Financial Performance of BT and AT&T - Case Study Example

Financial Reporting Introduction Accounting policies are important for any company as it decides how reporting accuracy is achieved and regulatory compliances are met. The paper discusses accounting policies and financial performance of BT and AT&T, the leading telecom companies from the UK and the US respectively. The paper also discusses how these companies perform their corporate social responsibilities. On concluding part, the paper will compare and evaluate these companies on these aspects including key financial performance indicators. Accounting Policies of BT While AT&T follows the US GAAP accounting standards set out by the Financial Accounting Standards Board (FASB) of the US, BT prepares its financial statements based on the Companies Act 2006, Article 4 of the Regulation and International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). Some significant differences between these accounting standards have been tabulated in the Appendix I of this paper. BT prepares its financial statements on the historical cost basis except certain equity instruments measured at fair value. BT has made some changes in accounting policies to presenting other operating income as either a reduction in operating costs or revenue as applicable. The company has followed IAS 19 to estimate pension liability incorporating them in their financial statements. Major accounting policies are described as per the following. BT recognizes revenue as the fair value of the amount receivable for services provided. Equipment sales are considered net of discounts excluding sales tax. Costs regarding services provided are expensed as incurred. The pension plan benefits obligations are reported in the income statement as expense towards the contributions payable for the year. Property, equipments are taken at historical cost excluding depreciation. Costs related to software have been capitalized to count on future economic benefits. License fees are recorded at cost and amortised over a period until useful life available. Goodwill gained due to acquisition is taken as an asset measuring them at cost. Research expenses are debited in the income statement for the period it has incurred. All financial liabilities are taken at fair value (BT Plc, 2014 p.129). Accounting Policies of AT&T Some of the major accounting policies of AT&T can be described as per the following. AT&T assesses credit risk based on historical experiences and make allowance for doubtful recoveries. The company accounts plant and equipment at cost. The company makes provisions for losses or gains related to pension and postretirement plan assets in their operating results. Intangible assets are accounted at fair values based on the expected discounted cash flows. AT&T accounts investments at fair value. Contingent liabilities are accounted on an ongoing basis. While determining a long-term healthcare cost, the company has taken into account the likely long-term trends, and historical cost data. The company assumes 3% annual growth rate in dental claims and 2.5% annual growth in administrative expenses. AT&T maintains adequate internal control over financial reporting as defined in the Securities Exchange Act of 1934 so that financial statements provide a fair preparation and presentation of accounts (AT&T, 2013). Corporate Governance and Social Reporting Practices of BT and AT&T Elliott and Elliott (2014) emphasise that sustainability issues should not be seen in isolation but it should be linked to the overall strategy of the firm or corporate governance. BT BT has formed a committee of 11 members with a chairman to conduct Sustainable and Responsible Business (CSRB) (BT Plc, 2014, 90). They meet twice in a year and seek input from stakeholders to implementing Better Future programme. The company has struck an agreement with Npower, an integrated energy company in the UK, to tap 100% of their energy needs from renewable sources. Not only is this but BT is also making concerted efforts to reduce its energy consumption including that of its suppliers so that carbon footprint could be reduced significantly in the years ahead. It is important to note that due to these efforts, in 2012/13, BTs suppliers could decrease their carbon emissions by at least 30,000 tonnes. In 2013/14, the company invested 1.01% of profit before tax in sustainable and responsible business activities; in absolute terms, this amounts to £27 million (Better Future Report, 2014 p.7). The company has supported children of slum area in Delhi, India by launching the Katha Information Technology and E-Commerce School (KITES) benefitting as many as 19,000 poor children. Same programme has supported at least 1450 girls by imparting training to IT-oriented courses. BT has laid down certain social and environmental standards that the company diligently follows not only for itself but for its global suppliers too. It focuses on reducing water use, waste recycling, maintaining biodiversity, growing more trees, protecting habitats and species and protecting wildflower meadows (Better Future Report, 2014). AT &T Currently, recycling/reuse along with reducing carbon emissions is considered a key strategy for success in businesses (Elliott and Elliott, 2014). AT&T provides highest priority to improving energy efficiency and product designing that reduces its impact of processes on environment. The company is not only concerned