COMPLETE ANALYSIS OF ANNUAL REPORTS OF VARIOUS COMPANIES IN THE TELECOM SECTOR

Prepared By:

Group No. 5, Section A

a) Assessing the quantum and quality of disclosures

1. Extent of overall disclosures of Selected Companies:

Different disclosures in the financial statements are as follows:

Vodafone:

Mandatory

Voluntary

Basis of preparation Yes NoAccounting for subsidiaries Yes NoAcquisition of interests from non-controlling shareholders Yes NoInterests in joint ventures No YesInvestments in associates Yes NoIntangible assets Yes NoLicence and spectrum fees No YesComputer software No YesProperty, plant and equipment Yes NoImpairment of assets Yes NoRevenue Yes NoInventory Yes NoLeasing Yes NoForeign currencies Yes NoCommissions No YesPost employment benefits Yes NoTaxation Yes NoProvisions Yes NoShare-based payments Yes No

Telstra:

Mandator

yVoluntar

yBasis of preparation of the financial report Yes NoClarification of terminology used in our income statement No YesRounding No YesChanges in accounting policies Yes NoForeign currency translation Yes NoCash and cash equivalents Yes NoTrade and other receivables Yes NoInventories Yes NoConstruction contracts No YesInvestments Yes NoImpairment Yes NoProperty, plant and equipment Yes NoLeased plant and equipment Yes NoIntangible assets Yes NoTrade and other payables Yes No

Provisions No YesBorrowings Yes NoShare capital Yes NoRevenue recognition Yes NoTaxation Yes NoEarnings per share Yes NoPost-employment benefits Yes NoEmployee Share Plans Yes NoDerivative financial instruments No YesContingent Liabilities No Yes

Verizon:

Mandatory

Voluntary

Basis of Presentation Yes NoEarnings Per Common Share Yes NoCash and Cash Equivalents Yes NoMarketable Securities Yes NoMaintenance and Repairs No YesAdvertising Costs No YesInventories Yes NoPlant and Depreciation Yes NoComputer Software Costs No YesIncome Taxes Yes NoForeign Currency Translation Yes NoEmployee Benefit Plans Yes NoDerivative Instruments No YesStock-Based Compensation Yes No

Idea: Mandatory VoluntaryBasis of Preparation of Financial Statements Yes NoFixed Assets Yes NoExpenditure during pre-operative period of license No YesDepreciation and Amortisation Yes NoInventories Yes NoForeign currency transactions, forward contracts & other derivatives

Yes No

Taxation Yes NoRetirement Benefits Yes NoRevenue Recognition and Receivables Yes NoInvestments Yes NoBorrowing Cost No YesLicense Fees-Revenue Share No YesUse of Estimate No YesLeases Yes No

Earnings Per Share Yes NoImpairment of Assets Yes NoProvisions & Contingent Liability No YesIssue Expenditure No YesEmployee Stock Option Yes No

1.1 Identify such disclosures - voluntary and mandatory- that are done only by the one of the four companies?

Vodafone:Unique mandatory disclosures:

Accounting for subsidiaries Acquisition of interests from non-controlling shareholders

Unique voluntary disclosure: Interests in joint ventures

Telstra:Unique mandatory disclosures:

Changes in accounting policiesUnique voluntary disclosures:

Clarification of terminology used in our income statement Rounding Construction contracts Derivative financial instruments Contingent Liabilities

Verizon:Unique mandatory disclosures:

Marketable Securities Unique voluntary disclosures:

Borrowing Cost Advertising Costs

Idea: Unique voluntary disclosures:

Maintenance and Repairs Issue Expenditure

1.2 Are these omitted disclosures important to the decision making process of any of the constituencies interested in the four companies?

The voluntary disclosures and some mandatory disclosures like Accounting for subsidiaries and changes in accounting policies may not be applicable but some mandatory disclosures like Marketable Securities is important to better analyse the company’s financial statements.

