COMPLETE ANALYSIS OF ANNUAL REPORTS OF VARIOUS COMPANIES IN THE TELECOM SECTOR Prepared By: Group No. 5, Section A
a) Assessing the quantum and quality of disclosures1. Extent of overall disclosures of Selected Companies:Different disclosures in the financial statements are as follows:Vodafone: Mandatory Voluntary Basis of preparation Yes No Accounting for subsidiaries Yes No Acquisition of interests from non-controlling shareholders Yes No Interests in joint ventures No Yes Investments in associates Yes No Intangible assets Yes No Licence and spectrum fees No Yes Computer software No Yes Property, plant and equipment Yes No Impairment of assets Yes No Revenue Yes No Inventory Yes No Leasing Yes No Foreign currencies Yes No Commissions No Yes Post employment benefits Yes No Taxation Yes No Provisions Yes No Share-based payments Yes NoTelstra: Mandatory Voluntary Basis of preparation of the financial report Yes No Clarification of terminology used in our income statement No Yes Rounding No Yes Changes in accounting policies Yes No Foreign currency translation Yes No Cash and cash equivalents Yes No Trade and other receivables Yes No Inventories Yes No Construction contracts No Yes Investments Yes No Impairment Yes No Property, plant and equipment Yes No Leased plant and equipment Yes No Intangible assets Yes No Trade and other payables Yes No
Provisions No Yes Borrowings Yes No Share capital Yes No Revenue recognition Yes No Taxation Yes No Earnings per share Yes No Post-employment benefits Yes No Employee Share Plans Yes No Derivative financial instruments No Yes Contingent Liabilities No YesVerizon: Mandatory Voluntary Basis of Presentation Yes No Earnings Per Common Share Yes No Cash and Cash Equivalents Yes No Marketable Securities Yes No Maintenance and Repairs No Yes Advertising Costs No Yes Inventories Yes No Plant and Depreciation Yes No Computer Software Costs No Yes Income Taxes Yes No Foreign Currency Translation Yes No Employee Benefit Plans Yes No Derivative Instruments No Yes Stock-Based Compensation Yes NoIdea: Mandatory Voluntary Basis of Preparation of Financial Statements Yes No Fixed Assets Yes No Expenditure during pre-operative period of license No Yes Depreciation and Amortisation Yes No Inventories Yes No Foreign currency transactions, forward contracts & other Yes No derivatives Taxation Yes No Retirement Benefits Yes No Revenue Recognition and Receivables Yes No Investments Yes No Borrowing Cost No Yes License Fees-Revenue Share No Yes Use of Estimate No Yes Leases Yes No
Earnings Per Share Yes No Impairment of Assets Yes No Provisions & Contingent Liability No Yes Issue Expenditure No Yes Employee Stock Option Yes No1.1 Identify such disclosures - voluntary and mandatory- that are done only by the one ofthe four companies?Vodafone:Unique mandatory disclosures: Accounting for subsidiaries Acquisition of interests from non-controlling shareholdersUnique voluntary disclosure: Interests in joint venturesTelstra:Unique mandatory disclosures: Changes in accounting policiesUnique voluntary disclosures: Clarification of terminology used in our income statement Rounding Construction contracts Derivative financial instruments Contingent LiabilitiesVerizon:Unique mandatory disclosures: Marketable SecuritiesUnique voluntary disclosures: Borrowing Cost Advertising CostsIdea:Unique voluntary disclosures: Maintenance and Repairs Issue Expenditure1.2 Are these omitted disclosures important to the decision making process of any of theconstituencies interested in the four companies?The voluntary disclosures and some mandatory disclosures like Accounting for subsidiaries andchanges in accounting policies may not be applicable but some mandatory disclosures likeMarketable Securities is important to better analyse the company’s financial statements.
