The disclosure rules for business combinations complicate financial analysis. Trend analysis becomes difficult because comparative financial statements

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The disclosure rules for business combinations complicate financial analysis. Trend analysis becomes difficult because comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acquisition. For example, consider AT&T’s acquisition of DirecTV in 2015. The following disclosure appeared in AT&T’s management discussion and analysis in its 2016 Form 10-K:

Percent Change ($ in millions) 2016 2015 2014 2016 vs. 2015 2015 vs. 2014 Operating Revenues Service 11.2% $148,884 131,677 $118,437 15,124 13.1% Equipment 14,902 14,010 (1.5) 8.0 Total Operating Revenues 163,786 146,801 132,447 11.6 10.8 Operating Expenses Cost of services and sales Equipment Broadcast, programming and operations Other cost


After the above disclosure, AT&T provided the following discussion:

Operating revenues increased $16,985, or 11.6%, in 2016 and $14,354, or 10.8%, in 2015. Service revenues increased $17,207, or 13.1%, in 2016 and $13,240, or 11.2%, in 2015. The increase in 2016 was primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic service revenues. These were partially offset by continued declines in our legacy wireline voice and data products and lower wireless revenues from offerings that entitle customers to lower monthly service rates. The increase in 2015 was primarily due to our acquisition of DIRECTV, our new wireless operations in Mexico, and gains in fixed strategic services and our IP-based AT&T U verse®(U-verse) services. 

In the notes to the financial statements, AT&T provided pro forma income statement information as if the DirecTV acquisition had been completed on January 1, 2014:

Dollars in millions except per share amounts

For the 160-day period ended December 31, 2015, our consolidated statement of income included $14,561 of revenues and $(46) of operating income, which included $2,254 of intangible amortization, from DIRECTV and its affiliates. The following unaudited pro forma consolidated results of operations assume that the acquisition of DIRECTV was completed as of January 1, 2014.


Required:

1. How should a financial statement user interpret the reference to 13.1% revenue growth for 2016 disclosed by AT&T?

2. Suppose you are asked to prepare a sales forecast for 2017. Based on the information provided, what is the best estimate of AT&T’s sustainable growth in revenues for the next several years? Explain your answer.

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Financial Reporting And Analysis

ISBN: 9781260247848

8th Edition

Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer

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