Introduction
The information presented in the financial statements does not necessarily present the actual scenario every time in which a company is operating and the circumstances being dealt with. In fact, a rigorous analysis of the information presented in the financial statements is required to gain an in-depth understanding of the financial and operating performance and other accompanying matters. This report aims at analyzing specific areas of the financial statements of a publicly-traded company, namely SIRIUS XM Radio Incorporation. This has been done by keeping in view the importance of analyzing the financial information embodied in a set of financial statements. In this regard, particular focus is on the balance sheet items of the said company, which include deferred tax assets and liabilities, temporary and permanent differences, income tax provision and expense, benefit plans of the company, earnings per share of the company, share-based payments,
Analysis of Financial Statements and Accompanying Information
As has been stated in the introductory section of this report, the analysis of SIRIUS XM Radio Incorporation includes various aspects of the financial performance and position of the company. It is pertinent to mention here, however, that most of the analysis deals with balance sheet items of the company.
SIRIUS XM Radio Incorporation’s Deferred Tax Assets and Liabilities
Deferred tax assets and liability arise primarily due to the differences in the profit calculations as per income statement and for taxation purposes (Albrecht, Stice, & Stice, 2008; Horngren & Harrison, 2009). One of the primary reasons for this difference is the amount of an asset’s cost allowed to be depreciated under tax laws and as per the rates determined by the owner of that asset. The difference resulting, thereby, due to differences in rates consequently results in a difference in the amount calculated for depreciation in a year. And, thereby, has a direct impact on the taxable income of a company in a particular financial year and also with regard to future financial periods (Albrecht, Stice, & Stice, 2008; Horngren & Harrison, 2009). The following table shows the deferred tax assets and liabilities for SIRIUS XM Radio Incorporation as reported for the past two financial years:
Source: (SIRIUS XM Radio Incorporation, 2012)
As far as footnotes related to deferred taxes are concerned, the company has provided the information under the Income Taxes section. As per the information provided, it is inferred that these deferred taxes have been recognized due to temporary differences arising from different carrying amounts of the balance sheet items as per financial reporting and as per taxation laws and regulations (SIRIUS XM Radio Incorporation, 2012).
SIRIUS XM Radio Incorporation’s Temporary and Permanent Differences Disclosure
There are various temporary differences noted in the financial statements and notes to the financial statements of SIRIUS XM Radio Incorporation. First of all, temporary differences arising due to differences in the carrying amounts of deferred tax assets and deferred tax liabilities, because of differences in profits calculated for the purposes of reporting them in the financial statements and profits calculated as per tax laws and guidelines (SIRIUS XM Radio Incorporation, 2012). Moreover, the company also provides information pertaining to temporary differences in the fair value of financial instruments held by the company. In addition, investments in the SIRIUS XM Canada have also been noted in the notes to financial statements as having temporary differences due to differences in carrying values (SIRIUS XM Radio Incorporation, 2012).
SIRIUS XM Radio Incorporation’s Income Tax Provision and Expense
As per the information provided in the footnotes, the company has no income tax provision, because all of the taxable income of the company has been offset by making use of net operating losses carried forward at the end of the year.
However, changes in the tax positions have been provided by SIRIUS XM Radio Incorporation during the last two financial years are presented in the following table:
Source: (SIRIUS XM Radio Incorporation, 2012)
By the end of the financial year 2012, SIRIUS XM Radio Incorporation had an operating loss carried forward amounting to $ 6,571,519. Operating losses incurred by a company can be made use of by adjusting them in future years to bring down the tax liability. As per the guidelines provided under Generally Accepted Accounting Principles (GAAP), the operating losses can be carried forward and used in any of the preceding 7 years after the loss has been incurred (SIRIUS XM Radio Incorporation, 2012).