2. Compare the quality of various disclosures2.1 Revenue Recognition:VODAFONEDetermining the fair value of each deliverable can require complex estimates due to the nature ofthe goods and services provided. The Group generally determines the fair value of individualelements based on prices at which the deliverable is regularly sold on a standalone basis afterconsidering volume discounts where appropriate.TELSTRA Rendering of services-straight line basis over the period of service provided, unless another method better represents the stage of completion. Sale of goods-This revenue is recorded on delivery of the goods sold. Rent of network facilities-The revenue from providing access to the network is recorded on an accrual basis over the rental period. Construction contracts-Telstra records construction revenue and profit on a percentage of contract completion bases. The percentage of completion is calculated based on estimated costs to complete the contract. Advertising and directory services-Classified advertisements and display advertisements are published on a daily, weekly and monthly basis for which revenues are recognised at the time the advertisement is published. All of our Yellow Pages and White Pages directory print revenues are recognised on delivery of the published directories to customers’ premises. Revenue from online directories is recognised over the life of service agreements, which is on average one year. Voice directory revenues are recognised at the time of providing the service to customers. Royalties-Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreements. Interest revenue-Telstra records interest revenue on an accruals basis. For financial assets, interest revenue is determined by the effective yield on the instrument. Revenue arrangements with multiple deliverables- The Company allocates the consideration from the revenue arrangement to its separate units based on the relative selling prices of each unit. If neither vendor specific objective evidence nor third party evidence exists for the selling price, then the item is measured based on the best estimate of the selling price of that unit. Government grants- Grants from the government are recognised at their fair value where there is a reasonable assurance. Government grants relating to costs are deferred and recognised in the profit or loss over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are included in noncurrent liabilities as deferred income and are credited to profit or loss on a straight line basis over the expected lives of the related assets. The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan is measured at amortised cost.
VERIZONOn January 1, 2011, Verizon prospectively adopted the accounting standard updates regardingrevenue recognition for multiple deliverable arrangements, and arrangements that include softwareelements. These updates require a vendor to allocate revenue in an arrangement using its bestestimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence(TPE) of selling price exists. The residual method of revenue allocation is no longer permissible.These accounting standard updates do not change our units of accounting for bundledarrangements, nor do they materially change how the company allocates arrangement considerationto our various products and services. Accordingly, the adoption of these standard updates did nothave a significant impact on our consolidated financial statements. Additionally, the company doesnot currently foresee any changes to our products, services or pricing practices that will have asignificant effect on our consolidated financial statements in periods after the initial adoption,although this could change.IDEARevenue on account of telephony services (mobile & long distance) and sale of handsets and relatedaccessories are recognized net of rebates, discount, service tax, etc. on rendering of services andsupply of goods respectively. Recharge fees on recharge vouchers is recognized as revenue as andwhen the recharge voucher is activated by the subscriber. Service Income from Passiveinfrastructure is recognized on accrual basis (net of reimbursements) as per the contractual terms onstraight line method over the contract period. Unbilled receivables, represent revenues recognizedfrom the bill cycle date to the end of each month. These are billed in subsequent periods as per theagreed terms. Debts (net of security deposits outstanding there against) due from subscribers, whichremain unpaid for more than 90 days from the date of bill and/or other debts which are otherwiseconsidered doubtful, are provided for. Provision for doubtful debts on account of interconnect usagecharges (IUC), roaming charges and passive infrastructure sharing from other telecom operators ismade for dues outstanding more than 180 days from the date of billing other than cases when anamount is payable to that operator or in specific case when management is of the view that theamount is recoverable.2.1.1 What are the revenue recognition policies of four companies? Are these policies unusual inanyways?Revenue recognition policies of four companies are different for different items. No these policiesare not unusual in anyways but few companies has not disclosed anything eg. Like VODAFONE andVERIZON have not given any information.2.1.2 Whose policy is easy to understand and is consistent with the way company is carrying outits business? Are these policies justified in terms of their risks and advantages? Do these policiesmake the reported revenue numbers more conservative or less conservative?TELSTRA’s policy is easy to understand and is consistent with the way company is carrying itsbusiness. Yes these policies are justified in terms of their risks and advantages. It doesn’t seem to beaggressive or at the same the same time they are not more conservative or less conservative.
