Telus Annual Report Analysis Essay Example

$368. million in 2007 compared to 2006. Cash flow from operation activities is the most important source of cash for business.

The increase of this figure shows that TELUS has a good ability to generate cash inflows to maintain or even expand its operations. Cash used by investing activities increased by $96. 4 million in 2007 from 2006, mainly due to upfront capital investment to support new enterprise customers as well as expenditures for digital wireless capacity and coverage. Generally to say, a company’s investments have significant impacts on its future performance.

Spending money on capital assets purchase indicates the company is expanding, which is a good sign about the company. Cash used by financing activities was increased by $220. 1 million in the last twelve months, due primarily to increased dividend payments. The common shares and non-voting shares issued were decreased by $103.6 million. The reason of this decrease is because TELUS keeps repurchasing its shares to reduce dilution and be able to pay shareholders higher dividends. From above analyze, based on its 2007 financial statements, TELUS is profitable and shows a good potential of future growth.The implication is that it’s a good company to invest on.

What information in the financial statements and notes did you find most helpful for assessing the financial performance in part (1) above? Why? On TELUS income statement, operating revenue helps readers to know the company’s sources of cash and the ability to generate it. It is a very important figure to measure the company’s operation status. Operating expenses shows the uses of cash for the company to run its business. Many users are focused on a company’s net income figure,

as it is a hard evidence to show how profitable the company is.

On its balance sheet, current asset and current liability help readers to predict the company’s ability to maintain normal business operations, (the ability to pay current liabilities) and to pay long-term debt. Information in Note14 (p102)-capital asset, and note 17 (p105-107)-long term debt provide further details about the company’s balance sheet accounts. By reading those notes, we can tell that many capital assets are amortized over 70%, such as telecommunications assets, assets on customers’ premises, assets under capital lease, other capital assets, and software.TELUS will have big expenditures on capital assets replacement in the next few years. It doesn’t have significant amounts of debt due in recent three years, which will assure its liquidity.

However, significant amounts of long-term debt mature in next few years, combing with the capital assets replacement expenditure could probably make readers worry about the company’s future financial situation and consequently feel hesitate to invest in the company. Therefore, they may want to know the earnings per share, which can be calculated from information provided in the shareholders’ equity section.This ratio shows how much rewards investors can get by investing at TELUS. Note 18 (g) p110 provides information about shareholders’ equity.

It indicates that TELUS spent a lot of money on repurchasing its outstanding shares to maintain high share price. The financial activities also prove that TELUS has the ability to get loans and pay off its debt. The cash flow statement on p74 is a summary of all the transactions that affected the cash account for the year. The cash flow statement helps to predict future cash flows.It helps to

evaluate management decisions.

Wise decisions lead to profits and strong cash flows, and vice versa. The investment activities show what investments the company is making. Cash flow statements also determine the company’s ability to pay dividends and debts. From the financing activities, users will see how much dividends were paid out during the year.

What additional information in the financial statements and notes, if any, do you wish you had to assess its financial positions? Why?TELUS tries its best to put as many information as possible to make the financial statements reliable and relevant for readers to make decisions. The company has 21 notes disclosed in the financial statements to give supplemental information for readers to better understand information hided behind the figures. However, if the company can provide more information about the following, it will make its financial statements better.

On the income statement: Depreciation and Amortization: We hope that we could have more information on depreciation, since it is a “soft number”.Estimates made on it will affect net income figure and balance sheet. The company provided a table on page 77 about estimated useful lives for the majority of its capital assets subject to depreciation and amortization. However, it did not indicate how the company came up with those numbers, and how reliable they are. Furthermore, TELUS did not show how it will adjust depreciation cost if the actual useful lives or the depreciation of these capital assets is different from the estimation.

Income tax expense: The income tax decreased $119. 6 million compared to 2006.It is a big change. In the note 9 (p92), it just explained the change due to the company’s income tax estimates.

Although it states $603. 7 million capital losses carried forward in 2006 was denied on audit by CRA, the company still accumulated this amount in 2007.

It makes readers to concern about the accuracy of these estimated numbers. TELUS should provide more details and reasonable explanations about the change. OCI: TELUS put OCI as part of income statement in year 2007, but no information about OCI items in year 2006. It loses the comparability for this section.

Readers will not be able to know if the company did better or worse at its investment activity. On the Balance Sheet: Current Liabilities: compare to 2006, current maturities of long-term debt decrease $1428. 1 million. There is no information available to explain why its maturities of long-term debt declines dramatically.

