Financial reporting and statement analysis
Nokia Corporation, with the website at http://www. nokia. com/ and has it’s headquarter is located in Espoo, Finland. The company is engaged in the manufacture of mobile devices and mobile networks. The company started as wood-pulp mill by Idestam while the name Nokia was taken from the name of a town in Finland on the banks of Nokianvirta river. Motorola on other hand, with website at http://www. motorola. com/ and has its headquarter located in the Illinois, USA. The company is engaged in providing wireless and broadband communication products worldwide.
Its founder was Paul Galvin who conceived the name for Motorola as when it started as manufacturer of car radios. 2. In which geographical areas does each company market its products and services? Both companies market their products and services world-wide. 3. What is the name of each company’s auditor? Nokia is audited by PricewaterhouseCoopers Oy while Motorola is audited by KMPG. 4. Are the audit reports for the two companies similar? Do they differ in terms of the scope or the nature of the assurance provided? If so, how?
Nokia audit report states about the use of IFRS and the standards of Public Company Accounting Oversight Board (United States). On the other hand, Motorola audit report states the use of the standards of Public Company Accounting Oversight Board (United States) . Since IFRS has some differences certain respects from generally accepted accounting principles (GAAP) in the United States of America, the nature of the assurances necessarily differ. The difference is as to the presentation of the information as will be explained latter. 4.
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Prepare a comparative set of financial statements for the two companies. Are the financial statements presented differently? If so, explain how they differ. State any assumptions you made in aligning the two sets of financial statements. The comparative financial statements may be found in Appendix A. The income statements of both companies are basically the same except for the following noted differences. For Nokia, the statement is called Consolidated Statement of Profit and Loss, while for Motorola; it is called Consolidated Statement of Operations.
Another noted difference is that under Nokia, there is information as dividend per share as presented with the income statement while for Motorola such information exists at the last part. Based on the original presentation of the balance sheets from the respective audit reports, they differ in presentation. For Nokia, the Assets are presented by showing first the non-current assets as against Motorola where current assets are presented first before the non-current assets.
Another difference is noted for the presentation of the Shareholders’ Equity and Liabilities where Nokia presented first the shareholders’ equity, followed by the non-current liabilities and lastly by the current liabilities. For Motorola, the liabilities came first ahead of the shareholders’ Equity. Current liabilities were also presented first ahead of the non-current liabilities by Motorola which is completely the opposite of that of Nokia. The assumptions used in aligning the two sets of financial statements include a determination of the purpose why they differ in presentation.
For Motorola, it may be assumed that liquidity is given a greater emphasis than solvency as current assets and current liabilities are presented ahead of the non-current assets and liabilities. On the other hand Nokia may be giving greater emphasis on solvency rather than liquidity as non-current assets and liabilities are given preference in presentation over current assets and liabilities. 5. Discuss how the financial statements of each company relate to each other. How financial statements of the each company is determined by comparing the two of stocks of the companies on which is better to invest into.
Although there is noted difference of their presentation because of the difference in the rules under which each is prepared one statement may be converted following the other to enhance better comparability and such would correspondingly enhance decision making. 6. If you were to invest in only one of these companies, which one would you choose, relying solely on the information provided in the financial statements and the management discussion section of the annual report? Justify your answer. I will choose Nokia over Motorola for purposes of investing in their stocks.
This is based on the results of the computation based on Return on Equity (See Appendix C). Return on equity may be used to measure how much return is generated from one company’s stock as compared to the other. As extracted based on 2006 annual reports of the two companies, Nokia has return on equity of 0. 36 as against 0. 21 for Motorola which means in practical terms that o dollar investment in Nokia will produce 36 cents as against 21 cents for Motorola. 7. Briefly, review the footnotes to the financial statements and address each of the following questions:
Are the financial statements prepared in accordance with international accounting standards? If not, which standard setting body’s rules and standards do they follow? Nokia follows both the International Financial Reporting Standards and the standards of Public Company Accounting Oversight Board (United States), while Motorola follows only that of latter or the US GAAP. Between the two therefore it is only Nokia which complies with the international accounting standards (IAS, now called IFRS, after 2001) as issued by the International Accounting Standards Board (IASB). 8.
Do the companies provide financial information about the industry and geographic segments in which they operate? If so, summarize the information provided. Do you consider the disclosed segmental information useful and why? What other segmental information would you like each company to disclose and why? Both companies provided a great amount of information on the industry and geographic segments where they operate. Nokia it admits that its growth in sales and profitability is greatly influenced the developments in the mobile communications industry, as well as on new market segments within that industry that the company targets .
Motorola had the chance to summarize its financial reports from its three business segments which included the Mobile Devices segment engage in the design, manufacture and sale of wireless handsets and integrated software and accessory products, the Networks and Enterprise segment which is engaged in design, manufacture , sale, installation and service of cellular infrastructure systems and wireless broadband systems and the Connected Home Solutions segment which is engaged in design, manufacture , sale, installation and service designs, manufactures, sells and services cable television, Internet Protocol , end-to-end digital video system solutions and broad access networks and voice products. I consider the segmental information useful because they could help in evaluating the financial statements in relation to the financial statements. I would prefer that they disclose the profitability of each segment but they seem to have left the user to read between the lines of their current state of disclosure. 9. Do these companies provide information about their contingent liabilities?
