Comparing the Financial Position and Reporting of BT Group Plc and Vodafone Group Plc - Assignment Example

Running head: AN ANALYTICAL REVIEW COMPARING THE FINANCIAL POSITION AND REPORTING OF BT GROUP PLC AND VODAFONE GROUP PLC Accounting and Corporate Governance University Name Table of Content Table of Content 2 Executive Summary 3 Chapter 1 - Introduction 3 Chapter 2 - The Company (Or Companies) 4 Chapter 3 - The Literature Search 10 Chapter 4 - The Data and its Analysis 10 Standard of Financial Reporting 10 Clarity, Comprehensive and Importance to the Users of the Reports 11 Financial Strengths and Weaknesses 13 Chapter 5 - Conclusions and Recommendations 15 References 17 Executive Summary This is a report and an analytical project comparing the financial position and reporting of two companies. These companies are BT Group Plc and Vodafone Group using their 2006 financial statements. The companies are in the telecommunication's sector with subsidiaries and therefore reporting on their financial statements from the group point of view. The aim of this project is to compare the reporting framework and whether based on the reporting, the financial statements are capable of satisfying users' needs. Chapter 1 - Introduction This paper being an analytic review compares the financial position and reporting of BT Group Plc and Vodafone Group Plc. The two companies are in the telecommunication sector whereby BT Group Plc provides fixed lines while Vodafone Group Plc provides mobile phone. Vodafone is one of the largest mobile telecommunication companies that have invested in 26 countries and has network partners in 34 countries. It was issued their first mobile license in 1982 in the UK. Their network serves 191.6 million customers worldwide as at September 30, 2006. Vodafone headquarter is located in Newbury, England in Vodafone House building. The company had an average of 600,000 employees as at March 31, 2006. Vodafone Group Plc was previously known as Vodafone AirTouch Plc. 1 As at November 15, 2006, Vodafone had a market capitalisation of 80 billion. The London Stock Exchange lists its ordinary shares while on the other hand, New York Stock Exchange lists it American Depositary Shares (ADS's). BT Group Plc is a telecommunication provider of fixed lines and it is one of the leading companies in this sector. Their customers are from America, Europe and Asia Pacific. They specialises in services such as: local telecommunication services; international communication services; internet products and services; networked IT services and higher-value broadband. (BT Group Plc, 2006) BT Group Plc has more than 20 million customers and 30 million exchange lines. It also provides network services to a number of other licensed communication companies. The data has been collected from the companies' websites and other publications. 2 Chapter 2 - The Company (Or Companies) Vodafone is powered by 3G (UMTS) whereby the facility is capable of sending and receiving bulk information. 3G (UMTS) is usually regarded as mobile network next generation. Vodafone network is capable of not only sending voices, pictures and text messages, but is also used to send music and video. 3 Though the services provided by Vodafone vary with country and phone, it generally provides the following services to its mobile subscribers:- Video Messaging where the network facilities one to share videos from their mobile handsets. Picture Messaging where the network is capable of sending pictures of what one is doing or seeing live as it happens. Video calling where one can see the person he is communicating with from his mobile phone handset. Games where the network allows one to choose the game he want to play from his mobile handset. Downloading of Ring Tones whereby the network allows one to download latest polyphonic ringing tones from their handsets. Downloading of Music as the network can allow one to download and play music of their choice. Providing Mobile TV whereby the network allows one to watch TV stations from their mobile handsets. Vodafone increased their revenue from 26,678 million as at March 31, 2005 to 29,350 million as at March 31, 2006. This is a clear indication that the company is increasing their market share. (http://www.vodafone.com/section_article/0,3035,CATEGORY_ID%3D300%26LANGUAGE_ID%3D0%26CONTENT_ID%3D21107,00.html) As at March 31, 2006, shareholders structures were as follow: Shareholder Structure Number of ordinary shares held Number of accounts % of total issued shares 1 - 1,000 439,814 0,19 1,001 - 5,000 102,534 0.33 5,001 - 50,000 28,540 0.57 50,001 - 100,000 1,451 0.15 100,001 - 500,000 1,292 0.45 More than 500,000 1,937 98.31 575,568 100.00 Source: Vodafone Group, 2006 Vodafone geographical shareholding is distributed as follow as at March 31, 2006:- UK was 52.68% North America had 32.04% Europe not including UK had 12.86% while Other parts of the world had 2.42% The major shareholders of Vodafone share are Bank of New York that holds 12.8%; The Capital Group Companies Inc. 5.56%; Barclays Plc 3.92 and 3.67% are held Legal & General