Analysis of Financial Statements of Goldman Sachs
Introduction
A world renowned company, Goldman Sachs is an American Multinational Corporation that deals with the institutional clients offering investment banking, investment management and other related financial services. The following report will analyze some of the crucial items of the financial statements of Goldman Sachs including Earning per Share, Cash Flow Statement, Tax Deferrals, Share based compensation, Employee Compensation Plans. We are sure that by the end of this report, we will be able to have a comprehensive overview of the company’s financial statements.
Amount Disclosed
Footnote Information-Deferred Taxes
Note 24 of the Annual Report is related to the Deferred Tax Assets and Deferred Tax Liabilities that states complete information as how the company has calculated these items. The company declares that it uses the asset and liability method under which deferred tax assets and liabilities are recognized for the temporary differences. The information also spells out the creation of valuation allowance to reduce the deferred tax assets to the amount that more likely than not will be realized and primarily relate to the ability to utilize losses in various tax jurisdictions. During 2013, the firm had created a valuation allowance of $45 Million.
As for the deferred tax liabilities, the company reported deferred tax liabilities of $1337 million. The company also declared that it permanently reinvests eligible earnings of certain foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if such earnings were repatriated. As of December 2013 and December 2012, this policy resulted in an unrecognized net deferred tax liability of $4.06 billion attributable to reinvested earnings of $22.54 billion and $21.69 billion, respectively.
Creation of Deferred Taxes
Difference between the treatment of an accounting item for tax reporting and for financial reporting can occur when:
The timing of revenue and expense recognition in the income statement and the tax return differ.
- Certain revenues and expenses are recognized in the income statement but never on the tax return, vice-versa.
- Assets and/or liabilities have different carrying amounts and tax bases.
- Gain or loss recognition in the income statement differs from the tax return.
- Tax losses from prior periods may offset future taxable income.
- Financial statement adjustments may offset future taxable income.
- Financial statements adjustments may not affect the tax return or may be recognized in different periods.
Deferred Tax Assets
A deferred tax asset is created when taxes payables (in the tax return) are greater than income tax expense (income statement) due to temporary differences. They are expected to reverse in the future and result in the future tax savings. Deferred tax assets occur when:
- Revenue is taxable before they are recognized in the income statement.
- Expenses are recognized in the income statement before they are tax deductible.
- Tax loss carry-forwards are available to reduce future taxable income.
Deferred Tax Liabilities
A deferred tax liability is created when income tax expense(income statement) is greater than tax payable(tax return) due to temporary differences. Just as deferred tax assets, they are also expected to reverse in future, but they will result in cash outflows. Deferred tax liabilities occur when:
- Revenue are recognized in the income statement before they are included on the tax return due to temporary differences.
- Expenses are tax deductible before they are recognized in the income statement.
Income Tax Provision
Footnote Information- Income Tax Provision
Note 24 of the annual report includes information relating to the income tax provisions that states that the firm reports interest expense related to income tax matters in “Provision for taxes” and income tax penalties in “Other expenses.” The tables below present the components of the provision/(benefit) for taxes and a reconciliation of the U.S. federal statutory income tax rate to the firm’s effective income tax rate paid by the company:
Carry-forward losses
Yes, the company had net operating carry forward losses in connection with US Federal, State and Local tax rates. During 2013, the company included an amount of $232 Million for net operating carry-forward losses as part of deferred tax assets.
Guidelines for carry-forward losses and carry-backs
- The company can carry-back the net operating loss amount and apply it against any taxable income that will produce a tax rebate for the company
- The company can carry-forward any net operating loss for next 20 years and apply it against any taxable income that will reduce the taxable income for those years.
Defined benefit plans
Yes, the company do have defined benefit plans and post retirement plans for US, UK and certain non-US subsidiaries. The defined benefit pension plans of the company provide benefits on the basis of years of credited services and a percentage of employee’s compensation. The footnote information declare that the firm recognizes the funded status of its defined benefit pension and postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation, in the consolidated statements of financial condition. As of December 2013, “Other assets” and “Other liabilities and accrued expenses” included$179 million (related to overfunded pension plan) and $482 million, respectively for these plans.
Defined Contribution Plans
The company also has defined contribution plan where it contributes to employer-sponsored US and non-US defined contribution plan. During 2013, the total contribution made in this regard is $219 Million.
Difference between Defined Contribution and Defined Benefit Plan:
-A defined contribution plan specifies as how much money will be contributed towards the retirement account of an employee by the company. This amount varies with the compensation of the employee and the amount is usually invested in the market index.
-A defined benefit plan indicates the amount that a firm promises to make to the employee after his retirement. The benefit is usually based on the employee’s salary and years of service.
