AstraZeneca

Table of Contents
Executive Summary.........................................................................................................................3
Subsidiaries & associated companies of AstraZeneca.....................................................................4
Regulatory Framework of AstraZeneca...........................................................................................4
IAS 36 – Impairment of Non-Current Assets..................................................................................5
Financial Instruments.......................................................................................................................6
Financial Risks and how should AstraZeneca manage them?.........................................................6
i) Liquidity Risk.......................................................................................................................6
ii) Credit Risk........................................................................................................................7
iii) Market risks.......................................................................................................................7
iv) Operational Risks..............................................................................................................7
Impact of financial risks to AstraZeneca’s financial position.........................................................8
IAS 39 - Impairment of Financial Instruments................................................................................9
Sensitivity to financial risks.............................................................................................................9
Hedge Accounting...........................................................................................................................9
IAS 19 – Employment Benefits.....................................................................................................10
Actuarial Assumptions in IAS 19..................................................................................................10
Impact of current and future economic benefits to the financial position of AstraZeneca............11
Are the assumptions realistic?.......................................................................................................11
IASB’s Conceptual Framework.....................................................................................................11
Usefulness of the disclosure to AstraZeneca.................................................................................12
Executive Summary

AstraZeneca is a multinational pharmaceutical company with its roots from a British-

Swedish background, and its headquarters in Cambridge England. It specializes in diseases such

as cardiovascular, infections, neuroscience, oncology and many more. AstraZeneca became

popular recently by being one of the first companies to develop the COVID-19 vaccine. This

company is listed in the London stock exchange and second listings in many other countries such

as US, India, and Sweden. (AstraZeneca, n.d.) In this report we will be looking at the regulatory

framework used by AstraZeneca and the methodologies used by the firm by incorporating the

accounting policies for the financial reporting. The types of financial risks AstraZeneca may

have to face and how to manage such risks effectively and the financial instruments of

AstraZeneca and the impairment of them. Many International Accounting Standards will be

discussed in relation to the financial reporting of AstraZeneca further in this report.

In the year 2004, AstraZeneca acquired the Cambridge Antibody Technology for 702

million pounds. KuDOS Pharmaceuticals was acquired by AstraZeneca in 2005 for 120 pounds

and entered into a anti-cancer collaboration agreement with Astex in the same year. In the year

2007, AstraZeneca acquired Arrow Therapeutics, with the intention of expanding their roots to

the anti-viral therapies for a total of US$150 million. The expansion of AstraZeneca into flu

vaccines and anti-viral treatment for infants commenced with the acquisition of the US company

Medlmmune for US$15.2 billion.

Moving further AstraZeneca widened its grip in the medical world with the takeover of the

Novexel Corp an antibiotics discovery company in 2010. In the consecutive year Guangdong

BeiKang Pharmaceutical Company which specializes in generics. In 2012 a joint venture was

formed with Amgen to collaborate on treatments for inflammatory diseases. In the same year

Andrea Biosciences, which is another biotechnology firm was acquired for $1.26 billion. This

was followed by a joint venture agreement with the Amylin Pharmaceuticals to be converted to a

diabetes joint venture. (AstraZeneca, n.d.)

Regulatory Framework of AstraZeneca

This is a set of rules and regulations set for accounting processes of business for which all

companies should abide by. At the global level the regulatory framework is established by the

International Accounting Standards Board and all UK listed companies should abide by. The aim

of a regulatory framework for financial reporting is for the financial statements to give a true and
fair value of the financial performance and position of the business. (Chapter 10, n.d.)

AstraZeneca transitioned to the IFRS accounting system in 2003 and is one of the first copa ies

to do so.

IAS 36 – Impairment of Non-Current Assets.

The IFRS foundation sets the International Accounting Standard 36, to state that no

asset’s value should be brought forward that is higher that the amount that can be gained by

using the asset or selling it. Incases where the brought forward value is higher than the

recoverable value of the asset it is known as the asset is impaired. And the difference is identified

as loss of impairment. IAS 36 applies for all cash generating and non-cash generating assets

except for inventories, deferred tax assets, employee benefits and a few more.

As AstraZeneca is engaged in a lot of research-based activities they can be identified as

intangible assets with an indefinite number of useful lives needs to be assessed for their

recoverable amount each year. But in some cases, the research and the innovation will lead to no

value and will not create any future cashflows and in that case the value in use will not be able to

determine by AstraZeneca.