with people but planet too by focusing on water management, reducing CO2 emissions significantly by installing solar installations, device recycling. Accordingly, the company has deployed 8,230 vehicles that operate on alternative fuels reducing gasoline consumption by 4.6 million gallons in 2013. The company has so far invested more than $600 million in Network Disaster Recovery Program in last two decades and its employees volunteered almost 5.3 million hours in community development programmes amounting to almost $118 million. AT&T uses the Global Reporting Initiative Framework to spell out its CSR initiatives. The GRI initiative encompasses those material aspects that are responsible to causing significant amount of environmental, economic and social impacts. Product design, energy efficiency, energy uses, recycling, carbon emissions and many others are given due consideration not only to achieve sustainability but enhance business success by the management (Materiality Assessment, 2013). Key Financial Performance Indicators Various financial ratios such as liquidity ratio, profitability ratio and many others are good indicators to inform about the performance of the company, especially when they are compared with its own past results (Atril and McLaney, 2013). Referring appendix II, it can be noticed that BT has improved its liquidity position in 2014 over 2013 as is evident from the calculated current and Acid-test ratios. As far as profitability of BT is concerned it has registered a slight improvement in 2014 over its previous year when seen in terms of gross and net profit margins. Returns on total assets and shareholders funds in 2014 are concerned they are in more or less in line with the results of 2013. Even no change is found in dividend payout ratio (at 35%) in both the years (Appendix II). In contrast, AT&T liquidity ratios such as current and Acid-test have shown slight deterioration in year 2014 when compared with its previous year. At the same time, debt-equity ratio has also worsened from almost 1 to 1.14 in year 2013 and 2014 respectively. That is because its current liability has increased by almost 10%. AT&T has improved its profitability significantly as evident from gross profit and net profit margins. The companys gross profit margin has gone up from 10.20% to 23.68% that is significant by any standards. Consequently, its net profit margins have also improved from 5.7% in 2013 to 14.41% in 2014. Impact of improved profitability can also be seen in its return on total assets and on shareholders funds that have gone up by almost 250%. It clearly appears from the dividend payout ratio that the company has retained major part of its earnings in 2014 against the previous year 2013 (Appendix III). Conclusion BT and AT&T both are leading telecommunication companies. While AT&T follows the US GAAP, BT follows the IFRS accounting standards developed by the International Accounting Standards Board. Both companies are known for their highest accounting policies to providing relevant information to investors necessary for economic decisions. BT and AT&T both are equally conscious about corporate social responsibility initiatives. Both are consciously attempting to reduce energy consumption and greenhouse gas emissions. Also, both are active in community development. BT and AT&T both are moving towards using renewable sources of energy to mitigate environmental impact of fossil fuels. However, BT has gone beyond to involving its suppliers to reducing energy consumption and mitigating environment impact of its all processes. On liquidity front, BT and AT&T both have almost matching current and acid-test ratios. AT&T has been able to contain its debt-equity ratio (1.1) in comparison to BT (2.5) meaning AT&T has been operating at lower leveraging. Major difference can be found in profitability parameters of these companies. While BT is found to operate at lower profit margins, AT&T has improved its profitability in 2014 significantly. Due to improved profitability, AT&T has been able to retain its large part of earnings while maintaining same dividends as given in previous year; however, BT could retain less in order to maintain dividends as declared in the previous year. With economy improving, it is certain that BT and AT&T will continue to forge ahead in the coming years. Appendix I As such, the conceptual framework for accounting standards namely IFRS and USGAPP is same so as to have same accounting results. However, some of the major areas of differences can be tabulated as per the following (Ernst & Young, 2012). Area of Differences IFRS Standards as followed by BT US GAPP Standards as followed by AT&T About financial periods Comparative information needs to be disclosed for the previous period for all amounts. Usually, comparative financial values are produced; however, it allows to present results for a single year. SEC rule allows balance sheet for two consecutive years while other statements must be produced for three consecutive years. Balance sheet layout and income statement No specific layout but emphasises on minimum line items. Requirements in Regulation S-X need to be fulfilled. No specific layout requirements. Public companies need to follow Requirements in Regulation S-X Current vs. non-current debt presentation in balance sheet Debt due to covenant violation must be treated as current if no lender agreement is in place. Debt due to covenant violation may be