Earnings Per Share
Extract from Income Statement
Referring to the income statement of the company for the year 2013, we found that the company has declared basic EPS of $16.34 and diluted EPS of $15.46. While the basic EPS is calculated by dividing net income available to common stockowners to weighted average common shares, Dilutive EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable for stock warrants and options and for RSUs for which future service is required as a condition to the delivery of the underlying common stock. The table below indicates the complete information relating to Basic EPS and Diluted EPS:
Other Examples of Dilutive Securities
- Convertible Debt
- Convertible Preferred Stock
How dilutive securities affect EPS
Dilutive securities, i.e. convertible stock warrant or options, if included in the calculation of EPS, they will turn out to be expansion to basic EPS by including them with weighted number of shares outstanding. As a result Dilutive EPS will be lower than the Basic EPS.
Share-Based Compensation
As part of share-based compensation, the company uses Stock Options. However, Note 29 of the annual report declares that the company has not issued any Stock Option since 2010 while the options so issued before 2010, are to expired by 10th year from the date of their issue. The table below indicates the outstanding stock options as of December, 2013:
During 2013 and 2012, the company has included an amount of $2039 million and $1338 Million, respectively as part of share-based compensation.
Other Type of Stock based Compensation tools:
Apart from Stock Options, Outright Share Grant is another method of providing stock based compensation.
Cash Flow Statement
Referring to the cash flow statement of the company, we found that the company uses Indirect Cash Flow Statement. This was inferred from the starting point of the cash flow statement. In other words, since the indirect cash flow statement begins with Net Income followed by adjustment to non-operating expenses and working capital changes, it was evident that Indirect Method of Cash Flow Statement is being followed.
Difference between Indirect and Direct Method of Cash Flow Statement
Indirect Method
As already discussed in brief, Indirect Cash Flow Statement begins with net income, i.e. the bottom line of the income statement. The net income is converted to operating cash flow by making relevant adjustments for the transactions that affect net income and not the cash transactions. Some of these adjustments include eliminating non-cash expenses and changes in working capital accounts resulting from the accrual accounting events. Below is the Indirect Cash Flow Statement of the company:
Direct Method
Unlike Indirect method, Direct Method of cash flow statement each line item of the accrual based income statement is converted into cash receipts or cash payments. In other words, Direct Cash Flow Statement begins with top item of the income statement, i.e. Revenues, adjusted to show cash received from the customers. Below is an example of Direct Cash Flow Statement:
Agreement of Cash Flow Statement with other financial statements
Cash Flow statement is one useful financial statement that incorporates the transactions of income statement and the balance sheet to provide a true cash position of the company to the investors. For Instance, the Cash Flow Statement begins with net income and then add-back non-operating expenses that had no cash effect such as depreciation and amortization expenses. Similarly, it also adjusts to the changes in balance sheet accounts resulting from the accrual accounting events.
Hence, Cash Flow Statement is an agreed financial statement that takes out cash effects from the income statement and the balance sheet and presents them to the investors.
Non-Cash Transactions held by the company
Referring to the supplementary information provided in the annual report, we found the following non-cash transactions on the cash flow statement:
-Depreciation and Amortization expense of $15 Million during 2013
-Undistributed Earnings of $1086 million during 2013
Other examples of Non-Cash Transactions
- Issue of debt to settle business acquisition.
- Issue of stock to settle business acquisition.
Investing Activities
As noted from the Cash Flow Statement, the investing activities of the company include:
- Purchase of property, plant and equipment
- Repayment of Short-term loans to subsidiaries
- Issue of term loans to subsidiaries
- Repayment of term loans by subsidiaries
- Capital Distributions from/to subsidiaries
Financing activities
As noted from the Cash Flow Statement, the financing activities of the company include:
- Unsecured Short-term borrowings
- Repayment of long-term borrowings, including the current position
- Preferred Stock repurchased
- Common Stock repurchased
- Dividends and Dividend equivalents paid on common stock, preferred stock and restrictive units
- Proceeds from issuance of common stock and preferred stock
- Excess tax benefits relating to share-based compensation
- Cash settlement of share-based compensation
Temporary and Permanent Differences:
Referring to the annual report of the company, we find that discussion relating to temporary differences is laid in Note 24 of the annual report. The Footnote disclose that the deferred income taxes reflects the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. During 2013, the company has reported tax expense of $29 Million as temporary difference.
As for the Permanent Difference, no amount or discussion has been reported in the annual report of the company.
Other Examples of Temporary and Permanent Difference
Temporary Differences:
i)Calculation of depreciation using straight line depreciation method for accounting books and accelerated method for tax return.
Permanent Difference:
i)Interest revenue on municipal bonds
ii)Amortization of Goodwill under the purchase method of acquisition.
Works Cited
Goldman Sachs Inc. (2013). Annual Report 2013. Retrieved October 9, 2014, from GS.com: http://www.goldmansachs.com/s/2013annualreport/assets/downloads/GS_AR13_Complete_Fin.pdf
Robinson, T. (2012). Employee Compesnation- Post-Employment and Share Based. In C. Institute, Financial Reporting and Analysis (pp. 117-118). Boston: Custom.
Robinson, T. (2011). Understanding Cash Flow Statements. In C. Institute, Financial Reporting and Analysis (pp. 122-128). Boston: Custom.