By reading notes 17 p107, TELUS has a huge amount under long-term debt maturities from 2010 to 2012-$80. 8, $1909. 2 and $887. 4 million respectively.

TELUS needs to explain why it has such a little amount in year 2008 and 2009 ($5. and $1. 5 million). Otherwise, readers may feel the company trying to manipulate its financial reports. There is no support information about the $145.2 million decrease on current portion of derivative liabilities. Lack of information about current liabilities accounts will affect readers to measure the profitability of TELUS. Cash flow statements: Operating Activities: the net change in non-cash working capital increased $272. 8 million compared to year 2006.

Notes 20(c) (p115) provided information about where the number came from.TELUS needs to explain reasons of the change, especially when the items under this account involved significant estimates, such as account receivable, inventory, income tax. Otherwise, it is hard for users

to judge its ability to generate cash.

Where did your company report OCI? Why do you think your company chose this option? How informative was OIC information to you in assessing the company’s performance? Why/why not? (P71) TELUS’s OCI is presented along with the income statement. TELUS is pursuing excellence in disclosure and governance.The management states that” underpinning all business decisions and actions at TELUS is a firm commitment to thorough and transparent reporting, excellence in corporate governance and ensuring high ethical standards. ”

TELUS also takes a proactive approach to corporate reporting and governance, often going above and beyond the basic requirements. The company adopted the recommendations of the CICA for accounting for comprehensive income is a way to prove that TELUS is putting words into actions.

The company also delivers a positive message to the public that is the company has confidence about its performance, and nothing to hide.TELUS is trying to reduce adverse selection, and makes its financial statements more reliable and relevant for readers to predict its future profitability, cash flows and risks, as the unrealized gains or losses in OIC provide relevant information to investors about the company’s future performance. TELUS included changes in shareholders equity arising from unrealized changes in the fair values of financial instruments such as held for trading, and available for sale, because it considers other comprehensive income is part of net income, OCI will affect the price of earnings per share.The company’s OCI also reflects management’s investment intentions. TELUS’s OCI contained major items required by Canadian GAAP, which provide relevant information to investors about its future performance.

As these unrealized gains and losses are realized through sales, they are

transferred to net income. Items include change in unrealized fair value of derivatives designated as cash flow-hedges, foreign currency translation adjustment arising from translating financial statements of self-sustaining foreign operations, and change in unrealized fair value of available-for-sale financial assets. However, the company’s OCI only showed the net amount under each category, and it did not have further details about where these numbers came from, or how the company implements the financial instruments, which are available-for-sale and held for trading. Readers must read through the related notes in order to have a better understanding about TELUS’s OCI. Note 1(g) 2nd paragraph (p78) explains how the foreign currency adjustment arises from self-sustaining foreign minor subsidiaries. Table in Note 1(h) (p78) explains TELUS’s financial instruments-recognition and measurement.

Note 17(b) (p106) provides information about the company’s cash flow-hedge. The unrealized gains/losses arise from crossing currency interest rate swap agreements between Canadian and U. S currency and the cash-settled equity forward agreements (cash flow hedges) that the company entered into in respect of share-based compensation. Note 18 (d) (p108) contains detail information about where the net amount under each category comes from.

Where are the grey areas or ‘soft numbers’ in their accounting? What accounts have the most judgment required? Why? Does the company appear to be conservative or aggressive in their accounting for these ‘soft number’? Are you able to tell? Provide specific examples referenced to the financial statements and notes. Note 1(b) (use of estimates, p76) clearly indicates several ‘soft numbers’ those are based on “significant estimates”, such as allowance for doubtful accounts, the recoverability of goodwill and the accruals of CRTC deferral account liabilities etc.. Among those numbers,

we believe the future income assets (liability) require the most judgment.

We come to this conclusion because of two reasons: First, the future income liability is based on prediction of future income. Needless to say, future income is generated with significant estimate, which is already a soft number. Second, as the tax regulations keep changing, estimate made with current existing rules will probably not apply to future. Just like what has been stated in note 9 (income taxes, page 92) “there are usually some matters in question. ” Except the future income tax liability, we also think “the estimated useful lives of assets” is another the most judgmental result.

