AT&T is one of the largest US multinational telecommunications corporation that provides United States with mobile and fixed telephony and broadband subscription television services. It headquarter is situated in Whitacre Tower, downtown Dallas, Texas. According to the observation of Forbes (2011), “AT&T is the 14th largest company in the world by market value, and the 9th largest non-oil company, and it is also the 20th largest mobile telecom operator in the world, with over 100.7 million mobile customers.”
AT&T Corporation started its existence in 1885 as the US Telephone and Telegraph Company. The name was changed to South-western Bell Corporation in 1983, and it is considered to be the official beginning of the existence of AT&T Inc. Currently AT&T consists of ten Bell Operating Companies.
As it is indicated on the official site of the company (Key facts, 2012), “We are proud to offer one of the world´s most advanced and powerful global backbone networks, carrying 28.9 petabytes of data traffic on an average business day to nearly every continent and country, with up to 99.999 percent reliability.” This includes the nation’s largest 4G network (which brings the mobility to its customers in more than 225 countries of the world); the nation´s largest Wi-Fi network; IP-based communications services. Moreover, AT&T is a partner of YP.com and the leader of providing of local and long distance voice services.
AT&T enables its clients to be constantly connected to their friends and colleagues who are anywhere in the world, furthermore, to keep customers in touch when they are travelling abroad. Corporation is permanently working on the improvement of the facilities that would ensure the successful functioning in the market. Company has the high annual revenue, which counts billions of dollars every year that are recorded and proved by the management and directors of the corporation. However, financial statement and notes of the company have to be accurately examined according to the GAAP principles for evaluating its current financial state. As a result, our research paper is devoted to the investigation of AT&T’s financial statements.
GAAP and Description of the Accounting Principles: Cost, Revenue Recognition and Matching
Before characterizing the financial state of AT&T Company, we have to define GAAP and its principles that are the basis for our estimation. In the United States Generally Accepted Acounting Principles (GAAP) are defined as “accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments.” (Investopedia) GAAP are used for analyzing the financial state of the company for investment purposes. They are used as minimum that should be accurately defined and presented that investors can use them any time they need. “Companies are expected to follow GAAP rules when reporting their financial statements.” (GAAP, 2012) Principles include revenue recognition, cost and matching of expenses and revenue.
These rules are not written in law but are required by the American Securities and Exchange Commission (SEC) to be followed by the companies while reporting the financial statements. The authority that determines all these universally adopted accounting principles is the Financial Accounting Standards Board (FASB).
Reporting financial statements company should provide information in such a way that it can be easily used by investors and creditors for making rational investments or any other financial actions; can be helpful for demonstrating the timing, amounts and revenues to potential creditors and investors; can be useful in maintaining decisions and improving the fulfilment of business. It was defined by researchers (GAAP, 2012) that principles of GAAP should be always followed reporting data for achievement of basic objectives of a company.
Now, we are going to characterize each GAAP principle in details. Firstly, cost (or historical cost) is defined as “a measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company.” (Investopedia) In other words, historical cost can be also called original cost of a product that was registered on the balance sheet. For example, say the main building of a bank, which consists of the building and the land, was dealt for $50,000 in 1930, and its current market value now is $10 million. The asset is still registered on the balance sheet at $50,000.
The next principle examined by US is revenue recognition. Revenue recognition principle means “that revenue are recognized when they are realized or realisable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.” (Wikipedia) It is also called accrual basis accounting. Revenue recognition of companies should be under careful observation as they can play around presenting fake data for making their financial figures look better. For example, a company, not having good year in sales, can accept income that has not yet been recollected as revenue for raising its sales incoming for the year.
The last GAAP principle under our examination is matching. This principle applies to the matching of expenses with revenues as long as it is rational to do so. Only after the work or the product begins to make a contribution to income, expenses are appreciated. Investopedia sets an example for better understanding of its meaning: “for example, when a company sells a TV to a customer who uses the credit card revenue is realized. The principle says that the cash method isn’t accurate because it is likely, if not certain, that the company will receive the cash at some point in the future, because the sale has been made. Therefore, this method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn’t yet in the bank, the sale is booked to an account known in accounting lingo as “accounts receivable”, increasing the seller’s revenue.”
Selected company’s application of GAAP in cost recording, revenue recognition, matching of expenses, and revenues
We examine the summary financial review of 2011, researching the application of GAAP that are represented in the financial notes of the AT&T. According to the notes of company’s financial condition, cost includes all highly-liquid investments with turnaround time of three months or less and present amounts have to be corresponded to fair value. According to company notes (Stephenson & Stephens, 2012), “At December 31, 2011, we held $1,182 in cash and $2,003 in money market funds and other cash equivalents.” Taking a close look on the cost, we consider it by such parts as: cost of services and sales, general and administrative selling, and impairment of intangible assets, depreciation, and amortization.
Impairment of intangible assets is characterized by $2,745 goodwill impairment and $165 of a trade name. That led to 3% of loss, while expenses exceeded incomes. Considering depreciation and amortization expense, they reduced 5.2% in 2011 and 0.7% in 2010. The company considers these changes as the result of lower amortization of intangibles for records of clients referred to acquisitions.
Revenue recognition is the second principle under our consideration. According to the company’s financial notes (Stephenson&Stephens, 2012), “Revenues derived from wireless, local telephone, long distance, data and video services are recognized when services are provided. This is based upon either usage (e.g., minutes of traffic/bytes of data processed), period of time (e.g. monthly service fees) or other established fee schedules. Our wireless service revenues are billed either in advance, arrears or are prepaid.” Recorded revenue is based on historical experience. Taking a look on service revenues, that are fasten on company by authorities, and consist also of billings to our clients for different regulatory fees. Revenues are related to the services based on their relative sale price. The company records the sale of product to clients as gross revenue when it is the first obligor in the regulation, when all is suitable and equipment is accepted by clients. For the consent that involves reselling of third-party services, where the firma is not the primary obligor, the revenue is recorded as the revenue net of the associated costs incurred.