2. Compare the quality of various disclosures

2.1 Revenue Recognition:

VODAFONE

Determining the fair value of each deliverable can require complex estimates due to the nature of the goods and services provided. The Group generally determines the fair value of individual elements based on prices at which the deliverable is regularly sold on a standalone basis after considering volume discounts where appropriate.

TELSTRA

Rendering of services-straight line basis over the period of service provided, unless another method better represents the stage of completion.

Sale of goods-This revenue is recorded on delivery of the goods sold. Rent of network facilities-The revenue from providing access to the network is recorded on

an accrual basis over the rental period. Construction contracts-Telstra records construction revenue and profit on a percentage of

contract completion bases. The percentage of completion is calculated based on estimated costs to complete the contract.

Advertising and directory services-Classified advertisements and display advertisements are published on a daily, weekly and monthly basis for which revenues are recognised at the time the advertisement is published. All of our Yellow Pages and White Pages directory print revenues are recognised on delivery of the published directories to customers’ premises. Revenue from online directories is recognised over the life of service agreements, which is on average one year. Voice directory revenues are recognised at the time of providing the service to customers.

Royalties-Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreements.

Interest revenue-Telstra records interest revenue on an accruals basis. For financial assets, interest revenue is determined by the effective yield on the instrument.

Revenue arrangements with multiple deliverables- The Company allocates the consideration from the revenue arrangement to its separate units based on the relative selling prices of each unit. If neither vendor specific objective evidence nor third party evidence exists for the selling price, then the item is measured based on the best estimate of the selling price of that unit.

Government grants- Grants from the government are recognised at their fair value where there is a reasonable assurance. Government grants relating to costs are deferred and recognised in the profit or loss over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are included in noncurrent liabilities as deferred income and are credited to profit or loss on a straight line basis over the expected lives of the related assets. The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan is measured at amortised cost.

VERIZON

On January 1, 2011, Verizon prospectively adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. These updates require a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence (TPE) of selling price exists. The residual method of revenue allocation is no longer permissible. These accounting standard updates do not change our units of accounting for bundled arrangements, nor do they materially change how the company allocates arrangement consideration to our various products and services. Accordingly, the adoption of these standard updates did not have a significant impact on our consolidated financial statements. Additionally, the company does not currently foresee any changes to our products, services or pricing practices that will have a significant effect on our consolidated financial statements in periods after the initial adoption, although this could change.

IDEA

Revenue on account of telephony services (mobile & long distance) and sale of handsets and related accessories are recognized net of rebates, discount, service tax, etc. on rendering of services and supply of goods respectively. Recharge fees on recharge vouchers is recognized as revenue as and when the recharge voucher is activated by the subscriber. Service Income from Passive infrastructure is recognized on accrual basis (net of reimbursements) as per the contractual terms on straight line method over the contract period. Unbilled receivables, represent revenues recognized from the bill cycle date to the end of each month. These are billed in subsequent periods as per the agreed terms. Debts (net of security deposits outstanding there against) due from subscribers, which remain unpaid for more than 90 days from the date of bill and/or other debts which are otherwise considered doubtful, are provided for. Provision for doubtful debts on account of interconnect usage charges (IUC), roaming charges and passive infrastructure sharing from other telecom operators is made for dues outstanding more than 180 days from the date of billing other than cases when an amount is payable to that operator or in specific case when management is of the view that the amount is recoverable.

2.1.1 What are the revenue recognition policies of four companies? Are these policies unusual in anyways?

Revenue recognition policies of four companies are different for different items. No these policies are not unusual in anyways but few companies has not disclosed anything eg. Like VODAFONE and VERIZON have not given any information.

2.1.2 Whose policy is easy to understand and is consistent with the way company is carrying out its business? Are these policies justified in terms of their risks and advantages? Do these policies make the reported revenue numbers more conservative or less conservative?

TELSTRA’s policy is easy to understand and is consistent with the way company is carrying its business. Yes these policies are justified in terms of their risks and advantages. It doesn’t seem to be aggressive or at the same the same time they are not more conservative or less conservative.

