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Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 1 Consolidations, Equity Interests, Joint Venture, Minority Interests and Legal Entities Versus Reporting Entities Objective: The objectives of this case exercise are to practice the accounting issues of Legal Entities, Consolidations and Equity Income and Non Controlling [Minority] Interests and to undertand various intercompany ownership percentages This exercise has short readings followed by case application and questions for: o Grant PrideCo o GE o Amerada Hess o Verizon Assignment: Read pages 2 – 8. Complete questions 1, 2, 3, 4, 5, 6 on page 9 and read pages 10 - 18. Read page 19. Complete the GE exercise on page 20, you must review pages 20 – 28 Read pages 32 – 34 Read Verizon on page 35 - 39 Barry M Frohlinger

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Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 1
Consolidations, Equity Interests,
Objective:
• The objectives of this case exercise are to practice the accounting issues of Legal Entities, Consolidations and Equity
Income and Non Controlling [Minority] Interests and to undertand various intercompany ownership percentages
• This exercise has short readings followed by case application and questions for:
o Grant PrideCo o GE o Amerada Hess o Verizon
Assignment:
• Read pages 2 – 8. • Complete questions 1, 2, 3, 4, 5, 6 on page 9 and read pages 10 - 18. • Read page 19. • Complete the GE exercise on page 20, you must review pages 20 – 28 • Read pages 32 – 34 • Read Verizon on page 35 - 39
Barry M Frohlinger
Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 2
There are six possible ways to account for the investment by one company in the common stock of another, depending on the ownership percentage of the voting stock
Percentage owned Name Key Accounting Issue Simple financial investment,
almost 0% interest in issuers equity
Marketable securities or Equity Investments
Equity Securities are Marked to Market
Less than 20% Cost Method Dividend Income 20 – 50% Equity Method, Affiliate Equity Income 50% Equity Method, Joint Venture Equity Income More than 50%, less than 100% Consolidation, NonControlling
Interest Full Consolidation with Non
Controlling Interest 100% Consolidation, Wholly-Owned
Subsidiary Full Consolidation
Trading Security Available for Sale Balance Sheet Mark-to-market Mark-to-market Gain/Loss Through the income statement Through OCI Dividends Other Income, Cash Flow and
Accrual Accounting should be the same
Other Income
Consolidation takes place when the parent owns more than 50% of the voting common stock of
the subsidiary. The purpose behind consolidation is to report as one economic unit the financial position and operating performance of a parent and its majority-owned subsidiaries. It presents the group as a single company instead of as separate companies.
Consolidated financial statements are a reporting mechanism for accounting purposes, ignoring
legal distinctions. A consolidation is negated, even if more than 50% of voting common stock is owned by the parent, in the following cases:
• Parent is not in actual control of subsidiary, such as when the subsidiary is in receivership
(arising from bankruptcy or receivership) or in a politically unstable foreign region. When control is temporary, consolidation is negated.
• Parent has sold or agreed to sell the subsidiary shortly after year-end. In this case, the subsidiary
is a temporary investment. Majority-owned subsidiaries not consolidated because of the existence of one of the preceding
exceptions should be accounted for under the equity method. • Note: Unincorporated joint ventures and partnerships that are directly controlled
(majority control) must be consolidated. The companies that make up the consolidated group retain their individual legal identities.
Adjustments and eliminations are only for financial statement presentation; they are never posted on the books of either the parent or the subsidiary.
Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 3
Legal structure: As an illustration the legal structure of four corporate entities is portrayed below. Co. X owns 100% of the common stock of C1 Corp. 80% of the common stock of C2 Corp.; and 30% of the common stock of C3 Corp. Each of the companies has only one type of stock outstanding and there are no other significant stockholders in either Corp. C2 or Corp. C3.
Reporting entities: 1. Co. X is called the “parent” (investor) and C1 Corp. and C2 Corp. are “subsidiaries”. Corp. C3 has
no commonly used title which clearly distinguishes it from the subsidiaries (the textbook term would be “50% or less owned company”). Any one of the four companies could refer to any other one as an ”affiliate”.
2. Each of the four corporations will maintain separate accounting records based on its own
operations (e.g., C1 Corp.’s accounting records are not affected by the fact that it has only one stockholder).
3. For public reporting, consolidated statements would be presented for Co. X + C1 Corp. + C2 Corp. as if the three separate legal entities were one entity. C3 Corp. would be shown as a one-line consolidation (both balance sheet and income
statement) called the “equity method”.