Investment Management. This shareholding structure was as per May 26, 2006. Vodafone Organisation Structure is as follow: Organisation Structure Source: Vodafone Group, 2006 BT Group Plc is a holding company composed of group of firms that offer voice and data services in the UK, Europe and other parts of the world. BT Group Plc. has the following organisation structure. Organisation Structure Source: About BT Group Plc, 2006 BT Retail is the considered as the prime channel that market other BT Group businesses as it serves residential customers. BT Global services usually services multi-site organisations in the world as it is regarded as a global managed services and solutions providers. BT wholesale has a responsibility of providing network services and solutions to communication companies. Openreach is a newly created section in BT that has a responsibility of owning, maintaining and developing the access network that links business and homes to the Britain's communications networks providers. BT Exact usually provides global networked IT services company with technology foundation for BT's transformation. 4 Chapter 3 - The Literature Search The sources where I found materials and data on Vodafone and BT Group Plc are their websites, journals, books and other publications. Chapter 4 - The Data and its Analysis Standard of Financial Reporting Generally the financial statements have been prepared in accordance with the international financial reporting standards. For instance BT-Group Plc offers various products and services and as by the international Accounting Standards No. 14 which requires companies who trade in different business or geographical segments to present financial statements in segments form. Although this is the case, information has not been provided to allow the user to determine which are the primary segment and the secondary segment. 5 BT Group Plc has also complied with requirements of consolidation that intra - group balance be eliminated from the group. This can be seen in intra- group elimination of revenue. Vodafone Group Plc seems to have disposed off some of its subsidiaries. This is indicated by the presence of "profit/ loss" from continued and discontinued operations. Vodafone has not complied with the reporting standard on continued and discontinued operations. (International Accounting Standard 35) whose objective is to segregate financial information about continuing & discontinued operations on a line by line item as opposed to a separate determination of the profit/ loss of a continuing/discontinued operation and then absorbing this into the accounts. The following format of a consolidated income statement could have been adopted by Vodafone group Plc. 6 Vodafone & Group Consolidated Income Statement For the years ended 31st March 2006 Continuing Discontinuing Enterprise Operations Operations Operations m m m Sales XX XX XX Cost of sales (XX) (XX) (XX) Gross profit XX XX XX Etc The format is followed until the point of profit after tax after which minority interest is deducted on the column of "Enterprise as a whole". 7 Clarity, Comprehensive and Importance to the Users of the Reports The consolidated income statement of BT Group Plc, I can say has achieved some level of clarity but not 100%. It contains too many columns which might confuse the reader. But it is comprehensive; giving detailed summarized users of financial statements: (i) Potential investors: - The Earning Per Share (EPS) has been given as 5.6 and 5.7 for quarter (1) & (2) respectively. The E.P.S gives the earning potential of the firm and this can assist any potential investor in making viable investment decision on whether or not to invest in the company. The Average Number of Shares in Issue has also been given and it is possible for the reader to calculate the Market capitalization of BT Plc i.e. / No. Shares in issue X E.P.S 8 (ii) Ordinary shareholders: - They can be able to gauge how much worth of dividends they will get. They will receive 0.255 as D.P.S in 2005 / 2006. Being an increment of 19% from the previous year, there's a likelihood that their Dividend per share (D.P.S) will improve in the coming period(s). 9 Vodafone's consolidated income statement is clear but the clarity is to the detriment of its comprehensives this barring the reader especially one with little accounting knowledge from deriving the figures so obtained. For instance more information on how they arrived at the figures of basic earnings per share and diluted Earnings per share ought to have been given a footnote. The number of ordinary shares for obtaining each of the EPS's could have been given in addition to the Net profit/ loss used for the calculations. The company has therefore failed to give the disclosure requirement of international Accounting Standards No. 133 'Earning per share' which require that the following be disclosed: 10 a) Earnings used and b) The weighed No. shares used in getting both the Basic and Diluted E.P.S Nevertheless, unlike BT Group Plc, Vodafone had given its additional summarized results like the cash flow statement shown by a summary of each item i.e. operating, investing & financing. This will give the reader satisfaction as to the movement of cash and cash equivalents of the company. 