Acct303 Intermediate Accounting Iii: Verizon Assessment Answers

Use the Internet to research Verizon Communications’ financial statements, annual report, notes to the financial statements, president’s letter, and management discussion and analysis from the most recent year in order to complete this assignment.

Discuss the disclosure requirement on accounting policies, and identify at least two (2) examples of the most commonly required disclosure. Explain the key ways in which the examples you provided are useful to financial statement users. Analyze Verizon Communications’ disclosure on accounting policies, and give your opinion on whether or not the information is helpful for decision making. Provide a rationale for your response.

Explain the importance of the management discussion and analysis section of an annual report. Select three (3) items from Verizon’s management and discussion analysis of the annual report that could be useful to potential investors. Provide three (3) specific examples of how the three (3) items you selected could influence a potential investor’s decision to invest in Verizon.

Describe segmented information, and explain the way in which companies determine segments. Identify at least three (3) advantages and three (3) disadvantages of segmented financial data. Give your opinion on whether or not the advantages outweigh the disadvantages. Outline the manner in which Verizon segments its financial data. Suggest key actions that Verizon’s management can take in order to improve the company’s segmented financial data. Provide a rationale for your response.

Analyze the various types of auditor’s reports, and determine the impact that the auditor’s report has on a company’s ability to obtain financing from a bank. Identify the type of auditor’s report issued on Verizon, and speculate the manner in which you believe banks will perceive Verizon’s auditor’s report.

Answer:

Verizon Communications Inc. that was incorporated on 7^th October 1983 is the holding company. It provides entertainment, information and communication services along with its subsidiaries to the consumers. Various segments of the company include wire line and wireless products. The wire line segment provides video and voice communication services and products. On the other hand, the wireless segment provides communication services and products that include equipment sales, data service and wireless voice to the government, business and consumers (Verizon.com, 2018).

Disclosure of accounting policies

Accounting disclosure is the statement that identifies the company’s financial policies. It shows the profits and expenses over the particular period of time. The accounting policies are disclosed for both potential as well as existing investors of the company. The accounting policies are the methods and strategies followed by the business. Disclosures also include the cash flow statement, balance sheet, income statement of the company. Main objective of disclosures of the accounting policies is to disclose the event or affair that has an impact on the financial statement of the company (Tsalavoutas & Dionysiou, 2014). The companies are required to follow the legal systems while preparing the financial statement and the companies are required to publish the same along with the financial statements. The disclosures are made to other publications apart from the annual report. Disclosures are compulsory as per the regulations and law and shall be made to the stockholders and shareholders of the company. Further, the disclosures provide the insight with regard to the management styles for conservative or aggressive earning natures. It also ensures that the policies used are not misleading and the management followed consistent and strict approaches while the accounting statements were prepared (Guay & Verrecchia, 2018).

Common disclosures

Most crucial and common disclosures among others are disclosures regarding the fixed assets and disclosures regarding the significant accounting policies. Disclosures for fixed assets provides the information regarding the information related to categories of fixed asset like equipment, building, leasehold improvements and furniture used for the business operations. This disclosure also shows the current depreciation and accumulated depreciation. On the other and the disclosure regarding the summary for significant accounting policies provides the users with the information regarding the company, its major revenues, accounting policies followed for preparing the financial statement and recognition criteria for various items (Glaum et al., 2013).

Analysing the annual report of Verizon Communications for the year ended 2017 it can be found that the company provided complete disclosures regarding fixed assets and significant accounting policies to provide sufficient insights to the users regarding the these items (Verizon.com, 2018).

Importance of management discussion and analysis section of the annual report

The management discussion and analysis section is the section where various aspects of business associated with the current as well as the past performance of the company are discussed by the company’s management. Further, under this section the management discusses regarding the operational efficiency of the company for the previous year. Therefore, it reveals the improvement or deterioration of the company’s financial performance over the past years. Based upon the analysis the company takes various future decisions like objectives, goals and decisions regarding the new projects. The section also includes the financial as well as non-financial aspects that focus on the management style and managerial operation of the company (Loughran & McDonald, 2014). This section plays important role as it discusses the past performance of the company, key factors that has an influence on the performance of the company, financial performance, financial position and growth prospects of the company.

3 items from the management and discussion analysis section of Verizon communication that can influence the decision of potential investors are as follows –

• Trends and operating environment – the industry under which the the company operates is highly competitive and the company expects to sustain through providing emerging services, non-traditional and traditional services to the customers that will help in increasing the market share. The base for high quality customers and the improved network differentiates it from its competitors and allows the company to manage and plan through the changing competitive and economic circumstances. Further, the company is focussed on execution of the business fundamentals like delivering strong operational and financial results, maintaining the customer base with high quality and generation of strong free cash flows. Potential and current competitors of the company includes the wireless service providers, cable companies, foreign as well as domestic telecommunication service providers, internet service providers and satellite TV companies. Irrespective of the challenging environment the company expects that it will grow in its major aspects and will continue offering the customers with various products like digital TV, long distance as well as local voice services, broadband internet access and IP services and products. The company will also focus on the cost efficiencies for offsetting the adverse impacts that is generated from non-favourable economic circumstances and various competitive pressures (Verizon.com, 2018).
• Market risk – under the normal business course the company is exposed to various business risks that include fluctuation in the rate of foreign exchange, changes in the rate of interest, changes in the investment, commodity and equity prices and changes in the rate of corporate tax. To minimize the impact of market risks the company employs the strategies for risk management that includes using various derivatives like forward swaps for interest rate, swaps for cross currency, caps for interest rate and swaps for interest rate. However, the company does not hold the derivatives for the purpose of trading. Further, it is the general policy of the company to enter the foreign currency, interest rate and derivative transactions for achieving the objectives to minimize the different market risks exposures (Panaretou, Shackleton & Taylor, 2013). Further, the company’s objectives include maintenance of mix of variable and fixed rate of debt to lower the cost of borrowing within the reasonable parameters of risks.
• Acquisitions – during May 2015, the company entered into the merger agreement with AOL Inc under which the company acquired all the common outstanding stock of AOL at $ 5.00 per share. AOL was the leader in advertising platform and digital content space. The acquisition of AOL share will enhance the Verizon’s advertising platform and its future business. Further, during July 2016 the company entered into the stock purchase agreement with Yahoo Inc. based on which the company agreed to acquire stock of 1 or more subsidiaries of Yahoo (Verizon.com, 2018).

