Assessing the annual financial report of Abbott Laboratories

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The aim of the financial report is to give information about the company's financial performance and position that may be useful to a wide range of users for evaluating the performance of the company's management and for making economic decisions. These users can be owners of a company, customers, competitors, bankers, shareholders, government, lenders, employees, investment analyst, community representatives, general public, etc. The information provided should be relevant so as to influence the economic decisions; it should be reliable to work further according to the information. The information should be such that it can be compared with the similar information about company for some other point of time in order to identify the financial performance and position. The financial report should be prepared and presented such that it is easily understandable by all the users with different capabilities.

In this report, the annual financial report of "Abbott Laboratories" is discussed. Abbott was founded in 1888 by Chicago physician Dr. Wallace Abbott, Abbott has emerged as one of the world's most diverse health care companies. The company, which ranks No.80 on the FORTUNE 500, has more than 72,000 employees worldwide serving customers in more than 130 countries. Abbott's principal business is the discovery, development, manufacture and sale of a broad line of health care products. The company has thousands of patents to its credit and has a wide production and distribution throughout the world.


The financial report should have the basic primary qualitative characteristics i.e. relevance, reliability, comparability, understandability and materiality. The information provided in the financial report should also be true and fair. The concept of true and fair view is very important in financial reporting. It is the final test for financial statements and has a powerful effect on an accounting practice. This true and fair view only applies to the financial report which has complete information and relevant quantity and quality wise to the ultimate user. All these criteria are considered in reviewing the financial report of Abbott Laboratories.

Primary Qualitative Characteristics


The information provided in the financial statement should be relevant to the prediction of future events or relevant in helping confirm past events. If the information is not relevant then there is no point in producing the information. The relevant information has the ability to influence the economic decisions provided in time. Relevant information has predictive value since it helps users to evaluate or assess past, present or future events. The confirmatory value of the relevant information makes the users to confirm or correct their past estimations and evaluations. Predictive and confirmatory values make the information more relevant if these values are taken accurately and timely.

According to the financial report of Abbott Laboratories:

Revenue from licensed products is measured for the specified period earned.

Sales figures comparison of various products with previous period is relevant information as it can increase the information of stakeholders about profitable products and trends of change in the market of these products.

Company has provided assets classification of short term and long term which create relevance to stakeholders. Separate disclosures of goodwill enable users to evaluate assets useful for business and yield to business can be calculated.

Tax calculations given in the balance sheet highlights actual contribution to government, which allows government to estimate its income.

Related party disclosure indicates shareholders various different companies and person on whom company are basically depended.


The accounting information should be reliable and free from significant error or bias. The information is reliable if the user can rely on the information completely while representing the information. The information provided should be neutral from any influence to achieve a predetermined result.

According to the financial report of Abbott Laboratories:

Historical data is available and company is able to keep it in reliable form.

Inventories are recorded on first-in first-out basis which makes the value of stock at more realizable amount.

Company has provided estimated life of property.

Company has provided basis of recognizing foreign currency earnings and assets clearly and accurately.

Debtors' classification make statement reliable as users can find correct value of future cash inflows.

Debtors are verified by auditors which helps customers and suppliers to show their actual payment due to / from company.


Comparability helps the users to measure the changes with time on the performance of particular activity, example sales. Comparisons of the performance of the business with the performance of its competitor can be done. Financial performance and financial position can also be compared.

According to the financial report of Abbott Laboratories:

There is change in method of accounting of securities in Boston, which earlier was recorded at cost. Company has shown the revenue recognized in financial statement attributed by change of policy to make financial statement comparable.

Separate disclosure of Statement of Financial Accounting Standards (SFAS) 158 allowed shareholders to ascertain actual income from operations.

Product segmentation has enabled users to compare performance of company for different products.

Amortization of goodwill in financial statement can distort the actual picture of current year operations; by presenting the value of amortization during the years can allow users to compare operating profits before extra-ordinary items.


The accounting information should be simple to be understood by the person who needs it. It should be presented in an understandable way considering the capabilities of the user. If the information provide is relevant and reliable but the user cannot understand, it would be of no use to him.

According to the financial report of Abbott Laboratories:

Disclosure of Joint venture agreement and its effect on financial statement create understanding regarding effect of revenue recognized.

