Question 9.15: Financial Statement Presentation and Disclosures for Long-Li......
Financial Statement Presentation and Disclosures for Long-Lived Assets
The following exhibits include excerpts from the annual report for the year ended 31 March 2009 of Vodafone Group Plc (London: VOD), a global mobile telecommunications company headquartered in the United Kingdom.
For licenses and spectrum and other intangible assets, amortization is included within the cost of sales line within the consolidated income statement. Licenses and spectrum with a net book value of £2,765m (2008: £nil) have been pledged as security against borrowings.
Excerpt from Note 10. Impairment
Impairment losses
Impairment losses recognized in the consolidated income statement as a separate line item within operating profit, in respect of goodwill and licenses and spectrum fees are as follows (£m):
. . . The impairment losses were based on value in use calculations. . . .
Turkey
. . . At 30 September 2008, the goodwill was impaired by £1,700 million. . . . During the second half of the 2009 financial year, impairment losses of £300 million in relation to goodwill and £250 million in relation to licenses and spectrum resulted from adverse changes in both the discount rate and a fall in the long-term GDP growth rate. The cash flow projections . . . were substantially unchanged from those used at 30 September 2008. . . .
Sensitivity to changes in assumptions
. . . The estimated recoverable amount of the Group’s operations in Spain, Turkey, and Ghana equaled their respective carrying value and, consequently, any adverse change in key assumption would, in isolation, cause a further impairment loss to be recognized. . . .
The changes in the following table to assumptions used in the impairment review would, in isolation, lead to an (increase)/decrease to the aggregate impairment loss recognized in the year ended 31 March 2009:
Excerpt from Note 11. Property, Plant, and Equipment
The net book value of land and buildings and equipment, fixtures, and fittings includes £106 million and £82 million, respectively (2008: £110 million and £51 million) in relation to assets held under finance leases. Included in the net book value of land and buildings and equipment, fixtures and fittings are assets in the course of construction, which are not depreciated, with a cost of £44 million and £1,186 million, respectively (2008: £28 million and £1,013 million). Property, plant, and equipment with a net book value of £148 million (2008: £1,503 million) has been pledged as security against borrowings.
1. As of 31 March 2009, what percentage of other intangible assets and property, plant, and equipment is pledged as security against borrowings?
2. What caused the £250 million impairment losses in relation to licenses and spectrum during the year ended 31 March 2009?
3. By what amount would impairment losses related to Turkey change if the pretax adjusted discount rate decreased by 2 percent?
4. Where are impairment losses reported on the financial statements? Where is amortization included within the consolidated income statement?
5. What percentage of property, plant, and equipment, based on net book value, is held under finance leases rather than owned as of 31 March 2009?
6. The gains and losses arising in the year on asset revaluation most likely are:
A. reflected on the consolidated income statement.
B. reported in the notes to the financial statements only.
C. recognized directly in equity and shown on the consolidated statement of recognized income and expense.
EXHIBIT 8 Vodafone Group Plc Excerpts from the Consolidated Financial Statements
Excerpt from the Consolidated Income Statement
For the Years Ended 31 March (currency in £ millions)
| ⋮ | Note | 2009 | 2008 |
| Revenue | 3 | 41,017 | 35,478 |
| ⋮ | ⋮ | ⋮ | ⋮ |
| Impairment losses | 10* | (5,900) | — |
| ⋮ | ⋮ | ⋮ | ⋮ |
| Operating profit/(loss) | 4 | 5,857 | 10,047 |
| ⋮ | ⋮ | ⋮ | ⋮ |
| Profit/(loss) before taxation | 4,189 | 9,001 | |
| Income tax expense | 6 | (1,109) | (2,245) |
| Profit/(loss) for the financial year from continuing operations | 3,080 | 6,756 | |
| Loss for the year from discontinued operations | 30 | — | — |
| Profit/(loss) for the financial year | \underline{\underline{3,080}} | \underline{\underline{6,756}} | |
| Attributable to: | |||
| – Equity shareholders | 23 | 3,078 | 6,660 |
| – Minority interests | 2 | 96 | |
| 3,080 | 6,756 | ||
*Notes relating to property, plant, and equipment and intangible assets are underlined.
