Corporate Accounting: Analysis of Annual Reports of Cochlear Limited and Cogstate Limited

This document evaluates the annual reports of Cochlear Limited and Cogstate Limited listed in Australian Securities Exchange (ASX) to understand the various elements of financial statements of these entities. It includes analysis of owners' equity, debt and equity position, cash flow statements, and comparative analysis of the two companies.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Authors Note:

1
CORPORATE ACCOUNTING
Executive summary:
Annual report is the document that an organization generally issues after the end of a
financial year to provide all relevant information about the organization and its operations. Such
document includes financial statements of an organization also that reflect the financial position
and performance as on a particular date. In this document the annual reports of two listed entities
in Australian Securities Exchange, referred to as ASX in this document subsequent to this, have
been evaluated with the objective of understanding the various elements of financial statements
of these entities.

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Contents
Executive summary:........................................................................................................................1
Introduction:....................................................................................................................................3
Cochlear Limited:............................................................................................................................3
Cogstate Limited:.............................................................................................................................3
Owners’ equity:...............................................................................................................................3
Different items in equity:.............................................................................................................3
Comparison of debt and equity position:.....................................................................................5
Cash flow statements:......................................................................................................................6
Comparative analysis of two companies:..................................................................................10
Other comprehensive income statement analysis:.....................................................................10
Reasons that such items are not recorded in income statement:................................................11
Comparative analysis of other comprehensive income statement:............................................12
Accounting for corporate income tax:...........................................................................................13
Effective tax rates are as following:..........................................................................................13
Increase and decrease in deferred tax assets and liabilities:......................................................14
Cash tax rate:.............................................................................................................................16
Reason for the differences in cash tax rates from book tax rates:.............................................17
Conclusion:....................................................................................................................................17
References:....................................................................................................................................19

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4
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Introduction:
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).

5
CORPORATE ACCOUNTING
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).

6
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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:

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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 0.2
5
0.2
4
(Damodaran, 2016)
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
(Penman, 2016)
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.

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CORPORATE ACCOUNTING
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.

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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:

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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 (32.0
0)
(28.0
0)
(50.
00)
(136.0
0)
(55.0
0)
Net change in cash (108.0
0)
(173.0
0)
(182.
00)
(246.0
0)
(286.0
0)
Cogstate:
$ million 2014-
06
2015-
06
2016-
06
2017-
06
2018-
06
Cash Flows From Operating Activities 1 2 2 3 3

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.00 .00 .00 .00 .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)
(Oliver, 2014)
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

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CORPORATE ACCOUNTING
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

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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

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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 Cochlea
r
Cogstat
e
Earnings before income tax 341.0
0
(2.
00)
Income tax expense 95.
00
(1.
00)
Effective tax rate (%) 27.
86
50.
00

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CORPORATE ACCOUNTING
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.

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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 (7,332.0
0)
Adds: Decrease in deferred tax assets (3844937 -3750629) 94,308.
00
86,976.

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00
Less: Decrease in deferred tax liabilities (723720 -618370) 105,350.
00
Cash tax amount (18,374.0
0)
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 (18,37

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4.00)
Earnings before income tax (2,000,00
0.00)
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:
I. The effective tax rate is calculated on the basis of income tax expense and profit
before tax whereas cash tax rate is calculated from the cash tax to be paid and the
profit before taxes.
II. The effects of changes deferred tax assets and deferred tax liabilities are considered
while calculating the cash tax. But these impacts are not considered while calculating
the effective tax rate.
III. After nullifying all impacts of deferred tax assets and deferred tax liabilities the cash
tax rate is calculated.

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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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