Free Two Common Disclosures And Their Use To Readers Of Financial Statements Essay Sample
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Assignment 1: Full Disclosure in Financial Reporting – Verizon Communications
Assignment 1: Full Disclosure in Financial Reporting – Verizon Communications
Section 1 - Disclosure Requirement on Accounting Policies
Policies and procedures used by any business entity in preparation of its financial statements are known as accounting policies. Such policies represent procedures, methods or even measurement systems employed in the presentation and design of information in financial statements . Disclosure requirement provide a proper and detail understanding about the financial information contained in the financial statements. Such type of disclosure provides an insight into the management style of reporting earnings, whether aggressive or conservative. This disclosure of accounting policies is also made to ensure that no misleading policy is used while preparation of financial statements but the management has followed a strict and consistent accounting approach.
Among the most common disclosures, the two examples include Summary of Significant Accounting Policies and Fixed Assets. The former is useful to users of financial statements in a manner that it provides information about the organization, its main purpose, its liquidity strength and sources of its major revenue.
It also reveals the accounting policies, such as accrual, cash basis or modified cash basis used to prepare financial statements. The latter section provides the users with information about the type of fixed assets - computers, equipment, furniture and leasehold improvements etc used in operations. This section shows the total accumulated depreciation and the current depreciation expense of the year.
Section 2 - Management Discussion and Analysis Section in Annual Report
Importance of Management Discussion and Analysis Section
It is a section of an annual report where different aspects of the business related to past and current performance are discussed by the management. It is a section where the management makes discussion on the operational efficiencies of last accounting year, depicts how the business performance changed overtime while it outlines the expected achievements, goals and approaches to pursue new projects in future . As an important section, it contains that useful financial and non-financial information which throws a light on managerial operations and management style of a particular public company. This section is important because here, the management discusses past performance, key factors influencing the public company, business’s financial condition and future growth expectations or prospects. Key aspects includes discussion on capital resources, causes of material changes in financial accounts, liquidity position, effects of inflationary pressures, significant uncertainties and international and domestic market risks etc (Wahlen, Baginski, & Bradshaw, 2010).
Items from Verizon’s M&DA Section Useful to Potential Investors and Their Influence
Disclosure on investment in fixed assets influence the investment decision of investors in a manner that they reveal the operational efficiency to generate sales revenue and net income made available to them for each dollar invested in acquisition of fixed assets to increase efficiency. Investors are mainly concerned about their returns on capital which they have invested into the public entity. Their investment decisions become manipulated if the investment in fixed assets is either increased or withdrawn.
In addition to this, disclosure about information on interest expense and credit rating determines the capability of Verizon Communication to repay its fixed interest obligations to banks and other debt-holders. It affects the investment decision in a manner that if interest expense increases or the credit rating is downgraded, it reflects that either the interest rate risk of this public business has increased or has borrowed more debt from banks or other investors. This accordingly affects the investment decision by banks and other financial institutions in Verizon Communication because, in this case, the financial flexibility of this business has declined . It also affects the investments by equity holders. Since their stake has declined into this business, in this case, they will either demand more investment return or will withdraw their investments from the entity.
Similarly, the disclosures about the sales revenue, costs and expenses and the net income also affects the investment decision of potential investors because they are worried about how much earnings will be made available to them as dividends per share. The disclosure about Earnings per Share (EPS) is important in this regard. Generally, investors like to financially support those businesses which make more earnings available to them and provide greater returns on their invested capital.
Section 3 - Segmented Information, Improvement
When any public company provides information disclosures within its financial statements for reporting the operational performance of different segments, it is known as Segment information \reporting. In other words, this concept refers to providing financial information, in a separate manner, about individual subsidiaries, divisions other business segments.
Determination of Segmented Information
Companies determine particular classes of entities to disclose information about the operational performance of different segments. These particular entities of divisions include the geographical areas where these public businesses operate and products/services. The most common method of segmenting information which companies use today is by dividing operations into large or small geographic units. International companies on a country-by-country basis whereas local businesses provide segmented information in different local arenas of the country.
Three Advantages of Segmented Information Reporting
Reporting the segmented information certainly has advantages (that outweigh the possible disadvantages) of which, three of them are elaborated as follows:
Disclosures of More Important Business Segments
Reporting information in segments has the first advantage that this activity gives flexibility to creditors and investors to highlight the financial position and performance of the most important as well as critical segments of a publicly traded company which derives the investment decision of potential investors.
