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22319 Financial Statement Analysis
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22319 Financial Statement Analysis
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Course Code: 22319
University: University Of Technology Sydney
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Country: Australia
Question:
Accounting Analysis
— Assess the degree to which the firm’s accounting reflects the underlying business reality. Identify any accounting distortions and evaluate their impact on profits and the sustainability of profits.
— The importance of accounting analysis:
— Understanding accounting allows the business analyst to more effectively use the financial information disclosed by companies.
— In particular, the analyst is trying to assess the accounting quality of the financial statements.
— Sound accounting analysis improves the reliability of conclusions from financial analysis.
Prelude to An Accounting Quality Analysis
— Understand the business
— Understand the accounting policy
— Understand the business areas where accounting quality is most doubtful
— Understand situations in which management are particularly tempted to manipulate
Types of Financial Statements
— According to the International Accounting Standards Board (IASB), a ‘complete set of financial statements’ comprises:
— Statement of financial position as at the end of the period
— Statement of profit or loss and other comprehensive income for the period
— Statement of changes in equity for the period
— Statement of cash flows for the period
— Notes (comprising a summary of significant accounting policies and other explanatory information).
Answer:
Research and development
Research and development and commercialization spending accounted for 45% of the total expenditure of the cluster for the fiscal year 2017/2018, compared to 40% for the financial year 2016/2017. This costs that are comprised of study costs for the clinic, drug formation research and manufacture and distribution fee, regulatory and research fee, and development and commercialization overheads. (Clinuvel Pharmaceuticals’ ,2018)
The increase in these expenditures reflects the further investments throughout the years in the commercial roll out in a bid to secure revenues the, was prepared on the NDA regulations that meet the FDA’s expectations. Innovation has been distinct as the outlined of new or better-quality changes in goods and services, procedures and means that organizations use to improve on products and new marketing methods (OECD/Eurostat 2005).
Intangible Assets
Clinuvel Pharmaceuticals’ operations deals with creating medicinal products and therefore the intangible assets compose of various portions of Clinuvel Pharmaceuticals’ operations. Intangible assets such as trademarks, patents, and licenses have a fixed beneficial life and are recorded at a costless amassed amortization and impairments losses, the amortization is done on a straight-line basis over a shorter valuable life that is reviewed annual reporting periods. The subject of amortization and capitalization of expenses on intangible assets is abundant and lively, thus by developing amortization plans that will progress rather than harm earnings are a huge task, the focus on fiscal report examination – the examination of statement of financial position and statement of income mark matters – and merging that examination with other non-accounting data to predict incomes progress. Benefit from and amortization is an issue in accounting, and not an issue of analysis. (Lev, Radhakrishnan, and Zhang, 2009).
Depreciation of plant, property, and equipment
The assets of Clinuvel Pharmaceuticals’ are specified at a cost less accrued depreciation and diminishing, the cost includes spending that is straight credited to the acquired item. The depreciation is calculated on value diminishing to write off the net cost of each asset over the expected useful life to be able to estimate its residual value. The management reviews the method of depreciation and end of each annual reporting time and can be adjusted if appropriate. The present rules for the measurement of PPE are providing under IAS 16 (IASC, 2003). The rules permit two models of accounting for the determining the value of property, plant, and equipment that is succeeding to original acknowledgment. Reappraisals should be completed frequently enough so that the carrying amount does not signi?cantly contrast from fair value at the statement of financial position date. Thus, in a case of impairment loss arising it ought to be known every time the sum of an asset to be recovered is fewer than the amount carried. (Clinuvel Pharmaceuticals’ ,2018)
Assess accounting flexibility
Capitalisation of Research and Development costing
According to Atkinson and Mckay (2007) economies that have a consistently higher level of the invention have a tendency to have high levels of growth. The venture in research and development is not synonymous with innovation. There are several organizations that make known to new commodities without research and development though it is likely to find the connection between the funds invested in R&D and the produce innovations, thus looking at Clinuvel Pharmaceuticals’s that accounts for 45% of total expenses which shows the investment made by the firm in improving the product.
Comparing to previous year 40% this shows that the company increased the R&D cost to cater for the innovations and improvement to providing quality pharmaceutical products. This is a positive evidence that underlines the importance of R&D in improving sales and contributing to the overall profitability of the company. (Clinuvel Pharmaceuticals’ ,2018)
From the objective of the Clinuvel Pharmaceuticals’ is ongoing investment in R&D continued. The expenditure towards drug formulation, manufacturing and in distribution programs increased significantly by 102% this is a result of combining the activities to improve the growth in sales volumes. (Clinuvel Pharmaceuticals’, 2018).
Valuation and estimations of the useful life of intangible assets
Possessions whether they are physical, or intangible is a way of making of services and goods, therefore are a vital element of economic examination as suggested the appropriate characteristics to be assessed through the increase in the economic performance of the company that employs the assets. (Cohen, 2009). The worth of the intangible assets will increase in value due to the enhanced performance. According to Basu and Waymire (2008) the contemplation of financial measurement of intangible assets is the main blockade to accounting valuation, thus accounting valuation is only proficient of recognising resources and benefits which is measured in monetary terms for value financial reporting.
