Publicly traded companies such as Verizon Communications are required to prepare and file fully audited financial reports according that adhere to U.S. generally accepted principles (GAAP) and International Financial Reporting Standards (IFRS) guidelines. The importance of preparing financial reports is to assist users with information regarding a company’s financial performance to make decisions. Financial reporting analysis helps to determine whether financial reports have any material misstatement or omissions that would influence a potential investor’s decision. An analysis of Verizon Communications’ 2015 annual report will highlight whether the company is complying with accounting policies to ensure information provided meets users’ needs. The general rule of governing financial disclosure requires financial statements to report transactions and events occurring in the accounting period and subsequent events affecting the balance sheet.
Accounting Policies Disclosure Requirements
Corporations are required to disclose all material facts relating to financial statements that they prepare. As such, notes explaining the accounting policies used, any assumptions, and other significant items should accompany the financial statements. The Securities and Exchange Commissions (SEC) requires that all financial reports be prepared and analyzed objectively so that they represent a true and fair view of a company’s financial status (Elliot, & Elliot, 2007). The management has the responsibility to ensure that the published statements provide accurate material facts on information provided. Disclosure helps users to understand whether the management uses aggressive or conservative approach when reporting earnings. The aim of disclosure is to ensure that the management has followed a consistent and acceptable accounting approach (Elliot, & Elliot, 2007).
Common Disclosures
Generally, companies must disclose any relevant facts in their financial reports that are related to the financial statements. However, the most common disclosures in financial reporting include summary of significant accounting policies and fixed assets. Disclosure of accounting policies is a note that provides a description of the company’s operations and sources of revenue (Elliot, & Elliot, 2007). Additionally, this note also highlights the company’s main accounting policies. This disclosure provides users such as investors and creditors with information regarding accounting method applied (accrual or cash basis) when preparing financial statements (Gibson, 2012). Further, the disclosure helps users to compare and analyze the financial statements of different companies. The use different accounting policies affect the financial figures computed and reported.
Another significant disclosure in financial reporting is on the fixed assets. Disclosure of fixed assets should provide information on the different types of fixed assets owned by the company including furniture, equipment, and leases (Elliot, & Elliot, 2007). It should also show the accumulated depreciation for each asset and the current year’s depreciation expense. This information is essential because analysts can estimate the total age of the assets owned by a company. Users can use the estimated age to analyze whether the company has several old assets making them lose competitive age over other companies that have adopted new technology.
Verizon Communications’ Disclosure on Accounting Policies
Verizon Communications’ 2015 annual report provides an insight on the different accounting policies that the company employed. Note 1 of the report highlights the company’s operations, which is to provide entertainment, communication, and information goods and services to consumers globally (Verizon Communications Inc., 2016). Further, this note provides specific accounting policies relating to revenue recognition, intangible assets, fair value measurement, income tax, and foreign currency translation among others. The report indicates that the company relies on GAAP to prepare financial statements, which acknowledges management’s use of estimates and assumptions. Additionally, the explanations provided on each accounting policies are in-depth making it easier for users with lack of financial knowledge to understand.
Importance of the Management Discussion and Analysis Section of an Annual Report
SEC requires financial reports to include a management’s discussion and analysis section, which discusses the company’s financial performances and analyzes previous year’s operations (Elliot, & Elliot, 2007). The discussion focuses on different topics including growth and strategy, historical performance and outlook, and investments and financing. Additionally, the management provides coming year forecasts, upcoming projects and future goals and approaches. This section is important to users because it provides an overview of management’s performance and it enables them to review a company’s financial status.
Verizon’s Management and Discussion Analysis
The management and discussion analysis section highlight several items that are useful to users. One important item mentioned in this section is a strategic transaction that involves the company’s acquisition of AOL Inc. through a merger agreement (Verizon Communications Inc., 2016). This strategic transaction is important to users because it provides information relating to growth and expansion. The purpose of the merger is to diversify and expand the company’s operation and this can influence an investor’s decision. Investors may decide to buy the company’s share because the merger will increase company’s profit, which in turn increases return on investment. Secondly, the company provides current year’s business overview and financial performance. According to the management, the wireline segment revenue declined by 1.8% because of decline in global enterprise (Verizon Communications Inc., 2016). Investors could interpret the information that this segment is not performing well. Consequently, this could make them to make a decision not to invest until revenues start increasing.
