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Healthcare - Accounting and Finance Analysis

FINANCING OF COMPANIES OPERATIONS

We need to assess the capital structure, debt and total assets of both the companies to rightly compare and contrast the financings of Healthscope Ltd and HealthLinx Ltd. And to do so we have calculated some related ratios as follows:

 

RATIO ANALYSIS:

First we have to see the short term financings of operations for both of the companies to do so; we have calculated some liquidity ratios as follows:

 

HealthLinx Ltd.

 

Healthscope Ltd.

 

2009

2008

 

2009

2008

Current assets

277,964

1,066,166

 

153694

143750

Current liabilities

445,898

282,533

 

280601

238661

Current Ratio

0.62

3.77

 

0.55

0.60

 

Form the above table we have analyzed that short term financing position of HealthLinx Ltd has deteriorated comparing the last year of 2008. It had a strong liquidity position in 2008 but now in 2009 it is not even able to fulfill its current short term liabilities form its current assets. Whereas, Healthscope Ltd was already unable to meet its current liabilities in 2008 and its further deteriorated in 2009. Comparing both companies in both years HealthLinx Ltd has the better short term financing position (Cleverley,1996)1.

           

We also have to analyze the log-term financing positions of both of the companies for their respective operations. For this we have calculated some of the related financial ratios as follows:

Company

HealthLinx Ltd.

 

Healthscope Ltd.

Year

2009

2008

 

2009

2008

Total Liabilities

722256

334892

 

990278

879504

Total Assets

2726036

3574405

 

1895594

1727586

Debt Ratio

0.26

0.09

 

0.52

0.51

 

IN the above table we can see that HealthLinx Ltd has only 9% of the financing form the debt in its total assets in 2008 but it increases to 26 % in the next year in 2009, whereas, Healthscope Ltd has 51% in 2008 and 52% in 2009 in next year.  Even though debt ratio of of HealthLinx Ltd has increased comparing last year of 2008 to the 26%, it is far better than the Healthscope Ltd which has 52% of its total assets financed by the debt and HealthLinx Ltd is more solvent comparing the other and it has lesser amount of assets financed by the debt.

 

Another name of this ratio is debt to capital ratio. It is a companies’ financial leverage comparison which is calculated by dividing the company's debt (which includes all short-term & long-term obligations) by the Total capital (Which includes companies’ debt, common stock, minority interest, preferred stock, & net debt. We can also present it as follows:

 

HealthLinx Ltd.

 

Healthscope Ltd.

 

2009

2008

 

2009

2008

Total Liabilities (total debt)

722256

334892

 

990278

879504

Total Debt

722256

334892

 

990278

879504

Total Equity

2003780

3239513

 

905316

848082

Total Capital

2726036

3574405

 

1895594

1727586

Debt to total Capital Ratio

26.47 %

9.36 %

 

52.24 %

50.90 %

 

 

Next measure to compare the financing of the two companies is debt to equity ratio. This is a measure of the companies' financial leverage which is calculated by dividing their total liabilities by common stockholders' equity. It signifies that what proportion of equity & debt the company is using to finance their assets (Tamari, 1978)3.

 

HealthLinx Ltd.

 

Healthscope Ltd.

 

2009

2008

 

2009

2008

Debt

722256

334892

 

990278

879504

Total Equity

2003780

3239513

 

905316

848082

Debt to Equity Ratio

0.36

0.10

 

1.09

1.04

 

 

IN the above calculated debt to equity ratios of both of the companies for both years; we can see that HealthLinx Ltd has lesser amount of debt in 2008 which is 0.1034 then it increases to .3604 of equity. Comparing Healthscope Ltd with the given stats; it has 1.0938 and 1.04 in 2009 & 2008 respectively debt to equity ratios.  These are much high comparing the first company. The results show that Healthscope Ltd has more amount of debt comparing HealthLinx Ltd. Healthscope Ltd has debt which is almost equal to the common equity whereas HealthLinx has much lower debt.   

 

Another measure to compare the financings of both of the companies is Cash Flow to Debt Ratio. This is a coverage ratio which compares both companies’ operating cash flow to their total deb. This measure provides an indication of both the companies’ ability to cover the total debt with its 2008 & 2009 yearly cash flows from operations. The higher the percentage of the ratio better is the company's ability to bear its total debt (. Finkler & Ward, 1999) 2.

 

 

HealthLinx Ltd.

 

Healthscope Ltd.