2.1.3. Has it provided any justification for the same?

VERIZON company changed its policy in the recent year (On January 1, 2011) it provided justification provided is (the company prospectively adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. These updates require a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence (VSOE) nor third party evidence (TPE) of selling price exists. The residual method of revenue allocation is no longer permissible. These accounting standard updates do not change our units of accounting for bundled arrangements, nor do they materially change how the company allocate arrangement consideration to our various products and services. Accordingly, the adoption of these standard updates did not have a significant impact on our consolidated financial statements.

2.2. Depreciation policy:

2.2.1. How four companies are depreciating there assets? Are the policies of two companies consistent with the way they carry out their businesses?

IDEA

Depreciation on fixed assets is provided on straight-line method (except stated otherwise) on pro-rata basis on their estimated useful economic lives. Intangible Assets are amortised on straight-line method as under:-

i) Cost of Rights, Licences including the fees paid on fixed basis prior to revenue share regime and Spectrum fee is amortised on straight-line method on commencement of operations over the validity period.

ii) Software, which is not an integral part of hardware, is treated as an intangible asset and is amortized over its useful economic life as estimated by the management between 3 to 5 years.

iii) Bandwidth / Fibre taken on Indefeasible Right of Use (IRU) is amortised over the agreement period. Assets costing up to 5,000/- are depreciated fully in the month of purchase.

VODAFONE

Land and buildings held for use are stated in the statement of financial position at their cost, less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Equipment, fixtures and fittings are stated at cost less accumulated depreciation and any accumulated impairment losses.

Assets in the course of construction are carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.

The cost of property, plant and equipment includes directly attributable incremental costs incurred in their acquisition and installation.

Depreciation is charged so as to write off the cost of assets, other than land and properties under construction, using the straight-line method, over their estimated useful lives, as follows:

Freehold buildings 25 – 50 years

Leasehold premises the term of the lease

Equipment, fixtures and fittings:

Network infrastructure 3 – 25 years

Other 3 – 10 years

Depreciation is not provided on freehold land.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the income statement.

TELSTRA

Items of property, plant and equipment, including buildings and leasehold property, but excluding freehold land, are depreciated on a straight line basis to the income statement over their estimated service lives. The company start depreciating assets when they are installed and ready for use

VERIZON

Verizon also follows only straight line depreciation and left for very few exceptions for items of plant, property and equipment.

2.2.2. Has anyone of the companies changed its depreciation policy in the recent years? Has it provided any justification for the same?

As far from the annual reports there is no evidence that any of the company has changed the methods of depreciation.

2.2.3. Are there policies conservative or aggressive or moderate?

No company seems to be very aggressive, more or less conservative. All the companies have only followed straight line depreciation method only except for few exceptions. They are moderate.

2.3. Fixed Asset Accounting:

2.3.1. Which model Cost vs. Revaluation companies are following for their various asset classes?

None of the four companies have mentioned anything in their financial statements about revaluation of fixed assets.

Telstra have mentioned that they have suffered some losses due to revaluation of non fixed assets like equity, derivatives, transactions either not designated or de-designated from fair value hedge relationships; on the other hand they have non cash revaluation gains which are primarily due to a strengthening of the Australian dollar.

2.3.2. If a company is following revaluation model for any of its asset classes, is it keeping the value of its assets updated?

Telstra is updating their non fixed assets and non cash revaluation gains every year.

2.3.3. Are the reasons for revaluation/impairment of company’s assets adequately disclosed?

Yes all the four companies have disclosed the adequate reasons for their impairment and revaluation (if any).

2.3.4. Is the basis used for arriving at revaluation estimates disclosed?

Telstra have clearly mentioned the basis of how it arrived at the revaluation estimates like non cash revaluation gains which are primarily due to a strengthening of the Australian dollar, some losses due to revaluation of non fixed assets like equity, derivatives, transactions either not designated or de-designated from fair value hedge relationships.

2.3.5. Is the company depending on external valuation expert or in-house valuation expertise?

All the companies are doing their in-house valuation

2.3.6. Is there any Indian or global company belonging to the firm industry which has done revaluation of its plant and equipment during recent year?

