Analysis of Financial Accounting Concepts: Cochlear Limited Report

This report provides a detailed analysis of advanced financial accounting concepts, specifically within the context of Cochlear Limited. It begins by identifying and describing key accounting concepts as defined by the Australian Accounting Standard Board (AASB), including financial statements, reporting entities, elements of financial statements, recognition and derecognition, measurement, presentation, and disclosure. The report then delves into the measurement issues, contrasting historical cost and fair value measurement bases, and discussing their relevance and application. Furthermore, the report examines the fundamental qualitative characteristics of financial information, emphasizing relevance and faithful representation, and their importance in making financial information useful for decision-making. Throughout the report, the analysis is grounded in the 2018 Annual Report of Cochlear Limited, illustrating how these concepts are applied in practice. The report concludes by summarizing the key findings and their implications for effective financial accounting.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Author’s Note

1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Introduction...................................................................................................................2
Identification and Description of Accounting Concepts................................................2
Discussion on Issues of Measurement.........................................................................3
Fundamental Qualitative Characteristics......................................................................4
Conclusion....................................................................................................................7
References...................................................................................................................8

2ADVANCED FINANCIAL ACCOUNTING
Introduction
The managements of the companies are needed to take into consideration of
certain accounting concepts in the process of financial accounting and these
concepts are crucial for the business success. In Australia, the companies are
needed to comply with different requirements of the Accounting Conceptual
Framework of the Australian Accounting Standard Board (AASB) for the purpose of
financial reporting (Cheng et al.2014). This aspect helps the companies in
addressing the measurement related issue within the organizations. The AASB
conceptual framework states that the companies are needed to put major emphasis
on both the fundamental qualitative characteristics of financial statements for the
effective measurement as well as accounting treatments of the organizational assets
and liabilities (Simnett and Huggins 2015). Consideration of these aspects leads to
the development of effective financial accounting systems within the organizations.
There are three parts of the report. The first part of the report discusses about
different accounting concepts and relates them with the chosen company. The
second part of the report addresses the measurement issues of AASB in respect to
the selected company. The last part of the report discusses about the fundamental
qualitative characteristics of financial information of the chosen company. For the
purpose of the report, Cochlear Limited is taken into consideration.
Identification and Description of Accounting Concepts
It can be seen from the above that the Australian companies are required to
comply with the accounting conceptual framework of the AASB for the purpose of
financial accounting. In this process, the companies are needed to adopt the
accounting concepts provided in the conceptual framework of AASB (aasb.gov.au
2019). It can be seen from the conceptual framework of AASB that there are certain
accounting concepts that the companies are needed to adopt for the purpose of
financial reporting. These concepts are Financial statements and reporting entities,
Elements of financial statements, Recognition and Derecognition, Measurement,
Presentation and disclosure and Concepts of capital and capital management
(aasb.gov.au 2019). These concepts are discussed below in general and in relation
to Cochlear Limited.
Financial Statements and Reporting Entities – This accounting concept deals with
the role of financial statements and the concept of reporting entity. It states that the
main objective of financial statements is to provide information on the company’s
assets, liabilities, equity, income and expenses (Barth 2013). As per the 2018 Annual
Report of Cochlear Limited, the company has provide the financial statements such
as income statement, balance sheet and others that provide this information. Going
concern is considered as another major accounting concept which states that the
reporting entity is going concern and will continue for foreseeable future. According
to the 2018 Annual Report of Cochlear Limited, the main objective of the capital
management of the company is safeguarding their ability to continue as a going
concern (aasb.gov.au 2019).
Elements of Financial Statement – The main components of this accounting
concepts are definition of assets, liabilities, equity, income and expenses. According
to AASB conceptual framework, asset can be considered as a present resource of a
company as a result of past events. Liability can be considered as a present
obligation of an entity for transferring an economic resource due to past events
(Weil, Schipper and Francis 2013). After that, equity is considered as a residual