Another significant item discussed in management analysis section is the capital expenditures and investment. According to the report, Capital expenditures were $17.8 billion and $17.2 billion for 2015 and 2014 respectively (Verizon Communications Inc., 2016). The company invested by acquiring AOL to enhance its advertising capabilities. This information regarding capital expenditure is very important because it provides investors with information they could use to analyze management performance. Through the capital expenditure, investors can analyze what decisions the management is making for investment choices. If the management is spending or investing in projects with low returns investors might choose not to invest in such a company
Company Segmentation
According to GAAP, segment reporting refers to the disclosure on a company’s operating segments accompanies by the financial statements. Public companies are required to provide segment reporting in their financial reports. These companies can define segments based on business operations or geographical location. Business segments are entity components that provide single or several products subject to return and risk. Geographical segments are business entities formulated based on a specific economic environment (Gibson, 2012). A company will consider and operating segment if the unit has business activities that provides a company with revenue and can incur expenses. The segment should account for at least 10% of total revenue and 10% of total expenses reported by a company. The aim of segment reporting is to provide investors with information regarding specific business units and their performance.
Advantages and Disadvantages of Segmented Financial Data
Advantages
Segment reporting makes it easier for financial users to identify and separate profitable segments. If segments are based on geographical location, users can determine which locations are profitable and make financial decision based on the information
This reporting improves context by providing specific figures on segments showing where the overall revenue is mainly generated.
Users are able to better forecast profits for various segments where activities are diversified.
Disadvantages
Competitors have information regarding profitable segment and can use this information to gain a competitive edge.
This reporting may lead to manipulation of data since the managers are required to determine the segments and report on revenues and expenses for each segment (Elliot, & Elliot, 2007).
It may lead to takeover when a segment is not profitable others might feel the need to take over to help the unit continue as a going concern.
Management might not consider business risks relating to specific segments and this could lead to failure.
Companies might incur additional costs related to segment reporting.
Financial segmentation has more disadvantages than advantaged based on the analysis. The company might lose vital information to competitors and incur additional costs while segmenting data. In my opinion, valuable information should not be disclosed to avoid competitors using it to outperform the company.
Verizon Segments
Verizon has used business operation to segment its financial data. According to the report, the business has two reportable segments, which are wireless and wireline (Verizon Communications Inc., 2016). The company has managed to provide an overview of each segment by providing business activities and the financial analysis. However, they could improve their segment reporting by providing forecasts on each segment based on opportunities and risks available. This information would help influence investors decision.
Types of Auditor’s Reports
Unqualified opinion
In this report, the auditor gives an opinion indicating the financial statements do not contain any material misstatement or omissions. Verizon communication’s 2015 audited report was given an unqualified opinion (Verizon Communications Inc., 2016). Therefore, it presents a true and fair financial performance position. With this opinion, the company can easily acquire finance from banks.
Qualified Opinion
The auditor indicates in this report that the financial information provided has issues relating to GAAP compliance or limited scope (Gibson, 2012). Banks might consider such institutions while offering finance but provide strict terms and conditions,
Adverse Opinion Letter
This is a negative report in which the auditor indicates that the financial statement continued material misstatements. This implies that the company accounting policies do not conform to GAAP and they are unreliable. Banks tend to avoid companies with such reports.
Disclaimer Opinion
This is the worst opinion a company could receive because the auditor indicates they cannot form any opinion regarding financial statements due to lack of independence or company has filed for bankruptcy.
References
Elliot, B., & Elliot, J. (2007). Financial accounting and reporting. New Jersey Pearson Education.
Gibson, C. (2012). Financial Reporting and Analysis. Boston, MA: Cengage Learning.
Verizon Communications Inc. (2016). 2015 Annual Report. Retrieved from https://www.verizon.com/about/sites/default/files/annual/verizon-annual-2015/downloads/15_vz_ar.pdf