No, none of these companies have done any kind of revaluation of its plant and equipment during recent year

2.3.7. Has anyone of the companies changed its policy in the recent years? Has it provided any justification for the same?

There are few changes that have been by all the companies except IDEA cellular in current financial year.

Verizon: Adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. No justification provided

Vodafone: On 1 April 2011 the Group adopted new accounting policies to comply with: “Improvements to IFRS” issued in May 2010. Amendments to IAS 24 “State-controlled entities and the definition of a related

party”.

Amendments to IFRIC 14 “Prepayments on a minimum funding requirement”. IFRIC 19 “Extinguishing financial liabilities with equity instruments”.No justification required as they have been amended as per the changes in the existing rules of different authority that being followed by the company.

Telstra: There are few amendments made by Telstra like AASB 136: “Impairment of Assets” AASB 107: “Statement of Cash Flows” AASB 1054: “Australian Additional Disclosures”Proper justification has been provided for the amendments.

2.4 Inventory Valuation Policy:

2.4.1. What Inventory valuation policies four companies have?

All four companies determine the inventory value as the lower of cost and market value. The cost is evaluated as:

Company Inventory Valuation PolicyVodafone weighted average costTelstra Inventory: weighted average cost

Directories: FIFOVerizon not clearly mentioned, states either of weighted average cost or FIFOIdea weighted average cost

2.4.2. Are these policies consistent in all the recent years?

Their policies are consistent and there has been no change mentioned in the financial report.

2.4.3. Are these policies consistent with the way company carries out its business?

Majority of the companies using mainly weighted average cost or FIFO at times, as the means of inventory evaluation is consistent with the accounting policies of the respective countries and the way they perform their business.

2.4.4. Do these policies make the reported numbers more conservative or less conservative?

All the four companies use weighted average as the means of evaluation of majority of its inventories is neither more or less conservative means of reporting. Only, Telstra’s use of FIFO in creation of directories can be stated as a more conservative method of reporting.

2.4.5. Has anyone of the companies changed its policy in the recent years? Has it provided any justification for the same?

None of the companies have changed any policy in any recent year.

2.5. Deferred Tax:

2.5.1. Identify the drivers of differed tax assets and liabilities of the four countries?

Company Deferred Tax Assets Deferred Tax LiabilityVodafone Tax losses Accelerated tax depreciation

Deferred tax on overseas earnings Other short-term temporary differences

Telstra Provision for employee entitlementsRevenue received in advance Provision for workers' compensation Allowance for doubtful debts Defined benefit liability/asset Trade and other payables

Property, plant and equipment Intangible assetsBorrowings and derivative financial instruments

Verizon Employee benefitsTax loss and credit carry forwardsUncollectible accounts receivableValuation allowances

Former MCI intercompany accounts receivable basis differenceDepreciation Leasing activity Wireless joint venture including wireless licenses

Idea Provision for Doubtful Debts Expenses allowable on payment basisBrought Forward Losses

Depreciation & Amortisation

2.5.2. Has company estimated to which extent the deferred tax asset is recoverable?

None of the companies shows any estimates or calculations on the recovery of the deferred tax assets.

2.5.3. Which company’s deferred tax footnote is more informative and comprehensive?

Whereas all companies give a fairly good idea about deferred taxes, it is only Vodafone that has the most non-comprehensive explanation for deferred taxes. Out of the others, it is M/s Telstra yet again that most comprehensively indicates the various components encapsulating the deferred taxes.

b) Assessing the Fundamentals:

1. Vertical common size statement analysis over latest two years:

Vodafone:Balance Sheet

2011(£m)

2010(£m)

Cash and Cash Equiv 6,252 4,423Account receivable 9,259 8,784Inventories 537 433Other current Assets 955 579Total Current Assets 17,003 14219

Net Property, Plant, Equipment 20,181 20,642Other Long Term Assets 1,34,217 142766Total Assets 1,51,220 1,56,985 Total Current Liabilities 27,075 28,616Long Term Debt 28,375 28,632Other Long Term Liabilities 8,209 8,927 Preferred Share N/A N/ATotal Equity Capital 87,561 90,810Total Liability and Equity 1,51,220 1,56,985