Do you believe that this information should be reported in the body of the financial statements or do you believe that it is sufficient to have this information disclosed in the footnotes? Explain. Yes both companies provide information about their contingent liabilities as found in the notes to financial statement. Nokia’s 2006 is annual report stated about contingent liabilities on behalf of group companies about guarantees amounting to EURm358 and EURm 276 for the years 2006 and 2005 respective; contingent liabilities on behalf of other companies about guarantees in the amount of EURm 2 each for the years 2006 and 2005 respectively . Standard does not require to be part but of the liabilities but should only be part of the notes.
While Motorola disclosed about its possible liabilities for minimum lease obligations which are based on non-cancelable operating leases and as well potential liabilities on lawsuits of which it was made one of the defendants and also on some agreements it entered into which could make the company liable. I believed this information should be sufficient to have been disclosed in the footnotes as they do not qualify in accordance with the accounting standard to be considered as liabilities. On the part of the decision maker, one could always may an adjustment on the financial statement as basis of decision making while others may just disregard the same especially those who may want to take higher risks. 10. Do the footnote disclosures provide any information about the companies executive and management compensation packages? How about the fees of the auditor? Explain. If not, would you like to see this information provided and why?
Nokia has disclosed more information regarding the companies executive and management compensation packages as well as auditor’s fees while Motorola went only up to the extend by disclosing by incorporation by reference but the breakdown of which were not found in the annual report. As a would be investor it is desirable that the auditor’s fees should be disclosed since an extraordinarily big amount of fees may be unfair to investors who do not have a direct hand in the management of the companies. 11. Do these companies provide any information about their share prices and dividends? Nokia provides information on its share prices of its stocks as well as on its dividends in the annual report.
Motorola has sufficiently provided the information on the face of the Consolidate Statement of Operation about the dividend paid but as to share price a statement was only made that is has been volatile and that it may continue to be volatile. If so, answer the following questions: 11. 1 What is the number of their outstanding shares? For Nokia, the average outstanding number of shares as of December 31, 2006 is 4,062,833,000 (basic) or 4,086,529,000 diluted. For Motorola, on the other hand, the average outstanding number of shares as of December 31, 2006 is 2,446,300,000 (basic) or 2,504,200,000 (diluted). 11. 2 What is the total market value of each company at year-end?
Market value of Nokia by multiplying average outstanding shares by market value per share would give the market value of about $83. 4 billion, while for Motorola, the same market value could not be computed due to absence of share price in the annual report. See Appendix D 11. 3 Calculate the ratio of price per share/earnings per share at year-end. Price-earnings ratio for Nokia is 19. 39 using the high share price from the New York Stock Exchange as of December 2006. Motorola price-earnings ratio could not be computed due to absence of price per share as of December 2006. See Appendix D. 11. 4 Calculate the ratio of price per share/book value of equity per share at year-end.
The ratio price per share/book value per share for Nokia is computer at while that of Motorola could not be computed due to absence of price per share as of December 2006. See Appendix D. 11. 5 How do you interpret the two ratios calculated above? Price earnings ratio tells how much investors are willing to pay for each of the stock company in relation to the capacity of each share to own. In other words, a higher price earning ratio assuming all other things are similar carries more value than one having a lower one. On the other hand, a higher price earnings ratio could also represent over valuation over another company’s stock assuming also that all other things are also equal.
The Market Value per share in relation to book value per share may also indicate another way of looking at how investors perceive the stock of the company but this time the basis is the book value of the stock which represents the value of the stockholders’ equity inclusive of the retained earnings which comprises accumulated earnings of the past years. 3. Conclusion A difference was still noted between the accounting standards which presents a choice to have IFRS, which is issued by the IASB, as better option over that of the US GAAP as issued by the Financial Accounting Standard Board (FASB). The varying standards from different countries are understandable in the light of the differences of systems of form of governments around the world as well as their own standard setting bodies. Each government has a unique way of taxation which demands a complex knowledge of accounting rules and procedures and because of which standards may necessarily differ.
Further differences could come from the nature of standard setting bodies which is performed by private sector in some while government sector in others. In the light now of the globalization of industries and world wide operation of multinational companies the need for the harmonization of the accounting rules and procedures has become more compelling for the guidance of investors who have also become global in their perspective as which will give them to easier way to maximize their wealth. 4. Appendices Appendix A – Nokia Financial statements, see excel file. Appendix B – Motorola Financial statements, see excel file. Appendix C – Computation of ROE, see excel file. Appendix A - Computation of Market Value, P/E ratio, and Market Value/Book Value per share, see excel file. Works Cited:
“Auditing Financial Statements”, Financial Reporting & Statement Analysis, Segment: Financial Reporting, Universitas 21 Global Pte Ltd. , 2005-2007 “Financial Statements”, Financial Reporting & Statement Analysis, Segment” Financial Reporting, Universitas 21 Global Pte Ltd. , 2005-2007 “Footnote Disclosure”, Financial Reporting & Statement Analysis, Segment: Financial Reporting, Universitas 21 Global Pte Ltd. , 2005-2007 “Regulatory Framework” Financial Reporting & Statement Analysis, Segment: Financial Reporting, Universitas 21 Global Pte Ltd. , 2005-2007 Meigs and Meigs, Financial Accounting, McGraw-hill, US, 1995 Motorola 2006 Annual Report, {www document} URL http://www. motorola. com/ ,
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