GAAP or Generally Accepted Accounting Principles refer to the commonly followed rules in the standard of accounting and preparation of financial statements. GAAP or Generally Accepted Accounting Principles depicts the principles and standards that are to be followed for company accounting (Prather-Kinsey, Boyar and Hood, 2019). GAAP provides a guideline so that set standards can be followed and includes revenue recognition, balance sheet, etc. The report is aimed at studying the company’s policies through a conceptual framework.
Cochlear Limited is a company that designs and manufactures a nucleus cochlear implant, the Hybrid electroacoustic implant, and also the Baha bone conduction implant. The company is based in Sydney and was formed in the year1981. The company holds around two-third of worldwide implant of hearing. The company was named as the most innovative company in the year 2002 and 2003 (Annual report Cochlear Ltd., 2020). The revenue of the company stands at A$1240 million while net income is at A$224 million. The company’s financial statements are prepared according to the Australian accounting standard board and comply with the International Financial reporting standard.
Conceptual framework can be described as a system that provides objectives and the ideas which in turn can lead to the creation of a consistent set of rules (Conceptual framework, 2019). As per the conceptual framework of accounting rules and standards set nature, limits, and functions of the statements.
According to the relevance concept of the conceptual framework, the information that is to be provided in the financial statements should have the capability for changing a decision through the value that is confirmatory and predictive.
For the calculation of leases, AASB117 has been used by the company. Operating leases payments have been expensed on a straight-line basis as per the standard. The judgment of the company for measuring the lease affects the amount of lease liabilities and also the rights for using the assets are recognized. The company has also mentioned the change it has taken in the operations of leased from AASB 117 to AASB 16 from 2019. With the change in the adoption of different standards, the company has shown the change that will be brought on the balance sheet. The lease liability that has been recognized under AASB 117 was at $202 million while by adopting AASB 16 the lease liability has been recognized at $197.8 million (Annual report Cochlear, 2019). This shows that the accounting standards that have been depicted are reliable as appropriate calculations have been provided. The changes that have happened in recognizing the lease liability after adopting a different standard are also depicted. This makes the company's accounting policy-relevant as per the conceptual framework as decisions can be taken on the further leases as per the amount that has been depicted as the liability for lease.
In the corporate governance report remuneration practices and policies are depicted. There is an equity-based incentive plan for the company's directors that are made. Also, the participant of equity incentives are not allowed to get into transactions for limiting economic risk (Corporate governance Cochlear ltd., 2020). The information is relevant as if any person of the equity plan gets into a transaction then it can be stopped. Relevancy is followed in corporate governance.
Comparability is a characteristic of a conceptual framework that helps the user in understanding and identifying the similarities and the differences. For the information to be comparable things that are similar should look alike while the different things should look different. For the provisions, IAS 37 under IFRS has been used by the company. The opening balance of the provision is at $37.8 million and some provisions have been used and the provisions that have been made during the year. Provisions that were made amounted to $4.6 million while provisions that were used are at $11.4 million. So, the total provision for the company stood at $31.6 million. The company showed the overall provisions at the end of the year. Also, the revenue of the company has been estimated through IFRS 15 for the company. According to annual statements of the company, the revenue generated from the sale of goods before hedging is at $1320.2 million while the loss that has been generated on foreign exchange hedged sales is at $31.7 million and the revenue that has been generated from rendering services is at $ 32 million. So, the overall revenue of the company stood at $1320.6 million (Annual report Cochlear ltd., 2020). This gives comparability to the company’s statements from other company’s revenue who is following the same standards. The figures will be deducted from the same items and that can be compared for information that is derived. The lease liability standard AS 16 will clarify the lease liability in the same manner to all the companies. This will identify the similarities and differences among the companies and the amount of liabilities can be measured and compared.
In the chapter of financial statements and reporting entity of the conceptual framework, information is depicted which is to be shown in the statements. The concept relates to the theory of Positive accounting. The theory of positive accounting shows the method in which the accounting is to be done (Srivastava & Baag, 2019). Also, this standard depicts the information that is to be depicted in the statement of finance. This framework also depicts the stewardship of the management for the economic resources that are being utilized. In the statements of the company total revenue that has been generated and also the total loss that the company has made in the year 2020 is depicted. Also, the total assets of the company that is at $2575.7 million, and the liabilities that are at $1174.2 million are shown as per the IAS 1 as it has been mentioned that the company follows the IFRS system (Cochlear Ltd. Annual report, 2020). These are the information that is supposed to be depicted as per the conceptual framework and also as per the accounting standard. Since these are as per the standard and framework, positive theory is also applied here as the theory states that it should show the method it is to be done.
In their corporate governance report, the company also shows the usage of economic resources. The company has adopted a policy of HEAR in responsible behavior. Customers are the main resource of the company and the management makes sure that customers are heard and as per their requirement changes are made so that company can make progress and work as one. Also, the management is trying to improve its efficiency of resources (Corporate Governance Cochlear Ltd., 2020). The company is trying to improve its infrastructure to improve the recycling of glass, plastic, metal, etc. The company's report of ESG shows the stewardship of management. Thus following the reporting entity financial framework for the company.