3ADVANCED FINANCIAL ACCOUNTING
interest in the asset after the deduction of all of its liabilities. Income can be
considered as the increase in assets or decrease in liabilities which leads to the
increase in equity. On the other hand, expenses are considered as increase in
liabilities or decrease in asses that leads to the decrease in equity. It can be seen
from the 2018 Annual Report of Cochlear Limited that the company has reported
their assets, liabilities, equity, income and expenses in their financial statements.
Recognition and Derecognition – Recognition and derecogntion are considered as
two specific accounting concept as per the accounting conceptual framework of the
AASB. Recognition is considered as the process to capture and item that satisfies
the definition of an element with the aim to include that element in the statement of
financial position and income statement (Măciucă, Hlaciuc and Ursache 2015). At
the same time, derecognition is considered as the process of removing a part or the
whole part of a pre-recognized asset or liability from the statement of financial
position of a company. It can be seen from the 2018 Annual Report of Cochlear
Limited that the company has used this concept in the process of their financial
reporting with the proper recognition of their assets and liabilities.
Measurement – The concept of measurement is considered as one of the most
crucial concepts for the companies. According to the AASB conceptual framework,
there are two types of measurement which are historical cost and current value. As
per the AASB conceptual framework, the historical cost measurement base helps in
providing monetary value about the assets, liabilities, income and expenses with the
information derived from the transaction or event (Ryan et al. 2014). It also states
that current value includes both fair value measurement and value in use. As per the
annual report of Cochlear Limited, the company has used both the historical cost and
fair value measurement for measuring their different assets and liabilities.
Presentation and Disclosure – According to the AASB conceptual framework,
presentation and disclosure can be considered as the communication tools for
providing information about the recognized assets, liabilities, equity, income and
expenses (aasb.gov.au 2019). Thus, the companies are needed to ensure effective
presentation as well as disclosure of all information of their financial substances. It
can be seen from the 2018 Annual Report of Cochlear Limited that the company has
effectively presented as well as disclosed all relevant information of their assets,
liabilities, equity, income and expenses (Luke 2016).
Discussion on Issues of Measurement
Measurement of considered as a crucial concept in financial reporting of the
companies. According to the AASB conceptual framework, the presence of two
measurement bases can be seen; they are historical cost measurement and fair
value measurement (aasb.gov.au 2019). As per AASB conceptual framework, fair
value can be considered as the price that an entity receive for selling an asset or
paying or transferring a liability in an orderly transaction between the market
participants at the date of measurement (Hodder, Hopkins and Schipper 2014). In
this context, it needs to be mentioned that the fair value measurement reflects the
actual market price of the assets and liabilities at the current date. On the other
hand, historical cost measurement base shows the values of the assets and liabilities
at ta date of acquisition or transaction (Linsmeier 2013). Thus, it can be seen that
there is difference between fair value measurement and historical cost measurement
bases.
The presence of a major debate can be seen regarding the measurement
concept and the debate can be seen between fair value measurement and historical

4ADVANCED FINANCIAL ACCOUNTING
cost measurement (Blankespoor et al. 2013). As per the proponents of the fair value
accounting, this is a more relevant measure because it captures aspects like market
trend, depreciation and others and thus, it makes the values of the assets and
liabilities more current as well as relevant. However, the measure of historical cost
accounting is considered as a more conservative idea which is also perceived as
reliable. Fair value accounting was vastly used in the 19th and early 20th centuries.
However, at the time of the economic collapse of US in 1920’s, the fair value
accounting was majorly blamed in the presence of its tendency to overstate the
value of the assets. It needs to be mentioned that this is an ever continuing debate.
However, AASB has provided the companies with the permission to use these
measurement bases on the basis of the nature of their businesses and needs
(Magnan, Menini and Parbonetti 2015).
It can be seen from the 2018 Annual Report of Cochlear Limited that the
company has used both the historical cost accounting as well as fair value
accounting based on their business needs. As per Note 1.2 (b), the company has
prepared their consolidated financial statements on the basis of historical cost
accounting and they have used fair value accounting measurement base for the
measurement of derivative financial instruments and the investments available for
sales (cochlear.com 2019).
According to the 2018 Annual Report, the company has measured their
inventory at the lower of cost and net realizable value (cochlear.com 2019). At the
same time, the company has measured the value of property, plant and equipment
at the cost price after the deduction of the aspects like accumulated depreciation and
impairment losses. The same aspect can be seen in the case of Goodwill since the
company has measured their goodwill at cost value after the deduction of any
accumulated impairment losses (cochlear.com 2019).
At the same time, Cochlear Limited has measured their investments at fair
value by adding directly attributed transaction costs. After that, the company has
done the initial recognition of the net debts at fair value after the deduction of
attributable transaction costs (cochlear.com 2019). In addition, the company has
recognized the forward exchange contracts initially at fair value and their
measurement is also done based on fair value accounting. It needs to be mentioned
that Cochlear Limited uses the three tier fair value model for the valuation of the
selected assets and liabilities (cochlear.com 2019).
Thus, it can be seen from the above discussion that the management of
Cochlear Limited has addressed the issue of measurement through the adoption of
both the measurement bases for their selected assets and liabilities. The
management of Cochlear Limited has adopted these methods based on their
business needs.
Fundamental Qualitative Characteristics
In case the financial information is to be useful, it is required that they must be
relevant as well as faithfully represented. The presence of two fundamental
qualitative characteristics of financial information can be seen; they are Reliance and
Faithful Representation (aasb.gov.au 2019). It needs to be mentioned that both of
these characteristics are useful in order to make the financial information useful.
These are discussed below.
Relevance – It needs to be mentioned it is possible to make positive difference in
the decision-making process of the users in case the information is relevant.
Information become relevant when they have both confirmatory value and predictive