Income Statement

2011(£m)

2010(£m)

Net Revenue 45,884 44,472Less: Cost of Sales (40,288) (34,992)Other income and (Expenses) 4331 706interest expense (429) (1512)Earnings Before Income Tax 9,498 8674Less: Income Taxes (1,628) (56)Adjustments NA NANet Profit 7,870 8,618

Telstra:Balance Sheet of Telstra

2011($m)

2010($m)

Current Assets Cash and Cash Equiv 2630 1936Account receivable Inventories Other current Assets 4823 5249Total Current Assets 7453 7185Net Property, Plant, Equipment 21790 22894Other Long Term Assets 8670 9203Total Assets 37913 39282 Total Current Liabilities 8538 8682Long Term Debt 12178 12370Other Long Term Liabilities 4905 5222Preferred Share 12074 12696Total Equity Capital 12292 13008Total Liability and Equity 37913 39282

Income Statement

2011($m)

2010 ($m)

Net Revenue 25304 25029

Less: Cost of Sales

Other Expenses 5047 5117

Interest Expense

Total Expense 15154 14184

Earnings Before Income Tax 4557 5538

Less: Income Taxes 1307 1598

Adjustments N/A N/A

Net Profit 3250 3940

Verizon:

Balance Sheet

2011($m)

2010 ($m)

Cash, Cash Equiv, Market sec 13954 7213

Accounts Receivables 11776 11781Inventories 940 1131

Other Current Asset 4269 2223

Total Current Asset 30939 22348Net Property, Plant and Equipment 88434 87711Other Long-term Asset 111088 109946TOTAL ASSETS 230461 220005

Total Current Liabilities 30761 30597Long Tern Debt 50303 45252

Other Long Term Liability 63489 57244Preferred Share N/A N/A

Total Equity Capital 85908 86912Total Liability and Equity 230461 220005

Income Statement 2011

($m)2010 ($m)

Net Sales 110875 106565Less: Cost of Sales (97995) (91920)Other Income and (Expenses) 430 562

Interest Expenses (2827) (2523)Earnings before Tax 10483 12684

Less: Income Tax (285) (2467)Net Earnings after Tax 10198 10217

Idea:

Balance Sheet

2012 (Rs mn)

2011 (Rs mn)

Current Assets Cash and Cash Equiv 1341 4515Account receivable 8075 5347Inventories 529 522Other current Assets 17.68 8.08Total Current Assets 23883 29470 Total Fixed Assets 285957 256810Total Assets 309840 286280 Total Current Liabilities 82937 80807Long Term Debt 86121 75857Other Long Term Liabilities 11677 7065Total Liabilities 180494 162973Preferred Share N/A N/ATotal Equity Capital 129345 123307Total Liability and Equity 309840 286280

Income Statement

2012 (Rs mn)

2011 (Rs mn)

Income Net Revenue 193223 153889Less: Cost of Sales 171591 147565Other Expenses 4132 3837Interest Expense 9078 2487Earnings Before Income Tax 8422 9063Less: Income Taxes 2657 618Adjustments N/A N/ANet Profit 5765 8445

1.2 Ratio Analysis:

Vodafone Telstra Verizon Idea 2011 2010 2011 2010 2011 2010 2012 2011Liquidity, Efficiency and Solvency Ratio:

Current Ratio 0.6279 0.4968 0.8729 0.8275 1.0058 0.7303 0.2879 0.3646Quick Ratio 0.5728 0.4615 0.3080 0.2230 0.4536 0.2357 0.1809 0.2230Avg. Collection Period

72 23 NA NA 39 40 15 13

Days Inventory 6 5 NA NA 4 4 1.1 1.3Days Payable 9.6 10 48 65 114 122 174 202Debt-Equity ratio 7.9549 3.4447 0.9907 0.9509 1.3246 1.1793 0.7542 0.6664 Profitability Ratio: GPM 0.3284 0.3380 0.1801 0.2213 0.1162 0.1374 0.2224 0.2043NPM 0.1715 0.1938 0.1284 0.1574 0.0945 0.119 0.0438 0.0592Return on common equity(ROE)

