has been no items of income and expenditures that have been reported in other comprehensive income statement. The company does not have any items that required to be reported in other comprehensive income statement (Robinson et. al. 2015).
Reasons that such items are not recorded in income statement:
The items that have been reported in other comprehensive income statement are not items that affect the business operations like normal business activities. These are items different from regular business items hence, such items have been shown separately in the other comprehensive income statement after ascertaining the net income from business in income statement. Losses and gains from foreign exchange translations, changes in fair value hedges and other such items are different from ordinary business operations. Hence, such items have been reported separately in other comprehensive income statement and not shown in the ordinary income statement at the time of calculating the net income of business.
Comparative analysis of other comprehensive income statement:
The other comparative income statement of Cochlear Limited is shown below. This is the extract taken from the annual report of the company.
In case of Cogstate there has been no item that has been reported in other comprehensive income statement of the company. Thus, from the above it is clear that whereas Cochlear has number of items that have been reported under other comprehensive income there is not even a single item reported under other comprehensive income statement of Cogstate.
The other comprehensive income should not be included in evaluating the performance of the managers as these are the items that are not within the controls of managers of an organization. These generally arise due to changes in foreign exchange rates and changes in fair value of assets and items reported in Balance sheet and income statement respectively. Since these are not within the controls of the managers hence, such items should not be considered while assessing the performance of the managers.
Accounting for corporate income tax:
Tax expenses of Cochlear Limited for 2018 as per the financial statements is $94.7 million. In 2017 the income tax expense reported was $85.2 million. In case of Cogstate Limited income tax benefit for 2018 is around $1 million as the company incurred a loss of $2 million in the year.
Effective tax rates are as following:
|
2017-18 ($’ million) |
||
|
Effective income tax rate |
Cochlear |
Cogstate |
|
Earnings before income tax |
341.00 |
(2.00) |
|
Income tax expense |
95.00 |
(1.00) |
|
27.86 |
50.00 |
Cogstate seems to have higher effective tax rate out of the two with 50% tax rate as compared to 27.86% of effective tax rate for Cochlear Limited.
Deferred tax assets of Cochlear Limited is $66.6 million for 2017 whereas for Cogstate has around $3.75 million for the same period in deferred tax assets. The reason for reporting deferred tax assets is that both companies expect to earn significant amount of profit in the future that will enable them to set off the income against taxes paid earlier.
Cochlear Limited has reported a deferred tax liability of $8.1 million in 2018 and Cogstate has reported a deferred tax liability of $618,370. The reason for recording deferred tax liabilities is that the company expects that the temporary differences in the past on items of revenue and expenditures that have resulted in income tax benefits would be reversed in the future. Thus, the companies have reported deferred tax liabilities for future periods.
Increase and decrease in deferred tax assets and liabilities:
Cochlear Limited:
Deferred tax assets of Cochlear Limited has increased in 2017-18 to $80.7 million from $66.6 million of 2016-17. Deferred tax liabilities as per the financial statements of the company for 2017-18 is $8.1 million compared to $5.8 million of 2016-17. Thus, both deferred tax assets and liabilities of the company have increased in 2017-18.
Cogstate Limited:
Deferred tax assets of Cogstate Limited for 2016-17 is $3,750,629 has decreased from $3,844,937 of 2015-16. Deferred tax liabilities of the company for 2016-17 as per the Balance sheet is 618,370 has also decreased from $723,720 of 2015-16.
Cash tax amount:
|
Cochlear limited (2017-18) |
|
|
Particulars |
Amount ($’million) |
|
Income tax expenses |
94.70 |
|
Less: Increase in deferred tax assets (80.7 -66.6) |
14.10 |
|
108.80 |
|
|
Add: Increase in deferred tax liabilities (8.1 – 5.8) |
2.30 |
|
Cash tax amount |
111.10 |
|
Cogstate Limited (2016-17) |
|
|
Particulars |
Amount ($) |
|
Income tax expenses |
(7,332.00) |
|
Adds: Decrease in deferred tax assets (3844937 -3750629) |
94,308.00 |
|
86,976.00 |
|
|
Less: Decrease in deferred tax liabilities (723720 -618370) |
105,350.00 |
|
Cash tax amount |
(18,374.00) |
Cash tax rate:
|
Cochlear |
|
|
Particulars |
Amount ($’million) |
|
Cash tax amount |
111.10 |
|
Earnings before income tax |
341.00 |
|
Cash tax rate (111 x 100/341) |
32.58% |
|
Cogstate |
|
|
Particulars |
Amount ($’million) |
|
Cash tax amount |
(18,374.00) |
|
Earnings before income tax |
(2,000,000.00) |
|
Cash tax rate (18374 x 100/2000000) |
0.9187% |
Note: Current tax assets and current tax liabilities have not been considered in calculating cash tax rate.
Reason for the differences in cash tax rates from book tax rates:
The cash tax rate sis different from book tax rates of both the companies as can be seen from the above calculation. In case of Cochlear Limited the effective tax rate is 27.86% whereas the cash tax rate is 32.58%. Similarly the effective tax rate of Cogstate is 50% whereas cash tax rate is merely 0.92%. The reasons for the above differences are as following:
Conclusion:
It is important to have necessary knowledge about accounting and taxation in order to assess the financial performance and position of an organization from its financial reports. In this document a detailed discussion has been made on various aspects of financial statements including owners’ equity, tax expenses, deferred tax assets and deferred tax liabilities. The financial statements of Cochlear Limited and Cogstate clearly reflect that the financial performance and position of these two companies are completely contrasting from each other. Cochlear in one hand has strong financial performance that reflects in its financial position whereas Cogstate is even finding it difficult to earn operating profits from business operations. Thus, the fortunate of two companies are very much evident from the financial information of these companies provided in financial statements.
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