Company X
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Reporting entities: [continued] 4. Line-of-business reporting—some public disclosure is given (revenue, operating earnings, assets,
depreciation and amortization and capital spending) by line of business. More detailed information is available for internal use. One can more easily visualize the results by assuming that each line of business has its own separate accounting system (frequently these are called “divisions”). The following illustration portrays the separate accounting divisions where each type of “P” denotes a particular product line. (Note: these are not separate legal entities!)
Statements for internal use would be prepared for each “P” and probably combined statements
for each line of business (e.g., one set of statements would show the two P1’s combined; one set of statements would show the two P2’s combined, and one set of statements would show the results of P3, P4 and P5 seperately). Line-of-business reporting creates substantial problems of splitting joint assets, liabilities and expenses.
Company X
P1 P2
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Statements requested by financial analyst: The financial analyst could request as much of the following as she/he needs for the analysis assuming that she/he is able to convince the customer of these needs (since only the consolidated statements would normally be available publicly). 1. Consolidated Co. X plus subsidiaries C1 and C2 (C3 would be a one-line consolidation). 2. Co. X statements only (all three invested companies, C1, C2 and C3 would be one-line
consolidations). 3. Separate statements for one or more of the invested companies (C1, C2 or C3). 4. Consolidating statements (which would provide everything in 1, 2 and 3 above except separate
statements for C3 and would also show the elimination entries). 5. Sometimes partial consolidations (e.g., Co. X plus C2) or combining statements (e.g., only C1 and
C2) may be useful. For example if C1 is a foreign subsidiary, the analyst may ask for a partial consolidation excluding C1 with separate statements for C1. Also loan covenants (or loan collateral) frequently cover only selected companies and a partial consolidation or combined statements are necessary.
More complex legal structures: We could add numerous legal entities to our initial chart. The basic public reports would still be the consolidated statements (Co. X plus all subsidiaries more than 50% owned) with parent company (Co. X) statements also given for some SEC reporting. However, the financial analyst would be faced with numerous possible combinations of reporting and he would need to define his requirements precisely.
Joint ventures – A joint venture is an entity that is owned, operated and jointly managed by a common group of investors.
A key feature of the joint venture is that the joint ventures are jointly controlled by the investor firms. Joint control is the sharing of power between investors; no single investor unilaterally controls joint ventures. Joint consent is required for major operating and financial policy decisions.
Under U.S. GAAP, ownership in a joint venture where the venturer does not own more than 50 percent and have a significant influence over the operating activities of the joint venture is to be accounted for using the equity method. Under US GAAP, profit after tax of joint-ventures is included on a single line within the income statement and in the investment is reflected in a single asset line in the balance sheet.
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Review the financial statements in order to see an Accounting Illustration of Consolidations and Joint Ventures Parent 100% owned Sub 50% owned JV Consolidated Revenues 0 1,000 1,300 1,000 Cost of Sales 0 (600) (900) (600) Selling and Admin 0 (300) (280) (300) Interest Expense 0 (50) (82) (50) Tax Expense 0 (15) (28) (15) Net Earnings 0 35 10 35 Equity Income 40 0 0 5 Net Income 40 35 10 40 Cash 0 20 10 20 Acc Rec 0 200 290 200 Inventory 0 100 150 100 PPE, net 0 500 1300 500 Investments 270 0 0 110 Total Assets 270 820 1750 930 Short Term Debt 0 100 200 100 Acc Payables 0 40 30 40 Accruals 0 20 20 20 Long Term Debt 0 500 1280 500 Equity 270 160 220 270 Total Financing 270 820 1750 930 Operating Profit 0 100 120 OP Margin NM 10.0% 9.2% Interest 0 (50) (82) Interest Coverage NM 2.0 1.5 Assets, for ROA 800 1740 ROA NM 12.5% 6.9%
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Parent Sub 90% owned Consolidated Revenue - 10,000 10,000 CGSold - (6,000) (6,000) SGA - (3,000) (3,000) Interest Expense - (300) (300) Tax Expense - (250) (250) Net Income - 450 450 Minority Interest - - (45) Equity Income 405 - - Net Earnings 405 450 405 Remember the following: Equity Income is leveraged, after tax Minority Interest is a financing cost
Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 8
PROPER TREATMENT OF Joint Ventures IN ANALYSIS A financial analyst must know how to treat joint ventures. For profitability analysis, the numerator and denominator of each ratio must be consistent. In income
statements, the revenues and expenses of the joint venture are netted as one number, after interest and after tax. The investors share [up to 50%] of the joint venture earnings are then included in the income statement.