It is because the company is in a hi-tech industry. The nature of telecommunication industry is that technology is updated in a very short period. Consequently, hardware and software assets are both obsolete very fast and it is hard to know when the new technology will replace current ones. In addition, for the intangible assets, as “there is a material degree of uncertainty with respect to this estimate given the necessity of making key economic assumptions about the future” (note 14, capital assets, page 102), the company has to make significant estimate with little hard number as support.We think the company appears to be quite aggressive in the accounting for these two soft numbers. For example, for the future income tax liability, in the note 9 (income taxes, page 92), the company indicated adjusted $79.2 million deduction of “Tax rate differential on , and consequential adjustments from reassessment of prior year tax issues” to the income tax expenses even the company has been denied on audit by CRA

to carry forward $603. 7 net capital loss. Compare to the $40. 3 million reduced in 2006, the company almost doubled the deduction in 2007.

Another example is the software amortization. In 2007, the company has $455. 4 million addition of software, however, the accumulated amortization only increased by $199. 3 million. Although the company has grown steadily in past few year, readers should still be careful to deal with the aggressive estimate made by the company.

Section 1000 indicates that financial statement information should be relevant, reliable, understandable, and comparable.

The first financial statement note should be regarding the company’s significant accounting policies? Review that note.Do you think it is understandable to an average reader? Explain.

Note 1 (summary of significant accounting policies, p76) summarizes most significant accounting policies adopted by the company in plain language. It is understandable to average readers for two reasons including clear format and detailed explanation. First, note 1 (as well as other notes) is presented in a clear format. Accounting policies are explained under sub headings, which allow readers to distinguish each policy from others.

In addition, point form and tables help to express content simply and clearly.For instance, note 1(b) (use of estimates, p76) lists accounts those are based on estimates, and note 1(h) (financial instruments-recognition and measurement, p78) presents the classification of financial instruments and reasons of applying such classification in a table, which readers can make comparison. Second, note 1 is understandable by giving detailed explanation. The note explains not only what policies the company has adopted, but also how those policies are applied in details. For example, note 1(c) (revenue recognition, p76) is about revenue recognition.

This section first describes

that the company earns its income from two different sources mainly (Voice local, vice long distance, data and wireless network, and other and wireless equipment). Then, it explains when and how revenue is recognized in each class. After that, the note gives more information about non-high cost serving area of deferral account (p77), which is probably confusing to readers who are not familiar with telecommunication industry, the note explains where the deferral account concept comes from, the reason to use the concept and the accounting method of deferral account.With those explanations, even readers who don’t have adequate knowledge of accounting the telecommunication products can understand how the numbers are generated.

Besides note 1(c), most other sections indicate readers the rationales and method of adopted accounting policies. Those indications enhance readers’ understandability even if they are lacking sufficient knowledge of telecommunication industry and accounting.

• Review all of the company’s notes to its financial statements.
• Provide an example specific to their notes which shows the company has tried to make their financial information understandable.

Note 21(difference between Canadian and United States generally accepted accounting principles, p116-118) well illustrates how the company has tried to make their financial information understandable. The company’s financial statements are prepared in accordance with Canadian GAAP. But it is listed on both TSX and NYSE. Therefore, certain financial information could not be understandable to readers who don’t know Canadian GAAP.Taking that factor into consideration, the company prepared note 21.

The note compared different effects on income statement, balance sheet and shareholders’ equity caused by significant differences between two sets of GAAP on (p116). It also explains what those differences are. One example is the different regulation

of “additional goodwill on Clearnet purchase” (p118). According to note 21(d) (goodwill, p118), “Under U.S GAAP, shares issued by the acquirer to effect an acquisition are measured at….. the transactions date. Due to this difference, share purchase price was $131.4 million higher under U. S. GAAP, which is material. Another important difference is the income taxes expense.

On consolidated statements of income and other comprehensive income, the company‘s current year income tax expense is $233.6 million including current taxes recoverable of $143. 3 and FIT liability of $376. 9 (p92). However, note 21(f) (income taxes, p118) shows that the company’s current income tax is $153. 8 million for U. S. GAAP purposes, $79. 8 million (34%) less cash outflow.Although the adjustment of “Revaluation of deferred income tax liability to reflect future statutory income taxes rates” relies on the company’s estimate very much, which could mitigate readers’ confidence in reliability; it is still a very significant difference that will cause readers’ attention. Moreover, it is noticed that investment tax credits was not allowed under Canadian GAAP but U. S. GAAP.

Above are examples from note 21 that demonstrates how the company has tried to make it financial information more understandable to various readers by providing additional information. i) Provide an example of where improved understandability or clarity is warranted in their notes. Note 20 (additional financial information, p115) improves understandability of consolidated financial statements. On the statements, there are many items are presented in net value of several different accounts.