 

2009

2008

 

2009

2008

Net cash Flow from operating activities

1138803

1556296

 

-150506

-124244

Total Debt

722256

334892

 

990278

879504

Cash Flow To Debt Ratio

1.57673

4.6471579

 

-0.15198

-0.14127

             
 

 

In the above table we can see that net operating cash flow form the HealthLInx Ltd are positive while form Healthscope Ltd shows the negative net cash flow from operating. Positive means cash inflow while negative means cash out flow. In the HealthLinx Ltd cash flow to debt ratio is 1.57 times in 2009 and 4.64 in the year 2008. Healthscope has negative 0.152 and 0.141 in year 2009 and 2008 respectively. Clearly HealthLinx Ltd has much higher ratio comparing Helthscope Ltd. So HealthLinx Ltd has better financing position comparing its other competitor. It has much smaller debt comparing its net cash form from operations.

 

INCOME TAX TREATMENTS

There are many differences in the tax treatment between the two companies. The first difference arises when we see the income statements of both of the companies. HealthLInx Ltd had a loss in the year 2009 and also for the previous year 2008 whereas; Healthscope Ltd has positive figures of profits for both of the years. HealthLinx had $2,295,945 & $1,799,007 losses for the year 2009 and 2008 respectively comparing Health scope had $61,640 & 55,842 positive figures of profits for the year 2008 and 2009 respectively (all the amounts given in the report are in Australian dollars). HealthLInx had tax benefit $355,498 for the year 2009 and 369,847 for the year 2008. Health scope had (24,211) & (22,108) Australian Dollars in thousands for 2009 & 2008. Both of the companies have audited reports by the best of the audit companies of the world and the auditor opinion is unqualified. Both of the companies’ reports are made according to the Australian Accounting Standards Board and also compile with the international accounting standards.

HealthLinx Ltd has AUD $21,863 deferred tax liability in 2009 and 45,994 same liability in 2008. The deferred tax liability is created in the year 2009 when it already is suffering from loss from a couple of years. If the company goes in the similar way of accruing losses, it may not be able to settle it deferred tax liability. Because of the position to the 2009 it is not certain that the company will generate enough profits to settle the deferred tax liability, is may not perfectly comply with AASB. On the other hand Healthscope Ltd has $ 42,889 & $36,565 in thousands in the respective years of 2009 & 2008 of deferred tax Asset which would be decreased gradually in the up coming years. While we look at the profits generated by the company in 2008 and 2009 the company does have the ability to expense the deferred tax assets in the upcoming future years (ASSB, 2010)4.

 

INTANGIBLE ASSETS AND COMPLICATIONS

Intangible assets can be defined as certain non-monetary assets which can’t be touched, seen, or measured physically. These intangible assets are created in the course of time and/or efforts and they are recognizable as a separate asset. There are two basic types of intangible assets legal intangibles; trade secrets like customer lists, patents, copyrights, goodwill, & trademarks, and competitive intangibles like; knowledge activities, leverage activities, collaboration activities, and structural activities.

Intangible assets are not that easy to create, maintain or impair as the tangible assets are. Management of accounts faces a lot of difficulties and complications for creating and impairing these assets. It also is a huge challenge for the auditors to verify the accounts maintained by the companies about intangible assets. Following are five of those complications which accounting managers face while work related to the intangible assets:

 

VALUATION PROBLEMS:

Intangible assets are considerably difficult to value comparing the tangible counterparts. Examples of intangible assets for a hospital include the use of the practice name, a trained workforce, its business reputation, patient loyalty and noncompetition agreements. It is very difficult to find out the value of patient loyalty. The difficulty in establishing the value of goodwill is also an issue which is largest assets of any physician practice.

 

INVESTMENT AND RETURN:

There is a skewed relationship between the investment and return of an intangible asset. Sometimes there are huge losses and other times it gives you some brilliant success. There are some very rare cases when the investment profits are equal to the predictions. Investment in intangible asset is often a huge risk.

 

HARDER TO MAINTAIN:

Intangible assets are much harder to maintain comparing the tangible assets. Copy right of any product can be stolen much easily comparing the land building, furniture and fixture types of tangibles.

 

FUTURE BENEFITS AND UNCERTAINTY:

There is a higher degree of uncertainty about the profits to be generated by the intangible assets in the future years. Future profits of a regular business are much easier to estimate than a new merger which contains the goodwill.

 

DIFFICULTY IN IMPAIRMENT

It is extremely difficult for accountants to judge the right impairment comparing the tangible assets’ depreciation. For impairment you got to test the intangible asset for the possible impairment in its value whereas we just deduct some fixed or predetermined amount of depreciation in the tangible asset’s book value (AASB, 2010)5.