Three typical profitability ratios must be carefully calculated:
profit margin ratios (% of sales) => without inclusion of joint venture earnings
return on assets => without inclusion of joint venture earnings nor the investment
from the balance sheet
return on equity => with joint venture earnings
For cash flow analysis, the change in the invesment account in the balance sheet is shown as an adjustment to net income in the operating section of the statement of cash flows and consists of the difference between joint venture earnings and distributions received during the year.
Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 9
Illustration of Consolidating Statements Grant PrideCo.
Required: Review the financial information and the brief writeup regarding Grant Prideco. 1. Draw the organizational chart for Grant Prideco.
2. Review the financial information for Grant Prideco, XL, Inc.
3. Why is total stockholders' equity the same for consolidated and the parent?
4. Why is net income the same for consolidated and the parent company? Be specific and show amounts.
5. Explain why the Consolidated Income Statement reports NO “EQUITY IN SUBSIDIARIES, net of tax” while the Parent Company reports the “EQUITY IN SUBSIDIARIES, net of tax ” of $ 595,690.
6. Explain why the consolidated earnings [$ 477,900] is less than the earnings of the sum of the two subsidiaries.
7. Which legal entities have the debt?
8. Neither Grant Prideco XL, Inc. nor Grant Prideco TCA, Inc. guarantee the debt of Grant Prideco Inc. Make a guess of the debt rating of each of these three legal entities.
9. Now assume that both Grant Prideco XL, Inc. and Grant Prideco TCA, Inc. guarantee the debt of Grant Prideco Inc. Make a guess of the debt rating of each of these three legal entities.
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The parent Grant Prideco, Inc. is a holding company which means that it holds investments in subsidiaries which are the operating companies, and it has no operating assets such as inventories nor operating revenues such as sales. Grant PrideCo is the world leader in drill stem technology development and drill pipe manufacturing, sales and service; a global leader in drill bit technology and specialty tools, manufacturing, sales and service; and a provider of an integrated package of large-bore tubular products and services.
The Company’s drill stem and drill bit products are used to drill oil and gas wells while
large-bore tubular products and services are primarily used in completing offshore oil and gas wells. Customers include oil and gas drilling contractors; oil and gas companies; and other oilfield service companies. The firm primarily operates through two business segments: (1) Drilling Products and Services and (2) ReedHycalog.
As of December 31, 2008, Grant PrideCo had a product backlog of $783 million, of which $779 million is expected to complete during 2009. The firm had a product backlog as of December 31, 2007 and 2006, of $1,158 million and $732 million, respectively. The decrease in product backlog primarily reflects a lower level of new land rigs entering the North American market as compared to last year coupled with capacity additions geared towards reducing customer lead times.
Legal Structure
The Grant Prideco organization consists of the following legal entities. The parent
company is Grant PrideCo, Inc.; the two subsidiaries are, Grant Prideco XL, Inc. and Grant Prideco TCA, Inc. Grant Prideco XL, Inc. has numerous equity investments in affiliates, the most significant is a 50% unconsolidated joint venture, Grant Prideco Jiangsu (GPJ). Grant Prideco TCA, Inc. owns three subsidiaries:
% Ownership Tianjin Grant TPCO (TGP) 60 % H-Tech 54 % Tianjin Grant Prideco (GPT) 85 %
Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 11
Grant Prideco XL, Inc.
Grant Prideco XL, Inc.
Revenues $1,364,328
Other operating items $5,844
Operating Income $423,636
Interest Expense $1,864
Income Tax Provision $(121,126)
Grant Prideco copyright 1981 – 2015 Barry M Frohlinger, Inc. 12
Grant Prideco XL, Inc. BALANCE SHEET As of Dec 31, 2008 Current Assets:
Cash and cash equivalents $82,319
Accounts receivable, net $249,221
Other current assets $566,787
Goodwill $187,041
Other Assets $46,036
Other current liabilities $59,940
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Grant Prideco XL, Inc. STATEMENTS OF CASH FLOWS (In thousands) Year Ended Dec 31, 2008 Cash Flows From Operating Activities: Net income $335,258 Adjustments to reconcile net income to net cash flow Depreciation and amortization $43,255 Deferred income tax $2,433 Equity income in affiliates, net $(123,983) Stock-based compensation expense $12,144 Deferred compensation expense $1,344 Change in operating assets and liabilities, net Accounts receivable $(45,677) Inventories $(39,033) Other current assets $455 Other assets $1,005 Accounts payable $2,001 Income taxes payable $16,755 Other current liabilities $(19,043) Other, net $4,321 Net cash provided by operating activities $191,235 Cash Flows From Investing Activities: Acquisition of businesses $(3,394) Capital expenditures $(89,432) Proceeds from sale of fixed assets $5,688 Net cash used in investing activities $(87,138) Cash Flows From Financing Activities: Borrowings (repayments) on credit facility, net $- Repayments on debt $- Issuance of debt $15,600 Dividends paid $(147,700) Net cash used in financing activities $(132,100) Effect of Exchange Rate Changes on Cash $733 Net Increase (Decrease) in Cash $(27,270) Cash at Beginning of Year $109,589 Cash at End of Year $82,319
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 14
Grant Prideco, Inc.