treated as non-current if no lender agreement is in place. Classification of deferred tax assets and liabilities in balance sheet All amounts to be treated as non-current. Based on the nature of the related asset or liability, current or non-current classification is to be done. Expense classification in income statement Based on function expenses can be presented; however, nature of expenses must be given in the notes. AT&T being an SEC-compliant needs to present expenses based on function. Extraordinary items in Income Statement Not allowed Only unusual and infrequent items can be presented. Disclosure of performance measures IFRS allows the presentation of additional line items, in the comprehensive income statement when it is relevant to understand firm’s financial performance As such no general requirements in GAAP for the presentation of specific performance measures. However, SEC-compliant firms are required to present certain headings and subtotals. Treatment of certain costs in Interim periods Each interim period is a separate reporting in itself. An expense that is not classified as an asset will be accounted for in that period. That means income taxes are applied based on annual effective tax rate. Each interim period is a part of annual period. The costs that accrue benefit to more than one interim period will be allocated accordingly resulting into accrual or deferral of those costs. Inventories and Accounting Treatment All other things remaining same, following major differences are noted in accounting treatment. IFRS Standards as Followed by BT US GAPP Standards as followed by AT&T Costing Methods LIFO is not permitted. Same cost formula needs to be applied for similar kinds of inventories. LIFO is permitted. For inventories similar in nature, consistent cost formula is not necessary. Long-term Assets Revaluation of Assets Revaluation is permitted for entire class of assets. Revaluation is not allowed. Depreciation of Asset Components Component depreciation essential if they offer differing patterns of benefits. Though component depreciation permitted but not usual. Appendix II Key Financial comparisons of BT for Two Subsequent Years (Source: BT Plc, 2014) Key Financial Measures Year Ending 2014 (£m) 2013(£m) Current Ratio = Current Assets/Current liabilities 5,706/7,687 4674/7604 = 0.74 =0.61 (p 124) Acid-test Ratio= (Current assets excluding inventories)/Current liabilities (5,706-82)/7,687 (4674-103)/7604 =0.731 =0.60 (p.124) The debt-equity Ratio= Total liability/shareholders equity 24,109/ 9,361 23,828/9,332 =2.575 =2.55 (p.68 & 179) Gross Profit Margin = (Revenue- Operating costs)/Revenue % (18,287-15,142)/18,287 (18,103-15,155/18,103) =17.20 =16.29 (p.122) Net Profit Margin = Net Profit/Revenue % 2,018/18,287 1,948/18,103 =11.04 =10.76 Return on Shareholder’s funds = Net profit/ Total equity % 2,214/9,361 1,948/9,332 =23.66 =20.88 (p.179) Return on Total Assets = Net Profit/ Total assets % 2,214/23,517 1,948/23,566 =9.4 =8.27 (p.68) Dividend Payout Ratio= Annual Dividend/Net profit % 778/2,214 683/1,948 =35 =35 (p.64) Appendix II Key Financial comparisons of AT&T for Two Subsequent Years (Source: AT&T 2013) Key Financial Measures Year Ending 2014 ($m) 2013 ($m) Current Ratio = Current Assets/Current liabilities 23,196/34,995 22,706/31,787 = 0.662 = 0.714 (p.41) Acid-test Ratio= (Current assets excluding inventories)/Current liabilities (23196- nil)/34,995 (22,706-nil)/31,787 = 0.662 =0.714 (p.41) The debt-equity Ratio= Total liability/shareholders equity (34,995+69,290)/91,482 (31,787+66,358)/92,695 = 1.14 =1.058 (p.41) Gross Profit Margin = (Revenue-Operating costs)/Revenue % (128,752- 98,273)/ 128,752 (127434-114,437)/127,434 =23.68 =10.20 (p.10) Net Profit Margin = Net Profit/Revenue % 18,249/128,752 7,264/127,434 =14.41 =5.70 (p.10) Return on Shareholder’s funds = Net profit/ Total equity % 18,553/91,482 7264/92695 =20.82% =7.84% Return on Total Assets = Net Profit/ Total assets % % 18,553/277,787 7264/272315 =6.68% =2.67% (p.41) Dividend Payout Ratio= Annual Dividend/Net profit % 2,404/ 18,553 2,556/7,264 =12.96 =35.19 (p.41) References AT&T (2013). Annual Report. [Online available from] http://www.att.com/Investor/ATT_Annual/2013/downloads/ar2013_annual_report.pdf [Accessed 9 January 2015] Atril and McLaney (2013). Financial Accounting for Decision Makers. 7th ed. Pearson Education. Better Future Report (2014). BT. [Online available from] http://www.btplc.com/Betterfuture/BetterFutureReport/pdf/2014/Better_Future_report2014- complete_report.pdf [Accessed 9 January 2015] BT Plc (2014). Annual Report. [Online available from] http://www.btplc.com/Sharesandperformance/Annualreportandreview/pdf/2014_BT_Annual_Report.pdf [Accessed 9 January 2015] Elliott and Elliott (2014). Financial Accounting and Reporting. 16th ed. Pearson Education Ltd. Ernst & Young (2012). US GAAP versus IFRS. [Online available from] http://www.ey.com/Publication/vwLUAssets/IFRSBasics_BB2435_November2012/$FILE/IFRSBasics_BB2435_November2012.pdf [Accessed 9 January 2015] People/planet/possibilities (2013). Corporate citizenship & Sustainability. [Online available from] http://about.att.com/content/csr/home/frequently-requested-info/governance.html [Accessed 9 January 2015] Materiality Assessment (2013). Corporate citizenship & Sustainability. [Online available from] http://about.att.com/content/csr/home/frequently-requested-info/materiality-assessment.html [Accessed 9 January 2015] Read More