For instance, on the income statement, readers are only given a total amount of $5464. 7 million operation expense. In order to help readers understand the statements better, note

20(a) (income statement, p115) describes the classification of its operations expenses further.It explains how the $5464.7 million is split into two sectors, which are cost of sales and services, and selling, general and administrative. Moreover, it also points out what items are counted within each sector. Supplied with this information, readers will have a better understanding of the company’s expense structure. iii) Provide one example each of where your company has provided information in the financial statement notes that is relevant to users to predict: a. Future profitability Readers can predict future profitability from implication of note 3 (capital structure financial policies, p84).In this note, company’s dividend payout ratio policy has been given.

The ratio of its sustainable net earnings is “calculated as the most recent quarterly… twelve-month”. With tracking the company’s quarterly consolidated financial statements and past twelve months’ earnings per share, readers can calculated dividend payout ratio and consequently predict the company’s future profitability. This is important information the company disclose in this note, because the company cannot direct state its estimate of future profit in reports, which will be known by competitors. .

Future cash flows Note 17 (h) (long-term debt maturities, p105) directly provides company’s future cash outflows to pay off long-term debt in next five years. Issuing long-term debt is a major financial instrument it utilizes to acquire capital, which accounts for almost 46% ($4583. 5 million out of $10,061. 4 million) of the company’s liability. Knowing how much long-term debt will be retired in future could help readers to figure out how much money will flow out of the company to pay off its debts. RiskNote 13 (accounts receivables, p101) of accounts

receivable is a good example that can be used to predict future credit risk. Although it is mentioned in note 5(b) (credit risk, p87) that the company has tried to minimize its credit risk by ensuring their cash and temporary investments with government, well-capitalized financial institutions and creditworthy counterparties, it is known that the company’s total receivables hold as of December 31,2007 has increased to $710. 9 million, which is about 0. 5% from 2006.

In addition, the company suffered $20. 7 million composite loss from the sale of receivables arising from securitization. Readers may predict that credit risk of less collectability will increase along with possible accounts receivable increase. This information is more important to creditors and counterparties who deal with the company about sales of receivables. Creditors will probably reduce the company’s credit rating and be more conservative when issue debt.

Counterparties may ask for more discounts because of the higher credit risk.

Overall, what is your opinion of your company’s financial statement notes? Explain. In our opinion, the company’s financial statement notes have following characteristics: ? Understandable.

The notes are presented to readers in a plain language and clear format. As mentioned above, tables, point form are used to help readers catch the key information quickly. Also, no accounting jargon is used to confuse readers who may have little accounting background. ?Comprehensive. The notes cover information in all aspects that readers may require further information from financial statements.

For example, note 1(c) explains to readers where the company generates revenue from, how to classify different sources of revenue and when the revenue can be recognized. Providing this information can help readers who are not familiar with telecommunication

industry to better understand interoperate financial figures. ?Clarity. All the contents of notes have been summarized in a content tale with note’s number, titles and description on page 75. Moreover, they are grouped by the company in terms of their serving purposes. Readers may find notes that they are most interested in quickly and easily.

Another example is note 1(c), which summarizes all areas involve estimate. It allows readers to pay attestation when their decision will be based on financial information from those areas. ?Flexibility. Instead of giving conclusions that may mislead readers’ decision making.

The company provides facts that leave readers to make their own judgment. For example, the company doesn’t say in its notes how much dividend the company would expect to declare in future. But it tells readers how the company calculates its dividend payout ratio.There is also another example, as of December 31, 2007, the company was denied to carry forward $603. 7 million capital loss by CRA.

Instead of concluding that loss will or will not be recognized finally, the company indicates it is considering all courses of actions to confirm that loss. Readers will react differently to that given different confidence levels. However, readers should be noticed that all supplementary information is provided to extent that is not over disclosed. For instance, note 20(a) (income statement, p115) doesn’t give the amount of each items in cost of sales and services sector.

Note 20(b) (balance sheet, p115) simply classify inventory between wireless headsets, parts and accessories (very basic inventory to telecommunication companies) and other. No any sensitive information is given in the company’s notes. With all those characteristics of the company’s financial statement notes,

we come to our conclusion that the notes are well prepared. They give readers lots of additional information to make the financial reports more meaningful and useful.