 

INTANGIBLE ASSETS AND COMPLIANCE:

HealthLinx Ltd has following list of intangible assets with their particular amounts in year 2008 and 2009.

 

 

Consolidated

 

2009 

2008 

 

Goodwill

 

 

Cost 

1,887,220 

1,887,220 

Accumulated impairment losses 

Net carrying value

1,887,220 

1,887,220 

Intellectual property

 

 

Cost 

778,286 

778,286 

Accumulated amortization and impairment 

(703,410) 

(622,974) 

Net carrying value

74,876 

155,312 

Capitalized development costs

 

 

Cost 

425,184 

312,593 

Accumulated amortization and impairment 

(57,048) 

Net carrying value

368,136 

312,593 

Total Intangibles

2,330,232 

2,355,125 

 

HealthLinx Ltd has following list of intangible assets with their particular amounts in year 2008 and 2009.

 

2009 

2008 

 

$’000 

$’000 

Goodwill 

 

 

Hospital Operations – Australia 

343,690 

343,690 

Pathology Operations – Global 

430,256 

405,915 

 

773,946 

749,605 

Other intangibles 

 

 

Hospital Operations – Australia 

Pathology Operations – Global 

106,153 

98,154 

 

106,153 

98,154 

 

 

Both of the companies are audited by the best of the audited companies of the world by BDO and Delloite and it is stated in the audit reports that both of the companies fully comply with the AASB and IAS. What is written in the annual report of HealthLInx Ltd:

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/ associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortized. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold (HEalthLinx, 2007)7”.

All the statements in the above paragraph are according to the AASB and fully comply with AASB 138. In the similar way intellectual property and capitalized development cost also comply with AASB 138.

“Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their value can be measured reliably. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses on the same basis as intangible assets acquired separately.”

Healthscope also just fully comply with the AASB 138 with respect to intangible assets and AASB 3 with respect to the business combinations. The above paragraph is taken from the annual report of health scope and all the statements of the paragraph comply with AASB and International Accounting Standards (AASB) 6.

 

AMORTIZATION AND IMPAIRMENT OF INTANGIBLES

This part of the report describes the amortization and impairment of intangible assets for both of the health care companies. The total accumulated amortization and impairment for HealthLinx Ltd is AUD 703,410 for year 2009. HealthLinx has calculated the impairment loss of financial assets at amortized cost which is being calculated as the difference between financial assets’s carrying amount and the estimated present value of future cash flows which is being discounted at the original effective interest rate. Exactly in the similar way AASB 138 recommends to do.

About intellectual property HealthLinx writes in its report that it is recognised at cost of acquisition. Intellectual property has finite life. It is carried at cost minus any accumulated amortisation and any other impairment losses. It is amortised over useful life of it which is estimated about 10 years. ASSB 138 supports this argument.

Goodwill is always tested for impairment which has an infinite life at the reporting date and HealthLinx say about it something like as under:

HealthLinx assesses the goodwill for any indication of any individual asset impaired. When any indications for impairment exist a recoverable amount is estimated and impairment losses are measured & stated in the income statement. It happens when the carrying value of asset exceeds its recoverable amount of goodwill. The recoverable amount of asset is estimated higher than its fair value less its costs of selling and the value in use. HealthLinx Ltd has estimated the future cash flows which are discounted to their present value by using a before tax discount rate which shows the assessments of current market the present value of money and the risks are specific to the asset. ASSB confirms the entire statement paragraph given above.  

ASSB 138 states in one of its various points about amortization of intangible assets acquired separately that are recorded at cost less accumulated impairment and amortisation. IN Healthscope Ltd amortisation is charged on straight-line basis over the estimated useful lives of these assets and the estimated useful life and method of amortisation is reviewed at the year ending of every annual reporting period. All these changes of these accounting estimates are accounted for on probable basis. AASB supports the whole process given in this paragraph.

Healthscope Ltd Group reviews the carrying amounts of the group’s tangible and intangible assets to decide for any indication which these assets have suffered for an impairment loss at the end of the year over each reporting date (Healthscope Ltd, 2007)8 lt. If any of such indication picked then the recoverable amount of those asset is evaluated in order to decide the extent of any possible impairment loss. When the asset of Healthscope Ltd. doesn’t generate cash flows and are independent from other assets, the company evaluates the recoverable value of the each cash generate unit to which all the tangible or intangible asset belongs. AASB also confirms the process given in this paragraph. 

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