GRANT PRIDECO INC.
STATEMENT OF OPERATIONS
Grant Prideco, Inc.
Cost of sales $- $823,273 $487,390 $(346,703) $963,960
Selling, general and administrative $229 $235,558 $110,289 $(6,974) $339,102
Other operating items $- $5,844 $602 $- $6,446 Equity Income in Unconsolidated Affiliates $- $123,983 $- $- $123,983
Equity in Subsidiaries, Net of Taxes $595,690 $- $- $(595,690) $-
Operating Income (Loss) $595,461 $423,636 $331,357 $(595,690) $754,764
Interest Expense $(95,619) $1,864 $(447) $- $(94,202)
Other Income (Expense), Net $4,753 $30,884 $(7,278) $- $28,359
Income Before Income Taxes $504,595 $456,384 $323,632 $(595,690) $688,921
Income Tax Provision $(26,695) $(121,126) $(53,267) $- $(201,088)
Minority Interests $- $- $(9,933) $- $(9,933)
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 15
GRANT PRIDECO INC. BALANCE SHEET At Dec 31, 2008
Grant Prideco, Inc. Grant Prideco XL, Inc.
Grant Prideco TCA, Inc. Eliminations Consolidated
Current Assets:
Accounts receivable, net $- $249,221 $166,304 $- $415,525
Inventories $- $310,379 $217,649 $- $528,028
Assets held for sale $- $182,059 $4,499 $- $186,558
Other current assets $- $566,787 $24,715 $(546,308) $45,194
Total Current Assets $201 $1,428,429 $495,076 $(546,308) $1,377,398
Property, Plant and Equipment, Net $- $177,492 $151,990 $- $329,482
Goodwill $- $187,041 $271,717 $- $458,758
Investment In Unconsolidated Affiliate $- $254,844 $- $- $254,844
Other Assets $5,331 $46,036 $55,739 $- $107,106
Total Assets $2,304,423 $2,093,842 $974,522 $(2,845,199) $2,527,588
Current Liabilities:
Deferred revenues $- $19,095 $1,798 $- $20,893
Income taxes payable $(87,263) $165,833 $(655) $- $77,915
Other liabilities $343,317 $- $202,991 $(546,308) $-
Liabilities held for sale $- $15,792 $685 $16,477
Other current liabilities $4,189 $59,940 $34,562 $- $98,691
Total Current Liabilities $260,389 $338,179 $289,742 $(546,308) $342,002
Long-Term Debt $1,474,585 $18,766 $2,350 $- $1,495,701
Deferred Tax Liabilities $2,370 $28,736 $41,599 $- $72,705
Other Long-Term Liabilities $- $28,372 $852 $- $29,224
Minority Interests $- $- $20,877 $- $20,877
$2,304,423 $2,093,842 $974,522 $(2,845,199) $2,527,588
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 16
GRANT PRIDECO, INC. (In thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2008 Grant Prideco, Inc. Grant Prideco XL, Inc. Grant Prideco TCA, Inc. Eliminations Consolidated
Net income $477,900 $335,258 $260,432 $(595,690) $477,900
Adjustments to net income to ops cash flow
Depreciation and amortization $1,355 $43,255 $14,176 - $58,786
Deferred income tax $1,455 $2,433 $2,455 $669 $7,012
Equity income in unconsolidated affiliates, net $(237,240) $(123,983) - $381,502 $20,279
Stock-based compensation expense $23 $12,144 $1,319 - $13,486
Deferred compensation expense - $1,344 $1,076 - $2,420
Minority interests in consolidated subsidiaries - - $1,704 - $1,704
Change in operating assets and liabilities, net
Accounts receivable - $(45,677) $(24,437) $(28,000) $(98,114)
Inventories - $(39,033) $(3,668) $(66,354) $(109,055)
Other current assets - $455 $(5,599) - $(5,144)
Other assets - $1,005 $(1,005) $(15,417) $(15,417)
Accounts payable - $2,001 $4,420 - $6,421
Income taxes payable $3,577 $16,755 $10,440 $(35,160) $(4,388)
Other current liabilities - $(19,043) $1,086 - $(17,957)
Other, net - $4,321 $1,893 - $6,214
Net cash provided by operating activities $247,070 $191,235 $264,292 $(358,450) $344,147
Acquisition of businesses, net of cash acquired - $(3,394) - - $(3,394)
Capital expenditures - $(89,432) $(34,080) - $(123,512)
Proceeds from sale of fixed assets - $5,688 $4,907 - $10,595
Net cash used in investing activities $- $(87,138) $(29,173) $- $(116,311)
Borrowings (repayments) on credit facility, net $(34,600) - - - $(34,600)
Repayments on debt $(34,681) - - - $(34,681)
Issuance of debt - $15,600 - - $15,600
Repurchases of common stock $(167,890) - - - $(167,890)
Dividends paid $(39,033) $(147,700) $(210,750) $358,450 $(39,033)
Net cash used in financing activities $(276,204) $(132,100) $(210,750) $358,450 $(260,604)
Effect of Exchange Rate Changes on Cash - $733 $38 - $771
Net Increase (Decrease) in Cash $(29,134) $(27,270) $24,407 - $(31,997)
Cash at Beginning of Year $29,234 $109,589 $54,262 - $193,085
Cash at End of Year $100 $82,319 $78,669 - $161,088
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Solution Notes 3. This is the direct consequence of the use of the equity method for accounting for the investment on the parent's books. Each