Review your corporation’s MD&A from its most recent annual report.Critique it compared against the six general disclosure principles as recommended by the CICA. How useful would it be to investors? How could it be improved?

Principle I: enable readers to view the company through the eyes of management The Company’s MD&A enable readers to view the company through the eyes of management. First, the report gives an introduction about its business environment, which is Canadian telecommunications industry.

It enables readers to get an idea about the Economic and telecom industry growth, Key industry development, Wireless developments, Wireline developments through management’s perspective.In the report, management lists the consolidated highlights and the reasons related to these highlights. The core business, vision and strategy indicate how management operates the company, the strategy it used to survive, compete and grow. The key performance drivers are the new corporate priorities set up by management each year to advance TELUS’ strategy. These priorities focus on the near-term opportunities and challenges and create value for shareholders.

Capability to deliver results is a “description of the factors that affect the capability to execute strategies, manage key performance drivers and deliver results. (p24). Risks and risk management discusses about what the risks and uncertainties the company facing, and how management deals with risks.

Principle II: complement as well as supplement of financial statements; The MD&A helps readers to understand the financial statements better by providing extra information of discussion about operation and financial condition. Results from operations (P27-34) are a detailed discussion

of operating results for 2007. For instance, in the section 5.

“quarterly results summary and fourth quarter recap”, the management discusses the company’s consolidated revenue trends from the first quarter of 2006 to the last quarter of 2007 (p28). Section 5. 4 and 5. 5 “wireline segment results” and “wireless segment results” (page 31-34) gives readers a closer look and comparison about each segment, which are the company’s revenue source. Financial condition (p35-36) in section 6 is a discussion of significant changes in the balance sheets and reasons which caused those changes for the year ending December 31, 2007.Liquidity and capital resources in section 7 “liquidity and capital resources” (p37-44) provide a discussion of cash flow, liquidity, credit facilities and other disclosures.

Critical accounting estimates and accounting policy developments in section 8 “critical accounting estimates and accounting policy developments” (p44-48) is a detailed and supplementary description of accounting estimates that are critical to determining financial results, and changes to accounting policies.

Principle III: reliable (complete, fair and balanced) and provide material informationWe think the information provided in the MD&A is reliable and material information was provided to readers. For instance, section 7. 2 “cash used by investing actives” and section 7.3 “cash used by financial activities” (p37-38) gives readers material information about the change how the company spent money in 2007. Since cash flow can affect readers’ decision significantly, the more understanding about the company’s capital expenditure structure, the better decisions readers can make. Principle IV: having a forward-looking orientationThe MD&A does not only review what had happened in the past year, it also gives readers a general outlook of future. In section 1-Introduction, performance summary and targets

except containing a summary of TELUS’ consolidated results for 2007, and performance against 2007 targets, it also contains a presentation of targets for 2008. In section 3 “key performance drivers” (p32), the company’s 2008 priorities are provided.

Moreover, section 9 “general outlook” is about the outlook for the telecommunications business in 2008 (p49).It forecasts management’s expectation of the company’s 2008 performance based on its summary of 2007 industry and company performance in general, as well as wireline and wireless’ performance respectfully.

Principle V: focus on management’s strategy for generating value for investors over time The best example to illustrate how the MD&A focus on management’s strategy for generating value for investors over time is section 2 “core business, vision and strategy”(p21). In this section, management briefly layout the major strategies it uses to gain competitive advantages in order to generating more value for investors over time.The major ones are building national capabilities across data, IP, voice and wireless ; focusing relentlessly on the growth markets of data, IP and wireless ;building integrated solutions that differentiate TELUS from its competitors ; partnering, acquiring and divesting to accelerate the implementation of TELUS’ strategy and focus TELUS’ resources on core business; going to the market as one team under a common brand, executing a single strategy; investing in internal capabilities to build a high-performance culture and fficient operations.

Furthermore, it describes how the company actively sponsored various events across the country to enhance its brand image and increase the brand value.

Principle VI: be written in plain language, with candour and without exaggeration, and embody the qualities of understandability, relevance, comparability and consistency over reporting periods. The whole MD&A is written in

plain language.Even for certain key operating indicators that readers may not understand are explained by how they are calculated. Furthermore, charts, tables and signals (check mark/cross) are used to make the contents more understandable. Regarding to other quality characteristics, the MD&A provide the target set at the end of last year and the results (p17) in two tables to enable readers to compare.

For other financial information, both 2006 and 2007 results are given to increase comparability.