5ADVANCED FINANCIAL ACCOUNTING
value. Confirmatory value increases the usefulness of the information through
providing feedback about the previous judgements (Herath and Albarqi 2017). On
the other hand, predictive value makes the information useful by making the
decision-makers able in predicting the future outcome of the companies. Materiality
and measurement uncertainty is considered as other crucial aspects in this for
increasing the usefulness of the information (Cohen and Karatzimas 2017).
Faithful Representation – It is needed for the managements of the companies to
ensure the faithful representation of the financial information along with representing
the relevant phenomena in order to make the information useful for the decision-
makers. There are three crucial elements that need to be there for ensuring faithful
representation of financial information; they are complete, neutral and free from
errors. An economic phenomena with complete, neutral and error free description is
paramount to the users of the financial statements to make effusive investment and
other decisions (Biondi and Lapsley 2014).
The investors are needed to follow certain steps for ensuring whether the
company has presented these two characteristics of financial information. First, it is
needed to consider an essential economic phenomena about the company. Second,
it is needed to identify the types of information that would be most relevant in case it
is available and it can be faithful represented. Third, it is needed to determine
whether the financial statements contain this information and they can be faithfully
represented. These steps satisfy the process to satisfy these two characteristic of
financial information.
It can be seen from the 2018 Annual Report of Cochlear Limited that the
company has satisfied these two fundamental qualitative characteristics of financial
information. Specific examples are provided below.
It needs to be mentioned that three major aspects of the financial statements
of the companies are assets, non-current assets and liabilities. It can be seen from
the 2018 Annual Report of Cochlear Limited that the company has faithfully
presented the most relevant information on these aspects in their financial
statements. For example, inventories can be considered as a crucial current asset of
Cochlear Limited which helps in determining the efficiency as well as liquidity
position of the company. For inventory, the most relevant information is its value and
the company’s policies regarding its valuation (cochlear.com 2019).
(Source: cochlear.com 2019)
It can be seen from the above that the company has disclosed the detailed
values of their inventoried that includes information on raw materials, work in
progress, finished goods and total invent toes. In addition, the company has also
presented the information on their measurement and recognition policies for

6ADVANCED FINANCIAL ACCOUNTING
inventories (cochlear.com 2019). This information ensures the presence of relevance
and faithful representation of this asset.
Among the non-current assets of the companies, Property, plant and
equipment is considered as a crucial asset class for ascertaining the financial health
of the firms. The most relevant information on property, plant and equipment is book
value, items under the reconciliation for its carrying amount and the company’s
policies and procedures for its measurement (cochlear.com 2019).
(Source: cochlear.com 2019)

7ADVANCED FINANCIAL ACCOUNTING
It can be seen from the above that the company has disclosed all the relevant
information on this class of non-current assets in faithful manner where the
information related to net book value, reconciliation amounts of carrying value,
measurement methods, depreciation method, impairment and others (cochlear.com
2019).
In case of liabilities, Net debt is considered as a crucial part of the liabilities of
the companies. The most relevant information about the debts of the companies are
its values and the policies for them.
(Source: cochlear.com 2019)
It can be seen from the above that Cochlear Limited has provided the detailed
values of their debts that includes the values of both the current and non-current
loans and borrowings (cochlear.com 2019).
Conclusion
It can be seen from the above discussion that the management of Cochlear
Limited has considered the crucial accounting concepts of the AASB conceptual
framework. Some of the adopted accounting concept by the management of
Cochlear Limited are going concern assumptions, financial statements, elements of
financial statements like assets, liabilities and others, recognition as well as
derecognition, measurement basis and preparation as well as financial statements.
The above discussion also discusses about the main debate between the fair value
measurement and historical cost measurement. The above discussion indicates
towards the fact that that Cochlear Limited has adopted both the fair value
measurement and historical cost measurement on the basis of their business need.
The above discussion also indicates towards the aspect that there are two
fundamental qualitative characteristic of financial information; they are relevance and
faithful representation. As per the above discussion, the management of Cochlear
Limited has included these two fundamental qualitative characteristic of financial
information by disclosing the relevant information of their assets and liabilities in the
financial statements on faithful basis.

8ADVANCED FINANCIAL ACCOUNTING
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