Excerpt from the Consolidated Statement of Recognized Income and Expense for the Years Ended 31 March (currency in £ millions)
| Note | 2009 | 2008 | |
| (Losses)/gains on revaluation of available-for-sale investments, net of tax | 22 | (2,383) | 1,949 |
Excerpt from the Consolidated Statement of Recognized Income and Expense for the Years Ended 31 March (currency in £ millions)
| Note | 2009 | 2008 | |
| ⋮ | ⋮ | ⋮ | ⋮ |
| Revaluation gain | 22 | 68 | — |
| ⋮ | ⋮ | ⋮ | ⋮ |
| Net gain/(loss) recognized directly in equity | 9,854 | 6,909 | |
| Profit/(loss) for the financial year | 3,080 | 6,756 | |
| Total recognized income and expense relating to the year | \underline{\underline{12,934}} | \underline{\underline{13,665}} | |
| Attributable to: | |||
| – Equity shareholders | 13,037 | 13,912 | |
| – Minority interests | (103) | (247) | |
| 12,934 | 13,665 | ||
Excerpt from the Consolidated Balance Sheet at 31 March (currency in £ millions)
| Note | 2009 | 2008 | |
| Noncurrent assets | |||
| Goodwill | 9 | 53,958 | 51,336 |
| Other intangible assets | 9 | 20,980 | 18,995 |
| Property, plant and equipment | 11 | 19,250 | 16,735 |
| ⋮ | ⋮ | ⋮ | ⋮ |
| 139,670 | 118,546 | ||
| Current assets | 13,029 | 8,724 | |
| Total assets | \underline{\underline{152,699}} | \underline{\underline{127,270}} | |
| Equity | |||
| ⋮ | ⋮ | ⋮ | ⋮ |
| Accumulated other recognized income and expense | 22 | 20,517 | 10,588 |
| ⋮ | ⋮ | ⋮ | ⋮ |
| Total equity | 84,777 | 76,471 | |
| Noncurrent liabilities | 39,975 | 28,826 | |
| Current liabilities | 27,947 | 21,973 | |
| Total equity and liabilities | \underline{\underline{152,699}} | \underline{\underline{127,270}} | |
EXHIBIT 9 Vodafone Group Plc Excerpts from the Notes to the Consolidated Financial Statements
Excerpt from Note 9. Intangible Assets (currency in £ millions)
| Intangible Assets | Goodwill | Licenses and Spectrum | Computer Software | Other | Total |
| Cost: | |||||
| 31 March 2008 | 91,762 | 22,040 | 5,800 | 1,188 | 120,790 |
| Exchange movements | 14,298 | 2,778 | 749 | 153 | 17,978 |
| Arising on acquisition | 613 | 199 | 69 | 130 | 1,011 |
| Additions | — | 1,138 | 1,144 | — | 2,282 |
| Disposals | — | (1) | (403) | — | (404) |
| Transfer to investments in associated undertakings | (9) | (16) | — | — | (25) |
| 31-Mar-09 | 106,664 | 26,138 | 7,359 | 1,471 | 141,632 |
| Accumulated impairment losses and amortization: | |||||
| 31 March 2008 | 40,426 | 5,132 | 4,160 | 741 | 50,459 |
| Exchange movements | 6,630 | 659 | 569 | 126 | 7,984 |
| Amortization charge for the year | — | 1,522 | 885 | 346 | 2,753 |
| Impairment losses | 5,650 | 250 | — | — | 5,900 |
| Disposals | — | — | (391) | — | (391) |
| Transfers to investments in associated undertakings | — | (11) | — | — | (11) |
| 31 March 2009 | 52,706 | 7,552 | 5,223 | 1,213 | 66,694 |
| Net book value: | |||||
| 31 March 2008 | 51,336 | 16,908 | 1,640 | 447 | 70,331 |
| 31 March 2009 | 53,958 | 18,586 | 2,136 | 258 | 74,938 |
| Cash Generating Unit | Reportable Segment | 2009 | 2008 | 2007 |
| ⋮ | ⋮ | ⋮ | — | — |
| Turkey | Other Africa and Central Europe | 2,250 | — | — |
| ⋮ | ⋮ | ⋮ | — | — |
| Total | 5,900 | — | 11,600 | |
| Spain | Turkey | Ghana | All Other | |||||
| ⋮ | ⋮ | Increase by 2% £bn | Decrease by 2% £bn | ⋮ | ⋮ | ⋮ | ⋮ | |
| Pretax adjusted discount rate | ⋮ | ⋮ | (0.4) | 0.6 | ⋮ | ⋮ | ⋮ | ⋮ |
| Long-term growth rate | ⋮ | ⋮ | 0.3 | (0.2) | ⋮ | ⋮ | ⋮ | ⋮ |
| Budgeted EBITDA | ⋮ | ⋮ | 0.1 | (0.1) | ⋮ | ⋮ | ⋮ | ⋮ |
| Budgeted capital expenditure | ⋮ | ⋮ | (0.1) | 0.1 | ⋮ | ⋮ | ⋮ | ⋮ |
Excerpt from Note 22. Movements in Accumulated Other Recognized Income and Expense (currency in £ millions)
| Translation Reserve | Pensions Reserve | Available-for-Sale Investments Reserve | Asset Revaluation Surplus | Other | Total | |
| ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ | ⋮ |
| 31 March 2008 | 5,974 | (96) | 4,531 | 112 | 37 | 10,558 |
| Gains/(losses) arising in the year | ⋮ | ⋮ | ⋮ | 68 | ⋮ | 10,023 |
| Transfer to the income statement on disposal | ⋮ | ⋮ | ⋮ | — | ⋮ | (3) |
| Tax effect | ⋮ | ⋮ | ⋮ | — | ⋮ | (61) |
| 31 March 2009 | 18,451 | (259) | 2,148 | 180 | (3) | 20,517 |
to 1: Assets that have been pledged as security against borrowings are licenses and spectrum, with a net book value of £2,765 million (Note 9), and property, plant, and equipment, with a net book value of £148 million (Note 11). These assets represent 7.24 percent [(2,765 + 148)/(20,980 + 19,250)] of the other intangible assets and property, plant, and equipment.
to 2: The £250 million impairment losses in relation to licenses and spectrum resulted from an increase in the pretax adjusted discount rate and a decrease in the long-term growth rate in Turkey (Note 10).
to 3: A 2 percent decrease in the pretax adjusted discount rate related to Turkey would reduce impairment losses by £0.6 billion or £600 million (Note 10).
to 4: Impairment losses are reported on the consolidated income statement (Exhibit 8). Impairment losses reduce the value of the assets impaired (Note 9) and are thus recognized within the consolidated balance sheet. Amortization is included within the cost of sales line within the consolidated income statement (Note 9).
to 5: The net book value of land and buildings and equipment, fixtures, and fittings includes £106 million and £82 million, respectively, in relation to assets held under finance leases (Note 22). The sum of these values represents 0.98 percent of the property, plant, and equipment [(106 + 82)/19,250].
to 6: C is correct. The gains and losses arising in the year on asset revaluation are recognized directly in equity and shown on the consolidated statement of recognized income and expense. They are also reported in the notes to the financial statements (Note 22).