Taking into consideration the matching of expenses and revenues, based on amortization method, it is obvious that the company has a stable income and not so many losses. However, according to financial data, 2011 is not so profitable for the company, as for example 2009 and 2010. The most successful is 2009, having $21,000 of total income. 2010 had $15,573 of total operating income. The income of 2011 is not high. The total operating income is $9,218 that is much taking into consideration the total operating expenses (including cost of services and sales, impairment of intangible assets, general and administrative selling and depreciation and amortization) are $117,505 and total operating revenues (including wireless service, voice, directory, data and other) are $126,723.
Considering this data in percentage, we receive the 52.9% decrease of operating income in 2011 and 6.8% in 2010. The company management explains the reduction of income by the higher wireless handset subsidies and commissions, “partially offset by growth in wireless service and equipment revenue driven by continued subscriber growth and increased Wireline data revenue related to AT&T U-verse growth.” (Selected financial notes, 2012) Examining operating revenues, according to the data, they increased 2% in 2011 and 1.4% in 2010. As it was already mentioned above, these increases are explained by increases in percentage of Smartphones, U-verse, strategic business services, and the subscriber base. However, the company has 12.3% decrease in voice revenues (company looses customers of cable offerings for voice and data). Nevertheless revenues increase, expenses are also higher. According to data, there is 9.5% increase in 2011 and 3.4% in 2010. The company’s management explains these changes by higher wireless handset costs referred to strong Smartphone sales. Considering selling, general and administrative expenses, they are higher than services and sales. The increase is 18.2% in 2011 referred to actuarial loss.
Description of recent accounting standard(s) and pronouncement(s) that affect the selected company’s financial statements
There are several recent changes that have a significant impact on financial statements of the selected company. First of all, there are new accounting standards. According to the Accounting Standards Update issued by the Financial Accounting Standards Board (FASB), presentation of comprehensive income determines that presentation of the parts of other exhaustive income in the notes of changes in stockholders’ equity or footnotes for temporal reporting has to be no longer allowed. Now, the company is working hard on improving the changed part of notes for being able to present the appropriate statements.
The second significant change is employee separation. The company provides the amount of benefits to employees that are not working at present, but are former or inactive, after employment but before retirement. These advantages include severance pavements, workers’ compensation, disability and others.
There are some changes in income taxes. The corporation provides separately income taxes for present amounts of assets and liabilities and for financial reporting purposes and its computed basis. The tax basis of assets and liabilities are measured on current standards and have to meet the recognition threshold. According to this, there are also changes on balance sheet: “Accrued taxes” were reclassified to “Other current assets”. In the time of strict market competition, the inventory of new models is the important factor of the market success. AT&T Inc. inventories, that are included in “Other current assets”, were $1,188 at December 31, 2011. Company tries to provide its clients with cheap modern supplies and network equipment attracting new customers and increasing incomes.
In addition to this, foreign currency transaction makes AT&T Inc. competitive in the market. These transactions are constantly under the risk but all earnings are strictly observed and recorded in their local currencies as a separate component of other accumulated comprehensive incomes in balance sheets.
Assertion of internal controls described in the notes to the financial statements
According to the financial notes, (Stephenson & Stephens, 2012) “The management of AT&T is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934.” Fair presentation of public financial statements is guaranteed by the Board of Directors and the company’s management. The effective company’s internal control is based on the criteria in Internal Control – Integrated Framework that is issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Policies and procedures of the company’s internal control over financial reporting (Stephenson & Stephens, 2012):
- the maintenance of notes in details that perform the transactions and dispositions of the assets of the company;
- Guarantee that all transactions are recorded in accordance with Generally Accepted Accounting Principles and that receipts and expenditures follow the conduction of directors and management of the company;
- Certainty of the prevention or timely detection of unauthorized acquisition use or disposition of benefits could be wrong.
Firstly, we are examining the internal control by the Board of Directors and Stockholders of AT&T Inc. They are responsible for presenting balance sheets of the company, changes in stockholder’s equity, notes of income, and cash flows for each of the three years in the period ended December 31, 2011. However, they are not in charge of financial statements, they express only the opinion on these notes based on their audits. Directors and stockholders are working in accordance to the U.S. Public Company Accounting Oversight Board. According to these standards, Board of Directors and Stockholders have to present that all financial notes are appropriate and support the current financial state of the company. For obtaining this statement, they research all the materials on a base of evidence supporting the amounts and disclosures in the statements. Furthermore, the accounting principles and meaningful estimates are also under their consideration. According to the Board of Directors and Stockholders, (Selected financial.., 2012) “In our opinion, the financial statements referred to present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2011 and 2010, and the consolidated results of its operations, and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.”
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It was defined that AT&T Inc. is one of the largest non-oil companies in the world. It has billions of revenues and expenses. We have researched the company’s application to the GAAP principles in cost recording, revenue recognition and matching of expenses and revenues. It was determined that company’s current revenue is lower than in 2010 and 2009, but still supplies the company to have a billions of income and makes it competitive in the sale market.
There are several recent changes that have a significant impact on the selected company’s financial statements mentioned above. These recent standards include Accounting Standards Update. The second one is employee separations that bring many new benefits to its workers. In addition to this, company provides the market with its inventories and make foreign currency transactions that make it competitive in the market.
It was defined that all financial notes of AT&T Inc. follow the GAAP and present the current financial state of the company. According to the Board of Directors and Stockholders, (Selected financial.., 2012) “In our opinion, the financial statements referred to present fairly, in all material respects.”