0.0885 0.0949 0.2569 0.3029 0.1213 0.1468 0.068 0.0737

DuPont Analysis 0.172* 0.298* 1.728

0.194*0.283*1.729

0.1284 *0.655*3.051

0.1574 *0.637 *3.02

0.0945*0.4811*2.6826

0.119*0.484*2.5313

0.0438*0.624*2.395

0.0592*0.536*2.322

Telstra and Vodafone have better liquidity, with Vodafone displaying better true liquidity with higher quick ratio.Idea shows best efficiency both for collection and payable.Vodafone has highest debt-equity ratio and Idea has lowest.Telstra and Vodafone show the highest true profitability with Telstra capturing the highest returns on true profitability.

1.3 Cash Flow Statement Analysis:

Cash Flow Statement of Verizon($ mn)Years 2011 2010 2009Operating Activities 29780 33363 31390Investing Activities -17250 -15054 -23156Financing Activities -5836 -13650 -16007Increase (Decrease) In Cash andCash Equivalents 6694 4659 -7773

Cash Flow Statement of Vodafone( Pounds mn)Years 2011 2010 2009Operating Activities 12755 11995 13064Investing Activities 3843 -1882 -7437Financing Activities -15369 -8259 -5853Increase (Decrease) In Cash andCash Equivalents 1229 1854 -226

Cash Flow Statement of Telstra($ mn)Years 2011 2010Operating Activities 8018 9691Investing Activities -2541 -3466Financing Activities -4873 -5481Increase (Decrease) In Cash andCash Equivalents 604 744

Cash Flow Statement of IDEA(Rs mn)Years 2012 2011Operating Activities 30550.11 45230.33Investing Activities -43663.5 -78268.04Financing Activities 577.5 33148.31Increase (Decrease) In Cash andCash Equivalents -12535.8 110.6

Positive net cash flow from any activities means a business generated more cash than it spent on that activities and the Negative net cash flow means the business spent more than it generated on those specific activities.

Cash Flow from Operating Activities

A healthy business should generate positive net cash flow from operating activities and should grow the amount over time. All the four companies are having positive net cash flow from operating and they are being consistent except IDEA where there is comparatively higher difference between the cash flows from operating activities from previous years which is not a very healthy sign.

Cash Flow from Investment Activity

The investment activities section shows the cash flows from buying and selling long-term assets, such as equipment and property. A stable or growing business typically has negative net cash flow from investment activities, which occurs when it buys more assets than it sells. A growing business routinely invests in new assets to expand its capacity, replace old equipment and to keep up with new technology.Apart from Vodafone all the other companies have invested well in buying more valuable assets.Verizon has comparatively has increased their investments from last year. This is a very positive sign as they consistent in their investment.

Cash Flow from Financing Activity

The cash flow from the financing activities section shows cash flows from issuing and paying off outside financing, such as stock and debt, and from paying dividends. A healthy business may occasionally show positive net cash flow from financing activities as it raises money from investors and creditors to grow its business, but a healthy business should more often show negative net cash flow from financing activities. A negative amount suggests the business is using its cash flow from operating activities to pay dividends and pay off its outside financing.Except IDEA all the other companies are paying dividends to their shareholders apart from paying off its borrowings.

a) Are you satisfied with the quality and quantum of financial disclosure levels of four companies? Which one of them has better quality and quantum of financial disclosure than other three companies?Overall all the companies have provided good comprehensive annual report, yet comparing among them we find Telstra has better the quality and quantum of financial disclosure which is very clear from the above comparisons, adhering to majority of the accounting principles.

b) Which one of them has better fundamentals than other three companies? Verizon is a company with highest growth rate; it has highest cash inflow and consistent growth. Vodafone and Telstra had a stable fiscal year with moderately positive cash flow. Finally, Idea had a bad fiscal year with overall losses and negative growth. So, in our opinion Verizon has the best fundamentals compared to others.