Segmented information 

Business segmented information segregates the financial data of the business based on the subsidiaries or geographical location or divisions. In the annual report of the company the main purpose of segmented information is to deliver accurate picture of the company and its subsidiary’s performance to the shareholders and other users of the financial statements. for the management level the segmented information are used to analyse each segment’s expenses, incomes, liabilities, assets and other details for assessing the riskiness, profitability and taking other major decisions (Franzen & Weißenberger, 2015).

Advantages of segmented information

• Resource allocation – segmented information plays important role in allocation of resources based on the requirement of each segment. Non-availability if non-segmented information leads to misallocation of scarce resources
• Credit and investment decisions – it enables the management and user of financial statement to analyse the uncertainties regarding the amount and timing of cash flows which in turn enables to assess the risk involved in different operating scenarios.
• True and fair value – segmented information is required to present the financial statement in true and fair manner. It presents the financial statement in more transparent and clear manner that enables the user and potential investors to have better idea regarding the operational segments and their profitability aspects (Farías & Rodríguez, 2015).

Disadvantages of segmented information

• Applicable for big entities – it is not applicable for small entities and they may find it irrelevant and costly
• Emphasis of present scenario – segment information only focuses on the present scenario and not takes into consideration the past year’s result and therefore the companies may not find it relevant
• Manipulation of data – the company can manipulate the data if it wants to show any particular segment more profitable and therefore, the segmented information is not always accurate (Lail, Thomas & Winterbotham, 2013).

Verizon Communication reports the segments as Wireline segment and Wireless segment.

As the company provides services to various countries, it is recommended to segment its financial information based on the countries to which it provides its services. It will enable the company to analyse how much profit or loss generated from which country. It will enable the company to take decisions regarding closing down the services in any particular country if it is not profitable.

Types of audit report 

There are 4 types of audit reports as follows –

• Unqualified report – this type of report indicates that as per the auditor’s opinion the financial activities and financial statement of the company is correct and therefore is acceptable
• Qualified report – this type of report indicates that though error has not been found the report has not been prepared as per the required accounting and auditing standards (Rahimian, Tavakolnia & Karamlou, 2014).
• Adverse report – this states that the company has not complied with the required accounting and auditing standards and discrepancies found in the financial statements of the company (Tsipouridou & Spathis, 2014).
• Disclaimer of opinion – under this circumstance, the auditor is not able to issue any audit report owing to absence of the appropriate financial records.

Generally the bank prefers unqualified audit report for the purpose of allowing finance to the company. It is found that the auditors of Verizon Communication issued unqualified audit report to the company. This report will help it to get loan from the bank as the bank prefers unqualified audit report for the purpose of allowing finance

References

Farías, P., & Rodríguez, R. (2015). Segment disclosures under IFRS 8’s management approach: has segment reporting improved?. Spanish Journal of Finance and Accounting/Revista Espanola de Financiacion y Contabilidad, 44(2), 117-133.

Franzen, N., & Weißenberger, B. E. (2015). The adoption of IFRS 8–no headway made? Evidence from segment reporting practices in Germany. Journal of Applied Accounting Research, 16(1), 88-113.

Glaum, M., Baetge, J., Grothe, A., & Oberdörster, T. (2013). Introduction of International Accounting Standards, disclosure quality and accuracy of analysts' earnings forecasts. European Accounting Review, 22(1), 79-116.

Guay, W., & Verrecchia, R. E. (2018). Conservative disclosure. Journal of Financial Reporting.

Lail, B. E., Thomas, W. B., & Winterbotham, G. (2013). Strategic Segment Reporting Using the “Corporate/Other” Segment. Accounting Horizons, 28, 455-477. 

Loughran, T., & McDonald, B. (2014). Measuring readability in financial disclosures. The Journal of Finance, 69(4), 1643-1671. 

Panaretou, A., Shackleton, M. B., & Taylor, P. A. (2013). Corporate risk management and hedge accounting. Contemporary accounting research, 30(1), 116-139.

RAHIMIAN, N., TAVAKOLNIA, E., & KARAMLOU, M. (2014). Qualified Audit Opinion and Debt Maturity Structure.

Tsalavoutas, I., & Dionysiou, D. (2014). Value relevance of IFRS mandatory disclosure requirements. Journal of Applied Accounting Research, 15(1), 22-42.

Tsipouridou, M., & Spathis, C. (2014, March). Audit opinion and earnings management: Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.

Verizon.com. (2018). About Verizon. [online] Available at: https://www.verizon.com/about/homepage [Accessed 2 Jun. 2018].