Separation of Profitable Segments
The second major advantage of reporting segmented information is the implementation of transparency in financial operations. Businesses operating in different geographic areas or product/service categories, segmented information reporting reveals profitable areas and which ones impose pressures on the bottom line. Segment reporting can prompt a modification in strategic activities because it will highlight which overseas operations of the public business are more profitable than local ones thereby spotting the non-profitable ventures.
Improvement in Reporting and Information Disclosure Context
The third advantage of segmented information is that it facilitates to give stakeholders a better insight into fluctuations in business earnings. For instance, if much higher earnings are reported than expected, segment reporting will help to sight the origin of those earnings (country, area or product/service) from where they get generated. Segmented information facilitates potential investors to better understand the public entity/s financial management and its potential stream of cash flows.
Three Disadvantages of Segmented Information Reporting Outweighed by Advantages
Though beneficial, even then, reporting information based on segmented position has some disadvantages which include:
Loss of Competitive Edge
The very first disadvantage of reporting information into segments is that competitors of the public company easily detect the nature of business operations and sources of competitive advantage and individual profit margins since all the information is made available to the general public.
Lack of Uniform Financial Reporting
The second and complex disadvantage of segmented information disclosure is that uniform financial reporting becomes difficult. This is because internal segmented information disclosure may follow different reporting requirement whereas external segmented accounting may oblige the public business to follow Generally Accepted Accounting Principles (GAAP).
Loss Sharing and Time Consuming
Segment reporting is as a large obstacle to effective time management when it comes to compile financial information into different segments/units for reporting purposes. Financial reporting becomes more problematic and critical to calculation of net income after tax liabilities and losses are shared across different business segments in consolidated financial statements.
How Verizon Communications Reports its Segments?
The reporting activity is performed by dividing the business segments into two categories namely Wireless and Wireline which are managed as strategic business units and are organized by types of products/services they offer. The former generate revenue from sales of services and equipment whereas the latter supports the parent company through subsidiaries like Mass Markets, Global Enterprise and Global Wholesale etc.
Section 4 - Auditor’s Reports
The report that attempts to appraise the financial performance and position of the business is called auditor’s report which is completed by an independent examination of financial records by a certified accounting professional . In auditing profession, there are four types of audit reports:
In an Unqualified Opinion report, a clean opinion is issued when auditors confirm that the financial records provided are free of any misrepresentation.
A Qualified Opinion report is passed when financial records are not maintained while adherence to GAAP procedures but none of the misrepresentations are identified. It is slightly different from unqualified opinion as it includes an additional paragraph highlighting reason due to which the audit report is qualified.
Adverse Opinion report reflects that financial records provided by the business’s management do not conform to GAAP and contains material misstatements.
Disclaimer of Opinion report is issued when auditors are unable to complete appropriate audit report due to variety of reasons like lack of accurate financial records.
Impact of Auditor’s Report on Raising Bank Funding
An auditor is responsible is for expressing an independent opinion on the reliability of financial statements and provide a reasonable assurance if the financial statements are free of material misstatements, which can cause either by fraud or human error.
This report affects the ability to borrow banks funds because a credit professional will only grant the loan after he carefully studies the reliability and accuracy of financial information. The bank will not provide any loan if the company accounts are backed by adverse opinion of auditors and financial statements are not dependable because the bank does not wish to lose its money and write the loan off as a business loss.
In contrast, if the financial statements are backed by unqualified opinion in which auditors state that financial statements are accurate, dependable and are free from material misrepresentations, it will be easy for banks to extend credit once they are sure that the business is capable enough to repay the debt on time.
Auditor’s Report for Verizon Communications and the Bank’s Reaction to It
The auditor for this public entity is Ernst & Young accounting firm which has issued and unqualified opinion against the financial records of Verizon Communications. This is identified because the unqualified report contains the word “Independent” in the related title of the report. The bank, if asked to provide a loan, will react positively to the financial statements and will perceive them as accurate and free from errors as well as material misstatements. This is because a reputable and qualified accounting firm, Ernst & Young, has passed an independent judgment and unqualified opinion over the reliability of financial records of the company.
Epstein, L. (2011). Reading Financial Reports For Dummies. John Wiley & Sons.
Prentzas, G. S. (2012). How Interest Rates, Credit Ratings, and Lending Affect You. The Rosen Publishing Group.
Rao, P. M. (2012). Fundamentals of Accounting for CPT. PHI Learning Private Limited.
Wahlen, J., Baginski, S., & Bradshaw, M. (2010). Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective. Cengage Learning.
Wahlen, J., Jones, J., & Pagach, D. (2012). Intermediate Accounting: Reporting and Analysis. Cengage Learning.
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