Recording of the impairment loss happens where the loss is disclosed in the income statement

under total expenses and reduced from the carrying amount in the statement of financial position

to show the asset at its recoverable value. (IAS 36 Impairment of Assets, 2021)

.
Financial Instruments

A financial instrument is known as a contract that entails to a financial asset of one firm and

a liability or capital investment in the other firm. The International Accounting Standard 32

represents the presentation of financial instruments with the direct objective of setting policies to

present financial instruments in-terms of liabilities and capital and off-set financial assets and

liabilities. (ACCA, n.d.) Therefore, this clearly helps us to understand that the financial

instruments shown in the statement of financial position are the assets which include current and

long-term assets, liabilities both short-term and long-term and equity.

Financial Risks and how should AstraZeneca manage them?

This is the possibility that a firm face with losing its funds or capital invested in a new project

or business venture. There are different types of financial risks such as liquidity risk, credit risk,

market risk and even operational risk. (HAYES, 2021). AstraZeneca indifferent to all other firms

also face the same types of financial risks. In order to identify how AstraZeneca manage these

risks we will look at each risk in detail.

i) Liquidity Risk

This is where the risk lies with the firm not having adequate current assets or liquid

assets to pay off the short-term debts, this risk also surfaces when AstraZeneca does not have

enough cash to run the day-to-day operations. In order to manage this risk AstraZeneca will

always try to keep its current ratio above or equals to one and the acid test ratio at least close to

one or above one. This is done by maintaining enough cash/bank balance to cover all current
liabilities in the business at all times. This can be executed by having long trade payable cycles

and short trade receivable cycles. (Liquidity Risk, n.d.)

ii) Credit Risk

This is the risk resulting from customers continuously defaulting on their payments

and becoming bad debts all the time. This will result in AstraZeneca becoming illiquid at first

and then insolvent which is when the business sis in the credit risk. In order to avoid such ill-fate

AstraZeneca can always make sure that a sale occurs after a down payments, or a partial

payment is made by the customer or by providing discounts and various other offers to

encourage prompt payment from customers. (Business Credit Risk Management, n.d.)

iii) Market risks

These are the risks that affect all the companies in a specific industry or even all the

industries in the world. Mostly due to uncontrollable factors by firms. Yet the pharmaceutical

industry is one of the industries that is least affected by market risks as they provide a necessity

that cannot be cut down by any individual or country at any time. Market risks include, economic

recessions, booms, world wars, natural disasters, exchange rate fluctuations, government

policies. They are also known as systematic risks. (HAYES, Market Risk, 2022)

iv) Operational Risks

These are caused by inside failures such as defects and flaws in the processes and

procedures of AstraZeneca. Such as failure in control processes, systems, policies, governance

structure, loss of employee morale and many more. These may have a greater impact on

AstraZeneca. Where there could be massive scale frauds, thefts which could lead to business
collapse like the Barings Bank, even non-compliance to health standards could lead them to lose

license in experiments and research. Such massive scale operational disruptions will result in

massive losses. In order to manage and avoid such misfortune AstraZeneca should have a strong

and structured governance mechanism and control process in place. (Morgan, n.d.)

Impact of financial risks to AstraZeneca’s financial position

We will be discussing the financial risks and their impact on the financial position

independently. The liquidity risks will lead to a negative net cashflow due to negative balance

from the operating cashflows as the current assets doesn’t suffice to pay off the short-term debts

of the firm.

Moving onto credit risks which will result the financial statement to have a high value of

current assets which will show a higher financial position yet a longer trade receivables turnover

period with longer working capital cycle.

Market risks are more hard to manage as they are mostly one off and will be unforeseen in

particular times. For instance, COVID-19 a risk that affected most companies, but AstraZeneca

benefited just like the other pharmaceutical companies. And their impact will commonly increase

the expenses of the business and reduce profitability in the future.

Operational risks will again result in a similar outcome for the future profitability of a

business. Yet again the measure taken to mitigate operational risks prior to occurrence will also

increase the expenses of the business and reduce the profitability.

The International Accounting Standard 39 represents the Recognition and Measurement of

financial instruments of a business. This is categorized into various segments based on the

instrument each company has. Under this standard impairment is only recognized only with solid

evidence that one or more incidents occurred after the initial recognition of the financial

instrument this is assessed in every financial year. The loss recorded will be the difference

between instrument’s carrying value and the present value.

Sensitivity to financial risks

financial risks. Therefore, the sensitivity measures the weightage of the reaction. If the business

is highly sensitive to financial risks, then they need aggressive and highly efficient risk

mitigation actions and vice versa.