2.1.3. Has it provided any justification for the same?VERIZON company changed its policy in the recent year (On January 1, 2011) it provided justificationprovided is (the company prospectively adopted the accounting standard updates regarding revenuerecognition for multiple deliverable arrangements, and arrangements that include softwareelements. These updates require a vendor to allocate revenue in an arrangement using its bestestimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence(TPE) of selling price exists. The residual method of revenue allocation is no longer permissible.These accounting standard updates do not change our units of accounting for bundledarrangements, nor do they materially change how the company allocate arrangement considerationto our various products and services. Accordingly, the adoption of these standard updates did nothave a significant impact on our consolidated financial statements.2.2. Depreciation policy:2.2.1. How four companies are depreciating there assets? Are the policies of two companiesconsistent with the way they carry out their businesses?IDEADepreciation on fixed assets is provided on straight-line method (except stated otherwise) on pro-rata basis on their estimated useful economic lives. Intangible Assets are amortised on straight-linemethod as under:-i) Cost of Rights, Licences including the fees paid on fixed basis prior to revenue share regime andSpectrum fee is amortised on straight-line method on commencement of operations over thevalidity period.ii) Software, which is not an integral part of hardware, is treated as an intangible asset and isamortized over its useful economic life as estimated by the management between 3 to 5 years.iii) Bandwidth / Fibre taken on Indefeasible Right of Use (IRU) is amortised over the agreementperiod. Assets costing up to 5,000/- are depreciated fully in the month of purchase.VODAFONELand and buildings held for use are stated in the statement of financial position at their cost, less anysubsequent accumulated depreciation and subsequent accumulated impairment losses.Equipment, fixtures and fittings are stated at cost less accumulated depreciation and anyaccumulated impairment losses.Assets in the course of construction are carried at cost, less any recognised impairment loss.Depreciation of these assets commences when the assets are ready for their intended use.The cost of property, plant and equipment includes directly attributable incremental costs incurredin their acquisition and installation.Depreciation is charged so as to write off the cost of assets, other than land and properties underconstruction, using the straight-line method, over their estimated useful lives, as follows:
Freehold buildings 25 – 50 yearsLeasehold premises the term of the leaseEquipment, fixtures and fittings:Network infrastructure 3 – 25 yearsOther 3 – 10 yearsDepreciation is not provided on freehold land.Assets held under finance leases are depreciated over their expected useful lives on the same basisas owned assets or, where shorter, the term of the relevant lease.The gain or loss arising on the disposal or retirement of an item of property, plant and equipment isdetermined as the difference between the sale proceeds and the carrying amount of the asset and isrecognized in the income statement.TELSTRAItems of property, plant and equipment, including buildings and leasehold property, but excludingfreehold land, are depreciated on a straight line basis to the income statement over their estimatedservice lives. The company start depreciating assets when they are installed and ready for useVERIZONVerizon also follows only straight line depreciation and left for very few exceptions for items ofplant, property and equipment.2.2.2. Has anyone of the companies changed its depreciation policy in the recent years? Has itprovided any justification for the same?As far from the annual reports there is no evidence that any of the company has changed themethods of depreciation.2.2.3. Are there policies conservative or aggressive or moderate? No company seems to be very aggressive, more or less conservative. All the companies have onlyfollowed straight line depreciation method only except for few exceptions. They are moderate.
2.3. Fixed Asset Accounting:2.3.1. Which model Cost vs. Revaluation companies are following for their various asset classes? None of the four companies have mentioned anything in their financial statements about revaluation of fixed assets. Telstra have mentioned that they have suffered some losses due to revaluation of non fixed assets like equity, derivatives, transactions either not designated or de-designated from fair value hedge relationships; on the other hand they have non cash revaluation gains which are primarily due to a strengthening of the Australian dollar.2.3.2. If a company is following revaluation model for any of its asset classes, is it keeping thevalue of its assets updated?Telstra is updating their non fixed assets and non cash revaluation gains every year.2.3.3. Are the reasons for revaluation/impairment of company’s assets adequately disclosed?Yes all the four companies have disclosed the adequate reasons for their impairment andrevaluation (if any).2.3.4. Is the basis used for arriving at revaluation estimates disclosed?Telstra have clearly mentioned the basis of how it arrived at the revaluation estimates like non cashrevaluation gains which are primarily due to a strengthening of the Australian dollar, some lossesdue to revaluation of non fixed assets like equity, derivatives, transactions either not designated orde-designated from fair value hedge relationships.2.3.5. Is the company depending on external valuation expert or in-house valuation expertise?All the companies are doing their in-house valuation2.3.6. Is there any Indian or global company belonging to the firm industry which has donerevaluation of its plant and equipment during recent year?No, none of these companies have done any kind of revaluation of its plant and equipment duringrecent year2.3.7. Has anyone of the companies changed its policy in the recent years? Has it provided anyjustification for the same?There are few changes that have been by all the companies except IDEA cellular in current financialyear. Verizon: Adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. No justification provided Vodafone: On 1 April 2011 the Group adopted new accounting policies to comply with: “Improvements to IFRS” issued in May 2010. Amendments to IAS 24 “State-controlled entities and the definition of a related party”.
