Unit Code

Cochlear Limited Integrated Reporting

Unit Code

Industry Analysis

Cochlear specialises in the design, production and supply of hearing implants. The company’s product range includes the Nucleus system, Aqua+, Acoustic implant solutions, true wireless and the Baha implant. The company has been named as the most innovative company in Australia for two consecutive years, 2002 and 2003. Its range of products are sold across Asia, Europe and the Americas’. Cochlear has two production plants; one in Australia and the other in Sweden. It employs over 300 specialists to help in the design and development of its products. The company commits a sizeable amount of cash to research and development. In 2015, Cochlear invested close to 14 per cent of total revenue ($128 million) to R&D.

The company participates in the Medical Technologies Industry. The industry is characterised by many small- and medium-sized businesses. These companies deal with the development and manufacture of devices or technologies that can be used by people to diagnose, prevent, monitor or treat diseases, injuries and other psychological problems. This indicates that the industry is still in its early stages of development and is, therefore, a growing industry. The industry requires huge capital investments and sophisticated machinery, such as magnetic resonance imaging, x-ray machines, and other diagnostic imaging equipment.

In Australia, the industry employs over 12,500 people. The key competitors in the industry include Abbott Australasia, ResMed Holdings, and Baxter Healthcare. Competition in the industry is low due to high barriers of entry, particularly the initial cost given the complex equipment required. The switching costs are also high. That’s why the industry is characterised by many small firms that employ around 20 individuals and make a yearly turnover of less than AUD 2 million.

Cochlear has a news centre portal where it reports on various events from time to time through press releases. The most recent event that the company reported on in the launch of the next generation wireless mini microphones on 23 March 2016.

Accounting Policy Changes

Cochlear made some changes to the accounting policies used in preparing the reports. The changes were aimed at making it easy to understand the financial statements and the notes. The changes include changing the location and phrases used to define some accounting policies contained by the notes. The company also reorganised particular sections and removed inconsequential disclosures. However, the company took into consideration the nature and amount of each item while applying materiality to financial statement disclosures. Besides that there were no changes to accounting standards that affected Cochlear in the 2015 reporting year.

PPE Carrying Amount

The carrying amount represents the book value of an asset that is arrived at after subtracting the accumulated depreciation from the asset cost. The table below indicates the carrying amount for property, plant and equipment for Cochlear in 2015;

Accumulated Depreciation

Carrying Amount

Leasehold improvements

32,325,000

20,941,000

11,384,000

Plant and equipment

193,703,000

112,951,000

PPE Accounting Policy

Cochlear measures the value of PPE at cost of the asset, minus accumulated depreciation and impairment losses. The cost of the asset constitutes the consideration paid for the asset plus incidental costs attached directly to the acquisition.

“The value of self-constructed assets includes the cost of material and direct labour and any other costs directly attributable to bringing the asset to a working condition for its intended use”.

“Subsequent costs in relation to replacing a part of property, plant and equipment are capitalised in the carrying amount of the item if it is likely that future economic benefits will flow to Cochlear and its cost can be measured reliably. All other costs are recognised in the income statement as incurred”.

As relates to leased assets, Cochlear pays for the assets “under operating leases which are expensed on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Minimum lease payments include fixed rate increases”. “Depreciation for PPE is computed to expense the cost of items of PPE less their estimated residual values on a straight-line basis over their estimated useful lives. The estimated useful lives in the current and comparative years are as follows: leasehold improvements between one to 15 years and plant and equipment three to 14 years. Depreciation is recognised in the income statement from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. The methods and rates for depreciation together with the assets useful lives and residual values are reviewed at each balance sheet date. When changes are made, adjustments are reflected prospectively in current and future financial years only”.

References

Anthony, R.N. and Breitner, L.K. (2010). Essentials of Accounting: International, 10th Ed. Pearson.

Cochlear (2016). Annual Reports 2015, retrieved 23 May 2016, <http://www. cochlear.com/home/investors/reports/Documents/2015/CochlearAnnualReport2015.pdf>.