11 Financial Strengths and Weaknesses The indicators of financial strengths & weakness of a company lies on its asset base in the balance sheet. Unfortunately, I couldn't get the Balance Sheet of BT - Group Plc. The Total assets and Total equity of Vodafone show a downward trend from the 2005 results declining from 147,197 to 126,738 and 113,648 to 85,312 respectively. The total equity to shareholders is also declining. Shareholders funds comprise of; a) Ordinary share capital b) Retained - earnings and c) Any dividends paid and proposed. 12 Their decline could mean that either the retained earnings have gone down (declined) or that the firm can no longer pay ordinary dividend. Ordinary share capital remains the same. This is a negative indicator disposal of the financial strengths of Vodafone. The decline in the total assets from 147,197 to 126,738 may indicate disposal of assets of the company. Unless for some other viable financial reasons like some assets being unproductive and hence increasing the firm's expenses e.g. maintenance costs, the firm may end up utilizing its capital by selling its assets. The decline of the asset value could also have been caused by depreciation of those assets if at all the company never disposed off any asset. There could also be a possibility that the company did not buy any asset that financial year hence the decline would have been caused by depreciation. The efficiency with which Vodafone utilizes its assets to generate sales revenue had declined from 5.5 to 4.3 as shown by the assets turnover: - ASSETS TURNOVER = SALES TOTAL ASSETS 2005: = 147,197 = 5.5 26,678 2006: = 126,738 = 4.3 28,350 BT is able to control its cost of goods sold expenses compared to Vodafone. This can be illustrated using the gross profit/ margin ratio. 13 BT Vodafone Gross profit = 1362 x 100 = 65% 12280 X 100% = 41% Revenue 2068 29350 It means that for BT, 65% of sales remained as gross profit whereas 35% was the cost of goods expenses. For Vodafone, 41% of sales remained as gross profit, 59% being the cost of good sold. In addition to Vodafone failing to control its cost of sales expenses, its liquidity is also sinking from the 30th September 05 results to the 31st March 2006 results. Its current asset ratio has declined from 0.54 to 0.48. i.e. 8072 7532 its acid test/ quick 15060 15512 Ratio has declined from 0.50 to 0.47 i.e. Current assets - inventory = 8072 - 536 to 7532 - 297 Current liabilities 15060 15512 This means that the ability of Vodafone to meet its short term maturing financial obligations as and when they fall due (financial strengths) is diminishing. 14 Chapter 5 - Conclusions and Recommendations At least with the information contained in the financial statements of the two companies, it is possible to meet the user's requirements. But the income statement of BT Group Plc needs to be made clearer by excluding a lot of comparable information. Its representation on revenue by segment should also be able to allow the user know which is the primary segment and which is secondary. This is determined by the source of risk in the firm. If the risk is due to the products & services produced & offered then business segment should be the primary segment. On the other hand it the risk is due to the firm operating in different geographical segments, the geographical segment should be the primary segment. Vodafone can control its cost of goods sold by bulk purchasing which attracts quantity discounts & reduces carriage costs. It can also reduce its dividend payout ratio so that more retained earnings can be achieved for future investment proposes. 15 References Alexander, D., Britton, A. and Jorissen, A. (2005): International Financial Reporting and Analysis, Second Edition, London: Thomson Accounting Standards Board, (1999): Revised Exposure Draft - Statement of Principles for Financial Reporting, ASB Publications. AT Foulks Lynch (1998): Drafting Financial Statements (Industry & Commerce), London, AT Foulks Lynch Ltd. BPP, (1998): CAT Interactive Text - Drafting Financial Statements, London, BPP Publishing Ltd. BT Group Plc (2006): About BT Group, Retrieved on November 20, 2006, from http://www.btplc.com/Thegroup/index.CFM Deegan, C. and Unerman, J. (2006): Financial Accounting Theory: European Edition, Maidenhead: McGraw Hill Elliott, B. and Elliott, J. (2006): Financial Accounting and Reporting, Eleventh Edition, Harlow: Prentice Hall Lerner, J. and Cashin, J.A (2001): Business and Economics, New York, Mc Graw Hill Publishers Thomsett M.C. (2001): Builder Guide to Accounting, London, Craftsman publishers Vodafone Group (2006): Global products and services from Vodafone, Retrieved on November 20, 2006, from http://www.vodafone.com/section_article/0,3035,CATEGORY_ID%3D300%26L ANGUAGE_ID%3D0%26CONTENT_ID%3D21107,00.html Wood F., and Sangster A., (1999): Business Accounting I, London, Financial Times Professional Ltd. Read More