SIRIUS XM Radio Incorporation’s Benefit / Contribution Plan
SIRIUS XM Radio Incorporation has various benefit plans included in the list of its defined benefits, which include “2009 Long Term Stock Incentive Plan”, “XM 2007 Stock Incentive Plan”, “Amended and Restated Sirius Satellite Radio 2003 Long Term Stock Incentive Plan”, “XM 1998 Shares Award Plan” and “XM Talent Option Plan” (Horngren & Harrison, 2009).
The benefit plans of the company are for all employees, consultants and members on the company’s board. The 2009 Plan allows the beneficiaries to avail stock options, restricted stocks and units and other types of stock based compensations (SIRIUS XM Radio Incorporation, 2012).
The stock option plan for the company has been summarized in the following table for the last three financial years:
Source: (SIRIUS XM Radio Incorporation, 2012)
Having discussed the benefit plans offered by the company, it is necessary to differentiate them from contribution plans. A benefit plan is a plan or scheme under which employees are entitled to receive monthly payments after they have retired from the employment. On the other hand, contribution plans refer to the saving schemes or plans offered by a company to its employees, such that they are able to save a certain portion of their monthly or annual salaries and a similar amount is also contributed by the employer towards those savings (Albrecht, Stice, & Stice, 2008; Financial Accounting Standards Board, 2013; Horngren & Harrison, 2009).
SIRIUS XM Radio Incorporation’s Earnings per Share and Dilutive Securities
The earnings per share disclosed by the company in its consolidated statement of comprehensive income are as follows:
Source: (SIRIUS XM Radio Incorporation, 2012)
The dilutive securities discussed in the notes to the financial statements include the following
- convertible debt,
- preferred stock,
- warrants,
- stock options,
- restricted stock, and
- restricted stock units (SIRIUS XM Radio Incorporation, 2012)
In addition to these dilutive securities, there are other securities also which are classified as same. The most common of them is convertible bonds (Horngren & Harrison, 2009; Albrecht, Stice, & Stice, 2008).
Dilutive securities are those securities which are not classified as common stock of a company; however they can be converted into common stock, if required. This convertibility of dilutive securities is seen as an addition into common stock and therefore earnings per share, beside basic EPS, is also calculated after adding dilutive securities in the common stock (Albrecht, Stice, & Stice, 2008; Financial Accounting Standards Board, 2013; Horngren & Harrison, 2009).
SIRIUS XM Radio Incorporation’s Share Based Compensation
As has been mentioned earlier, there are four different types of share based compensation plans offered by the company. These plans include “2009 Long Term Stock Incentive Plan”, “XM 2007 Stock Incentive Plan”, “Amended and Restated Sirius Satellite Radio 2003 Long Term Stock Incentive Plan”, “XM 1998 Shares Award Plan” and “XM Talent Option Plan” (SIRIUS XM Radio Incorporation, 2012).
The share based payment expense for the last two financial years has been presented in the following table:
Source: (SIRIUS XM Radio Incorporation, 2012)
SIRIUS XM Radio Incorporation’s Cash Flow Presentation Method
SIRIUS XM Radio Incorporation makes use of the indirect method for preparing cash flow statement (SIRIUS XM Radio Incorporation, 2012). The basic difference between direct and indirect methods of cash flow statement preparation lies in the operating section. Under the direct method, cash relating to operating activities include line items, as for instance, cash received from customers and paid to suppliers. On the other hand, in an indirect method of cash flow preparation, all line items are shown as adjustments made to net income amount so as to determine the net cash flows from operating activities (Albrecht, Stice, & Stice, 2008; Financial Accounting Standards Board, 2013; Horngren & Harrison, 2009).
The cash flow statement is prepared by taking information from statements such as changes associated with income statements and balance sheet which are related to cash. Therefore, the cash flow statement is bound to agree with them, as the statement begins with the net income earned by a company and ends at the cash reserves maintained by the company, both of which relate to the income statement and balance sheet respectively (Albrecht, Stice, & Stice, 2008; Financial Accounting Standards Board, 2013; Horngren & Harrison, 2009).