Amendments to IFRIC 14 “Prepayments on a minimum funding requirement”. IFRIC 19 “Extinguishing financial liabilities with equity instruments”. No justification required as they have been amended as per the changes in the existing rules of different authority that being followed by the company. Telstra: There are few amendments made by Telstra like AASB 136: “Impairment of Assets” AASB 107: “Statement of Cash Flows” AASB 1054: “Australian Additional Disclosures” Proper justification has been provided for the amendments.2.4 Inventory Valuation Policy:2.4.1. What Inventory valuation policies four companies have?All four companies determine the inventory value as the lower of cost and market value. The cost isevaluated as:Company Inventory Valuation PolicyVodafone weighted average costTelstra Inventory: weighted average cost Directories: FIFOVerizon not clearly mentioned, states either of weighted average cost or FIFOIdea weighted average cost2.4.2. Are these policies consistent in all the recent years?Their policies are consistent and there has been no change mentioned in the financial report.2.4.3. Are these policies consistent with the way company carries out its business?Majority of the companies using mainly weighted average cost or FIFO at times, as the means ofinventory evaluation is consistent with the accounting policies of the respective countries and theway they perform their business.2.4.4. Do these policies make the reported numbers more conservative or less conservative?All the four companies use weighted average as the means of evaluation of majority of itsinventories is neither more or less conservative means of reporting. Only, Telstra’s use of FIFO increation of directories can be stated as a more conservative method of reporting.2.4.5. Has anyone of the companies changed its policy in the recent years? Has it provided anyjustification for the same?None of the companies have changed any policy in any recent year.
2.5. Deferred Tax:2.5.1. Identify the drivers of differed tax assets and liabilities of the four countries?Company Deferred Tax Assets Deferred Tax LiabilityVodafone Tax losses Accelerated tax depreciation Deferred tax on overseas earnings Other short-term temporary differencesTelstra Provision for employee entitlements Property, plant and equipment Revenue received in advance Intangible assets Provision for workers compensation Borrowings and derivative financial Allowance for doubtful debts instruments Defined benefit liability/asset Trade and other payablesVerizon Employee benefits Former MCI intercompany accounts Tax loss and credit carry forwards receivable basis difference Uncollectible accounts receivable Depreciation Valuation allowances Leasing activity Wireless joint venture including wireless licensesIdea Provision for Doubtful Debts Depreciation & Amortisation Expenses allowable on payment basis Brought Forward Losses2.5.2. Has company estimated to which extent the deferred tax asset is recoverable?None of the companies shows any estimates or calculations on the recovery of the deferred taxassets.2.5.3. Which company’s deferred tax footnote is more informative and comprehensive?Whereas all companies give a fairly good idea about deferred taxes, it is only Vodafone that has themost non-comprehensive explanation for deferred taxes. Out of the others, it is M/s Telstra yetagain that most comprehensively indicates the various components encapsulating the deferredtaxes.b) Assessing the Fundamentals: 1. Vertical common size statement analysis over latest two years:Vodafone: Balance Sheet 2011 2010 (£m) (£m) Cash and Cash Equiv 6,252 4,423 Account receivable 9,259 8,784 Inventories 537 433 Other current Assets 955 579 Total Current Assets 17,003 14219