Hedge Accounting

This is an accounting method where the transactions are recorded by adjusting it to the fair

value of a security. Hedge accounting is very beneficial in reducing the volatility created in due

to the continuous alterations in the market. Where this process is done by combining the hedge

and the financial instrument as one entry to set-off the movements. AstraZeneca uses hedge

accounting in various arenas where as they operate around the world and cater to customers

worldwide they may hedge the currency with their suppliers and customers due to the continuous
volatility in the exchange rate markets. This will allow AstraZeneca to not have constant

volatility in cost of goods purchased or even sales which would result in multiple revisions in the

income statement and financial position of the business.

IAS 19 – Employment Benefits

This standard specifically speaks about the accounting for the employee benefits after

recruitment which are more short-term benefits and post- employment benefits such as pension

funds and retirement benefits, and even termination benefits which are more long -term benefits.

The standard states that the cost incurred by the business to provide the benefit needs to be

recognized in the year which the employee earns the benefit.

Employee benefits recognized under this standard are wages& salaries, absence pay, bonuses,

life or medical insurance, non-monetary benefits such as housing, cars, electronic devices, staff

discounts, retirement benefits and even sabbatical leave and other compensation programmes.

Actuarial Assumptions in IAS 19

Most financial assumptions are based on the market expectations and the competitor

employee benefit strategies for each financial period. Mortality assumptions are made post-

employment to calculate the payable pension funds cost. The wages and salaries are assumed to

reflect future salary increments and future changes in government benefits or taxes. This is not

practical. The medical cost assumptions also incorporate any future hikes in medical equipment

or medicinal requirements.
Impact of current and future economic benefits to the financial position
of AstraZeneca

This requires the characteristics and in-depth details of the benefit plans to be disclosed in

the financial statements. And how the future benefits affect the timing and uncertainty of the

future cashflows. The service costs, interest expenses and the future employee reimbursements

will be recognized in the income statement. (IAS 19 — Employee Benefits (2011), n.d.)

Termination benefits and future pension and other funds are considered as a liability as the

employee has provided the service and the business now requires paying off the benefits.

Are the assumptions realistic?

Not all the assumptions are realistic where a business cannot approximate a worker’s

mortality rate and yet alone the mortality rates of all the previous workers to calculate the post-

employment benefits. Also, this will result in heavy expenditure for businesses which will

generate no value or income to the business at all. Therefore, not all assumptions are realistic and

practical for AstraZeneca to adopt.

IASB’s Conceptual Framework

Board with making changes to assets, liabilities and providing revised guidance in measuring and

disclosing them. The IASB helps the IFRS in setting concepts and standards after its revision in

2004. The IFRS states very clearly that the conceptual framework that the concepts are

consistent with the transactions and the core principles of accounting without creating any

conflicts in any stage of the accounting process which includes identifying, gathering, reporting,
analyzing and preparations of the financial statements using the financial information for the

relevant period.

The key importance of the conceptual framework lies where in helps the stakeholders of the

business specially the shareholders to interpret and understand the financial transactions of the

accounting period. This is crucial as AstraZeneca is not traded only in one stock market rather

almost three separate stock markets. Within the revision of the conceptual framework the

following was revised too. The goal achieved by uniform and consistent financial reporting

around the world, the characteristics of useful information, the details of the reporting entity and

its limitations. The definition of an asset, liability, equity and income and expense and how they

are measured and disclosed. The process of including the assets, liabilities, equity, income and

expense in the financial statements and when they need not be disclosed. (Conceptual

Framework for Financial Reporting, n.d.)

Usefulness of the disclosure to AstraZeneca

With the disclosure of the financial statements of the comp any in a frequent manner,

apart from this being a mandatory requirement helps AstraZeneca to gain the trust of its investors

and even attract more potential investors to increase the capital base. By also disclosing the

research and developments, innovations that they are currently engaged in will help them being a

pharmaceutical company to gain more fame and the attention of the world and be a socially

recognized company this will also help to attract skilled pool of employees and even gain

customers from their competitors. Disclosure of financial information will assist AstraZeneca

when applying for a bank loan or a government and specially in times of developing a vaccine

for a global pandemi9c which help them to be in a strong foot among the other pharmaceutical
giants. This will allow them to gain a higher market share and also thrive as a company even

during harsh times like a global pandemic allowing more investors to have faith in the shares of

AstraZeneca which will boost their share price.