SIRIUS XM Radio Incorporation’s Investing and Financing Activities
The items included in the cash flows from investing activities of SIRIUS XM Radio Incorporation are as follows:
- Additions to property and equipment
- Purchase of restricted investments
- Sale of restricted and other investments
- Release of restricted investments
- Return of capital from investment in unconsolidated entity (SIRIUS XM Radio Incorporation, 2012)
The items included in the cash flows from financing activities of SIRIUS XM Radio Incorporation are as follows:
- Proceeds from exercise of stock options
- Payment of premiums on redemption of debt
- Repayment of long-term borrowings
- Repayment of related party long-term borrowings
- Long-term borrowings, net of costs
- Related party long-term borrowings
- Dividends paid (SIRIUS XM Radio Incorporation, 2012)
Apart from these investing and financing activities, a company may also have other investing and financing activities, such as:
Source: (Albrecht, Stice, & Stice, 2008; Financial Accounting Standards Board, 2013; Horngren & Harrison, 2009)
SIRIUS XM Radio Incorporation’s Non-Cash Transactions in Cash Flow Statement
Following non cash transactions are on the cash flow statement of SIRIUS XM Radio Incorporation:
- Depreciation and amortization
- Non-cash interest expense, net of amortization of premium
- Provision for doubtful accounts
- Restructuring, impairments and related costs
- Amortization of deferred income related to equity method investment
- Loss on extinguishment of debt and credit facilities, net
- Gain on merger of unconsolidated entities
- Loss on unconsolidated entity investments, net
- Dividend received from unconsolidated entity investment
- Loss on disposal of assets
- Share-based payment expense
- Deferred income taxes
- Other non-cash purchase price adjustments (SIRIUS XM Radio Incorporation, 2012)
In addition to these, there are no other non-cash transactions identified in the cash flow statement of SIRIUS XM Radio Incorporation.
Apart from these identified non-cash items in the cash flow statement of SIRIUS XM Radio Incorporation, a company may also include non-cash items in its cash flow statement such as:
- Unrealized revenues
- Expenses payable
- Revaluation gain and loss (Albrecht, Stice, & Stice, 2008; Financial Accounting Standards Board, 2013; Horngren & Harrison, 2009)
Summary
This report has analysed different parts of financial statements and notes to the financial statements. This analysis includes discussion and presentation of different types of disclosures and information embodied in the financial statements and accompanying notes. The company has deferred tax assets and liabilities, as shown in the financial statements. Apart from this, there are various temporary differences noted in the financial statements due to differences in the carrying amounts of different financial statement items, and these differences have been noted and disclosed in the notes along with their impacts. Moreover, the company has a benefit plan which includes various plans for employees, consultants and members of the board of directors. In addition, the company follows an indirect method for preparing its cash flow statement, which is evident from the fact that adjustments are made in the net income to arrive at net cash flows from operating activities of the company. There are a number of items included in the financing and investing activities of the company. These further include all of the items generally listed in the cash flow statement under financing and investing activities of a company. Moreover, there are also non-cash items included in the cash flow statement of SIRIUS XM Radio Incorporation, which are mostly found under cash flows from operating activities. Lastly, various cash inflows and outflows have been observed under cash flows from investing, capital budgeting and financing activities of the companies.
Reference List
Albrecht, W. S., Stice, E. K., & Stice, J. D. (2008). Financial Accounting: Cocnepts and Applications. Mason: CENGAGE Learning.
Financial Accounting Standards Board. (2013). 205 Presentation of Financial Statements 20 Discontinued Operations. Web.
Horngren, C. T., & Harrison, W. T. (2009). Accounting. Upper Saddle River, NJ: Prentice Hall.
SIRIUS XM Radio Incorporation. (2012). Annual Report 2012. New York: SIRIUS XM Radio Incorporation.