Company gave break - up of its debts which enhanced understandability of users regarding company and impact of change in portfolio of debts.

Company has provided broad vision of its future plans which give user understanding about company business and its future.


The materiality in the information makes the information relevant or irrelevant. The particular information has materiality, if it is lost from the financial report it would alter the complete decision of the user. Materiality is therefore a threshold quality. If the information is not regarded as material, it should not be included in the financial report since it will just make the user more confused for taking any decision.

According to the financial report of Abbott Laboratories:

Significant effect of litigation expenses which can have large impact on reserves and profit of the company. Company has disclosed the information at appropriate place, as amount is material for making decisions by stakeholder.

Cash and bank balance and its spit up in different banks give picture of dependencies on cash of the company and liquidity position.


Sometimes it becomes difficult to choose between relevance and reliability of the information then the most relevant information from the reliable information is given the preference. These conflicts may be due to the timeline but relevant information cannot be provided until it is completely reliable. In case of uncertainty, profits and assets cannot be overstated and losses and liabilities cannot be understated. Prudence if in this case is implemented then the balance between the two can be achieved.

According to the financial report of Abbott Laboratories:

Company has recorded most of assets on quoted price of similar assets or liability, but for rest they have recorded value of rest of assets on the basis of discounted cash flow method or Black Scholes model. However, company was able to estimate fair value of rest of assets on the basis of discounted value of asset at current price as this will also cover the obsolesce of the assets.

Company has not provided enough information regarding profit contribution from different countries, users of information was not able to find the profit of different countries and they can get better idea of future market and expected growth in company profit related to growth of company business in various countries.

Company has waited of investigation for recording environmental cost. All effects will be directly on one years' income only. Company could recognize cost on previous years on the basis of announcement of new rules. It reduces the usefulness of financial statement and there may be certain other costs which are yet to be booked in books of accounts.

In case of global organization, adoption of uniform accounting policies is difficult. In case of this situation, company can make reconciliation statement to make all statements in an order.

Companies having branches in different locations have various financial years. Company is required to make lot of reconciliations to put all statements in one financial year. Company can maintain quarterly statement of all countries despite not having statutory requirements, so that we can have comparable financial statements.

Information regarding its customer products and market share of them can make financial statement more useful as shareholders can have idea regarding company growth compare to its competitors as well.

There is huge change in interest rates and currency values in 2008, statement can have distorted picture in case of certain adverse combinations. Company financial statements are not very much useful in some cases as there is big impact of all these changes in the year. Presentation of figures after putting all these items fixed can create much better picture. It is little difficult exercise as it is difficult to account these changes as business cycle scenario or impact of extraordinary items outside the organization.

Disclosures are sometime useful to the competitors also who can misuse the information about the company and its costing as well as future products. Company can hide information by disclosing similar things in its AGM instead of publishing that in auditor statement.


Abbott Laboratories is a very old and successful company. It has taken care of all the issues coming its way. For giving the financial report of the company, accountants have taken care of all the criteria as relevance, reliability, comparability, understandability and materiality. Being in No.80 of FORTUNE 500 companies there are many shareholders, investors, analysts and government looking forward in investing in the company. Therefore, accountants have given relevant and reliable information. Different users are of financial statements like customers, shareholders, bankers and general public. Company is expected to provide information in a manner understandable to all of them. Company should provide statistical data for elite class and general information i.e. future plans and director's reports for general public. Company has not shown risk opportunity analysis as it is difficult in Pharmaceutical Company. But there is big risk in this nature of business. Small mistakes in the product can levy heavy penalty on the company and can make financial statements irrelevant for the future.


In conclusion, the financial report should have all the primary qualitative characteristics given by Accounting Standard Board. Abbott laboratories have given the financial statement clearly, efficiently, in a simple and straightforward manner as possible without loss of relevance or reliability and without unnecessarily increasing the length of the financial statements.

The company has given the revenue earned from all the licensed products which is measured for the specified period. Historical data of the company is available and is able to keep it in reliable form since new investors can know about the company. Product segmentation by the company has enabled users to compare performance of company for different products and the decision properly.

Overall, Abbott Laboratories is a growing company with strong background and upcoming investors. This years' financial review and the previous years have shown a positive growth in the company.