Net Property, Plant, Equipment 20,181 20,642 Other Long Term Assets 1,34,217 142766 Total Assets 1,51,220 1,56,985 Total Current Liabilities 27,075 28,616 Long Term Debt 28,375 28,632 Other Long Term Liabilities 8,209 8,927 Preferred Share N/A N/A Total Equity Capital 87,561 90,810 Total Liability and Equity 1,51,220 1,56,985 Income Statement 2011 2010 (£m) (£m) Net Revenue 45,884 44,472 Less: Cost of Sales (40,288) (34,992) Other income and (Expenses) 4331 706 interest expense (429) (1512) Earnings Before Income Tax 9,498 8674 Less: Income Taxes (1,628) (56) Adjustments NA NA Net Profit 7,870 8,618Telstra: Balance Sheet of Telstra 2011 2010 ($m) ($m) Current Assets Cash and Cash Equiv 2630 1936 Account receivable Inventories Other current Assets 4823 5249 Total Current Assets 7453 7185 Net Property, Plant, Equipment 21790 22894 Other Long Term Assets 8670 9203 Total Assets 37913 39282 Total Current Liabilities 8538 8682 Long Term Debt 12178 12370 Other Long Term Liabilities 4905 5222 Preferred Share 12074 12696 Total Equity Capital 12292 13008 Total Liability and Equity 37913 39282
Income Statement 2011 2010 ($m) ($m) Net Revenue 25304 25029 Less: Cost of Sales Other Expenses 5047 5117 Interest Expense Total Expense 15154 14184 Earnings Before Income Tax 4557 5538 Less: Income Taxes 1307 1598 Adjustments N/A N/A Net Profit 3250 3940Verizon: Balance Sheet 2011 2010 ($m) ($m) Cash, Cash Equiv, Market sec 13954 7213 Accounts Receivables 11776 11781 Inventories 940 1131 Other Current Asset 4269 2223 Total Current Asset 30939 22348 Net Property, Plant and Equipment 88434 87711 Other Long-term Asset 111088 109946 TOTAL ASSETS 230461 220005 Total Current Liabilities 30761 30597 Long Tern Debt 50303 45252 Other Long Term Liability 63489 57244 Preferred Share N/A N/A Total Equity Capital 85908 86912 Total Liability and Equity 230461 220005Income Statement 2011 2010 ($m) ($m)Net Sales 110875 106565Less: Cost of Sales (97995) (91920)Other Income and (Expenses) 430 562Interest Expenses (2827) (2523)Earnings before Tax 10483 12684Less: Income Tax (285) (2467)Net Earnings after Tax 10198 10217
Idea:Balance Sheet 2012 2011 (Rs mn) (Rs mn)Current AssetsCash and Cash Equiv 1341 4515Account receivable 8075 5347Inventories 529 522Other current Assets 17.68 8.08Total Current Assets 23883 29470Total Fixed Assets 285957 256810Total Assets 309840 286280Total Current Liabilities 82937 80807Long Term Debt 86121 75857Other Long Term Liabilities 11677 7065Total Liabilities 180494 162973Preferred Share N/A N/ATotal Equity Capital 129345 123307Total Liability and Equity 309840 286280Income Statement 2012 2011 (Rs mn) (Rs mn)IncomeNet Revenue 193223 153889Less: Cost of Sales 171591 147565Other Expenses 4132 3837Interest Expense 9078 2487Earnings Before Income Tax 8422 9063Less: Income Taxes 2657 618Adjustments N/A N/ANet Profit 5765 8445
1.2 Ratio Analysis: Vodafone Telstra Verizon Idea 2011 2010 2011 2010 2011 2010 2012 2011Liquidity, Efficiencyand Solvency Ratio:Current Ratio 0.6279 0.4968 0.8729 0.8275 1.0058 0.7303 0.2879 0.3646Quick Ratio 0.5728 0.4615 0.3080 0.2230 0.4536 0.2357 0.1809 0.2230Avg. Collection 72 23 NA NA 39 40 15 13PeriodDays Inventory 6 5 NA NA 4 4 1.1 1.3Days Payable 9.6 10 48 65 114 122 174 202Debt-Equity ratio 7.9549 3.4447 0.9907 0.9509 1.3246 1.1793 0.7542 0.6664Profitability Ratio:GPM 0.3284 0.3380 0.1801 0.2213 0.1162 0.1374 0.2224 0.2043NPM 0.1715 0.1938 0.1284 0.1574 0.0945 0.119 0.0438 0.0592Return on common 0.0885 0.0949 0.2569 0.3029 0.1213 0.1468 0.068 0.0737equity(ROE)DuPont Analysis 0.172* 0.194* 0.1284 0.1574 0.0945* 0.119* 0.0438 0.0592 0.298* 0.283* *0.655 *0.637 0.4811* 0.484* *0.624 *0.536 1.728 1.729 *3.051 *3.02 2.6826 2.5313 *2.395 *2.322Telstra and Vodafone have better liquidity, with Vodafone displaying better true liquidity with higherquick ratio.Idea shows best efficiency both for collection and payable.Vodafone has highest debt-equity ratio and Idea has lowest.Telstra and Vodafone show the highest true profitability with Telstra capturing the highest returnson true profitability.