The depreciation method of property, plant and equipment adopted
The firm’s management has a decision to make on the mode of depreciation to use. In financial year 2017 and year 2018, the firm depreciated some of its assets using diminishing value method where the computers and software at 40% and the other assets at 7.5% to 33% , rather than the depreciated replacement cost method , that is the present charge of reproducing or any spare of an asset minus deductions for any physical weakening and any other form of undesirability and optimization ( RICS, 2005). The diminishing method of valuation allows for more value of expenditure to be charged at the start of the life of the asset and low residual values towards the end of the life of the asset. However, the straight-line method of depreciation should be adopted as its more transparent and relatively easy to apply and calculate (IVGN 8, 2005).
Potential Red Flag
Changes in methods of depreciation for property, plant and equipment
The firm choose to change to use the diminishing value method, however this method does not provide a constant residual amount reduced over a given useful life of the asset. According to Elliot (2011) despite the theoretical attractiveness of other methods, the straight-line method remains to be the most straight forward to compute and any imperfections in the charge for depreciation are more likely to be significant and more so the method confirms to the adopted users.
Evaluation of accounting disclosure procedures
Clinuvel Pharmaceuticals’ has provided information as required by IASB for the board and its users. The accounting policies has been used in the annual reports of the firm, the firm further provided all the information as required and complied with the reporting standards as required. CPL disclosed all the financial information including the director’s report and remuneration report the reports were based on performance, the remuneration policy complies with the Companies Act and ASX Listing Rules and supports the objectives of the firm. (Clinuvel Pharmaceuticals’ ,2018)
The Remuneration of the company’s key personnel in the management is aligned with the interests of the firm and the shareholders which is within the appropriate control. The incentive and remuneration framework in place have ensured that the executives are focused on enhancing the short-term operational performance and strategic growth that is the long-term objective. (Clinuvel Pharmaceuticals’ ,2018)
The report has been organized based on the Australian accounting standards and has been prepared on the accrual basis which is based on the historical costs and does not consider changing the value of money with an exception of where stated. The accounting policies chosen to ensure the fiscal data satisfies the concepts of importance and consistency. (Clinuvel Pharmaceuticals’ ,2018)
Undo Accounting Distortion
According to Mamo and Aliaz (2014) financial information manipulation is a distorted way to present financial performance, creating a false impression of an organization of financial strength.
The financial misreporting by prominent firms distorts peer firms’ capital investment decisions this distortion are not confined to capital investments; they also extend to choices peer firms make with respect to R&D, advertising and pricing policies – decisions with immediate bottom-line impact to the organisation. (Beatty, Liao, and Wu 2013).
Conclusion
Clinuvel Pharmaceuticals’ has had a successful history over the past years of operations, the success of the firm has been improving and increasing over the years. the firms increase R&D cost show that the firm is consistently researching and willing to improve on the quality of pharmaceuticals products, and this has also improved the revenue stream of the firm. Further comparisons reveal that the company has been having consistent revenue streams over the past decade.
References
Atkinson, Robert D. and Andrew S. McKay. (2007). Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution. Washington DC: The ITI Foundation. Available at: https://www.itif.org/files/digital_prosperity.pdf.
Basu, S., & Waymire, G. (2008). Has the importance of intangibles really grown? And if so
Beatty, A., S. Liao, and J. J. Wu. 2013. The spillover effect of fraudulent financial reportingpeer firms’ investments. Journal of Accounting and Economics 55: 183-205.
Cohen, M. (2009). The valuation of intangible assets and hedonic pricing models” Paper delivered at 36th Australian Conference of Economists, 24-26 September 2009, Hobart.
CSL Limited (2018), Annual Report, Melbourne, viewed 6 December 2018,
Elliot, B. and Elliot, J. (2011). Financial accounting and reporting. 14th ed. England: Pearson education Ltd.
International Accounting Standards Committee (IASC) (2003). International Accounting Standard No. 16. Property, plant, and equipment. IASC.
Lev, B., S. Radhakrishnan, and W. Zhang. (2009). Organization capital. Abacus, forthcoming
Mamo, J. and Aliaz, A. (2014). Accounting manipulation and its effects in the financial statements of Albanian entities. Interdisciplinary Journal of Research and Development, 1(2): 55-60.
OECD/Eurostat. (2005). Oslo Manual – Proposed Guidelines for Collecting and Interpreting Technological Innovation Data. 3rd Edition. Paris: Organisation for Economic Cooperation and Development.
RICS, (2005). RICS Appraisal and Valuation Standards. (The Red Book). The Royal Institution of Chartered Surveyors. London. UK.
VGN (2005). The Cost Approach for Financial Reporting – (DRC) International Valuation Guidance Note No. 8. (revised 2005)
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