In the conceptual framework, it has been stated that financial statements are supposed to be prepared for some time to provide the information that is related to the expenses, incomes, etc. This information is required by the users, as they need to determine the trend and also the changes that have taken place over the years. Also, information about the previous year should be depicted in the company' statements. Future events about the companies activities should be included too that are useful for the users.
This concept of the conceptual framework is connected with the measurement concept of accounting. It states that data should be depicted in a manner for the company so that it can be compared over some time (Mickhail, 2019). In the same manner, the framework states that the information of at least two years should be provided in the statements.
In the annual report of the 2020, the information for the finances of the year 2020 and 2019 has been stated. The company made a profit of $283.6 million in the year 2019 while in the year 2020, the company made a loss of 4216.7 million. The company’s statements are prepared according to the IFRS standards. Also, the net assets of the company in the year 2019 were at $725.9 million while in the year 2020 it reached $1401.5. This shows the rising trend of net assets. Also, the equity capital of the company has increased from $725.9 million to $1401.5 million (Cochlear Annual report, 2020). This means that the company has circulated more equity into the market. Thus, helps the user in identifying the financial position of the company and also helps them in measuring the value of the form for the 2 years and compare accordingly.
In the same manner in the company's corporate governance report, diversity and inclusion are depicted for various periods. It shows the workplace profile of the company. In the year 2019, the board of director's consist of 78% of the male population while 22% was female while in the year 2020, the male population increased to 80% and female was at 20%. In senior manager, the company's male percentage was at 65% while the female was at 35% in the year 2019 while in the year 2020, the female percentage increased to 36% and the male was at 64% (Corporate governance Cochlear ltd., 2002). This helps the users in understanding the inclusions of females at higher levels and the trends can be read. Thus, the conceptual framework of the reporting period is followed by the company.
According to the conceptual framework, financial information should be represented faithfully. For information to be faithful, three characteristics are to be followed i.e. completeness, neutral, and free from errors. It should depict all the information that is required for the user to understand. This concept follows the normative theory. It describes the method in which accounting is to be done in the same manner as the conceptual framework (Cardio-Pito & Silva Ferreira 2018.
IAS 2 states that inventories are to be stated at lower of the cost or the net releasable value. The same has been followed in the statements of accounting. Information related to inventory has been depicted and also the net realizable value for the business is shown. The estimation of the value is done through the estimated selling price less cost of completion. In the year 2020, the raw materials were at $70.3 million while WIP stood at $32.5 million. The finished goods were at $108.7 million. So the total inventories were at $223.8 million (Cochlear Annual report, 2020). This is the complete information about the inventories that have been depicted in the statement. The correctness of the figures can be understood by the reports of the auditors and directors declaration. In the director's statement, it has been stated that true and fair value has been depicted, and also in the opinion of independent auditors that is KPMG, a true and fair position has been depicted.
Also, for the corporate governance matters of the company, there is an internal audit that has been carried out by the company, and assurance statement has been made by the management for fair representation and has stated that all the information is according to the section 295A of the corporation act. Thus following the framework of faithful representation.
Cochlear limited follows the conceptual framework and its various standard. Relevancy can be seen in calculations as they are made according to the accounting standards. AS 16 has been followed by the company in the treatment of leases and shows the changes that have occurred. This makes the amount relevant. Incorporate governance matters, financial reporting, and entity concept has been followed and appropriate information as per the framework is provided. Also, the reporting period standard is followed in the annual report as well as the corporate governance report of the company. This shows that the company follows the conceptual framework statement in its annual report and corporate governance report.
Annual Report. 2020. Cochlear Limited. Retrieved from: https://www.cochlear.com/5a41c9a8-7972-4999-aca7-45822fab0867/2020+Annual+Report.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=ROOTWORKSPACE-5a41c9a8-7972-4999-aca7-45822fab0867-ng9ofuN
Cardio-Pito, T. & Silva Ferreira, J. 2018. ‘Fair Value ‘accounting as the normative Fisherian phase of accounting. Accounting History Review, 28(3), 149-179.
Conceptual framework. 2019. A conceptual framework for financial reporting. Retrieved from: https://www.aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-19.pdf
Corporate Governance Report. 2020. Cochlear Limited. Retrieved from: https://www.cochlear.com/57e42786-d846-4fe0-8099-fdf2e436ffe8/2020CorporateGovernanceStatement.pdf?MOD=AJPERES&CONVERT_TO=url&CACHEID=ROOTWORKSPACE-57e42786-d846-4fe0-8099-fdf2e436ffe8-nf-XJGP
Mickhail, G. 2019. The Accounting Measurement of MetaCapitalism. Journal of New Business Ideas & Trends, 17(3).
Prather-Kinsey, J., Boyar, S. & Hood, A.C. 2018. Implications for IFRS principles-based and US GAAP rules-based applications: Are accountants’ decisions affected by work location and core self-evaluations? Journal of International Accounting, Auditing and Taxation, 32, pp.61-69.
Srivastava, J. & Baag, P.K., 2019. Positive Accounting Theory, Agency Costs, And Accounting Regulation. pp 346.
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