1.3 Cash Flow Statement Analysis: Cash Flow Statement of Verizon($ mn) Years 2011 2010 2009 Operating Activities 29780 33363 31390 Investing Activities -17250 -15054 -23156 Financing Activities -5836 -13650 -16007 Increase (Decrease) In Cash and Cash Equivalents 6694 4659 -7773 Cash Flow Statement of Vodafone( Pounds mn) Years 2011 2010 2009 Operating Activities 12755 11995 13064 Investing Activities 3843 -1882 -7437 Financing Activities -15369 -8259 -5853 Increase (Decrease) In Cash and Cash Equivalents 1229 1854 -226 Cash Flow Statement of Telstra($ mn) Years 2011 2010 Operating Activities 8018 9691 Investing Activities -2541 -3466 Financing Activities -4873 -5481 Increase (Decrease) In Cash and Cash Equivalents 604 744 Cash Flow Statement of IDEA(Rs mn) Years 2012 2011 Operating Activities 30550.11 45230.33 Investing Activities -43663.5 -78268.04 Financing Activities 577.5 33148.31 Increase (Decrease) In Cash and Cash Equivalents -12535.8 110.6Positive net cash flow from any activities means a business generated more cash than it spent onthat activities and the Negative net cash flow means the business spent more than it generated onthose specific activities.Cash Flow from Operating ActivitiesA healthy business should generate positive net cash flow from operating activities and should growthe amount over time.All the four companies are having positive net cash flow from operating and they are beingconsistent except IDEA where there is comparatively higher difference between the cash flows fromoperating activities from previous years which is not a very healthy sign.
Cash Flow from Investment ActivityThe investment activities section shows the cash flows from buying and selling long-term assets,such as equipment and property. A stable or growing business typically has negative net cash flowfrom investment activities, which occurs when it buys more assets than it sells. A growing businessroutinely invests in new assets to expand its capacity, replace old equipment and to keep up withnew technology.Apart from Vodafone all the other companies have invested well in buying more valuable assets.Verizon has comparatively has increased their investments from last year. This is a very positive signas they consistent in their investment.Cash Flow from Financing ActivityThe cash flow from the financing activities section shows cash flows from issuing and paying offoutside financing, such as stock and debt, and from paying dividends. A healthy business mayoccasionally show positive net cash flow from financing activities as it raises money from investorsand creditors to grow its business, but a healthy business should more often show negative net cashflow from financing activities. A negative amount suggests the business is using its cash flow fromoperating activities to pay dividends and pay off its outside financing.Except IDEA all the other companies are paying dividends to their shareholders apart from paying offits borrowings.a) Are you satisfied with the quality and quantum of financial disclosure levels of four companies?Which one of them has better quality and quantum of financial disclosure than other threecompanies?Overall all the companies have provided good comprehensive annual report, yet comparing amongthem we find Telstra has better the quality and quantum of financial disclosure which is very clearfrom the above comparisons, adhering to majority of the accounting principles. b) Which one of them has better fundamentals than other three companies?Verizon is a company with highest growth rate; it has highest cash inflow and consistent growth.Vodafone and Telstra had a stable fiscal year with moderately positive cash flow. Finally, Idea had abad fiscal year with overall losses and negative growth. So, in our opinion Verizon has the bestfundamentals compared to others.