subsidiary’s equity is eliminated against the parent's investment account to avoid double counting [of subsidiary profits]. Remember that equity [normally a credit balance] must be the same as assets [debit balance] net of liabilities [credit balance]. The net asset is already included in the balance sheet of the parent firm as a net balance, it is merely replaced in the consolidation with the gross amounts.
4. This is a direct consequence of the use of the equity method for accounting for the investment on the parent's books. To be
specific, in consolidation, the one net line “equity in earnings” [as shown on the parent company income statement] is replaced by all [gross] of the individual revenues and expenses of the subsidiary. Therefore, net income is not affected.
5. “Equity in income” represents the company's proportionate share of the earnings of an investment accounted for under the
equity method, included because the owner has significant influence over the other's decisions (usually over 20% ownership). “Non Controlling [Minority] interest” represents the ownership by other investors in a consolidated subsidiary that is less than
100% owned by the parent.
ˆprofit margin should exclude both amounts. ˆrate of return on total assets should exclude the equity in earnings [and the balance sheet should remove the investment
account from the assets] and should not have the minority interest deducted (remember that minority interest is an after tax amount)
ˆrate of return on common equity should include both the equity in earnings and the minority interest deduction.
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 18
PROPER TREATMENT OF Equity Income IN ANALYSIS A financial analyst must know how to treat equity investments. For profitability analysis, the numerator and denominator of each ratio must be consistent. In
income statements, the revenues and expenses of the investment are netted as one number, after tax. The investors share of earnings are then included in the income statement.
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 19
GE .
General GE is one of the largest and most diversified industrial corporations in the world. GE’s services include product services and through General Electric Capital Services, Inc., they offer a broad array of financial and other services including consumer financing, commercial and industrial financing, real estate financing, asset management and leasing, mortgage services, consumer savings and insurance services, and specialty insurance and reinsurance. Questions: [1] Why is the consolidated revenue for fiscal 2003 of $134,187 more than the revenue of GE of $78,841 but less than the revenue of GE of $78,841 Plus the revenue of GECS of $64,279? [2] Calculate EBITDA for GE consolidated and GE [parent]. [3] How is GECS reflected in the following Statement of Cash Flows:
o GE Consolidated o GE Parent Only
[4] Describe the impact to the consolidated financial statements due to the adoption of FIN 46.
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 20
GE 2003 ANNUAL REPORT
INDEPENDENT AUDITORS' REPORT
To Shareowners and Board of Directors of General Electric Company We have audited the accompanying statement of financial position of General Electric Company and consolidated affiliates ("GE") as of December 31, 2003 and 2002, and the related statements of earnings, changes in shareowners' equity and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of GE management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of General Electric Company and consolidated affiliates at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, GE in 2003 changed its methods of accounting for variable interest entities and asset retirement obligations, in 2002 changed its methods of accounting for goodwill and other intangible assets and for stock-based compensation, and in 2001 changed its methods of accounting for derivative instruments and hedging activities and impairment of certain beneficial interests in securitized assets. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual entities. The consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. /s/ KPMG LLP KPMG LLP Stamford, Connecticut February 6, 2004
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GE 2003 ANNUAL REPORT STATEMENT OF EARNINGS General Electric Company
and consolidated affiliates
For the years ended December 31 (In millions; per-share amounts in dollars) 2003 2002 2001 REVENUES Sales of goods $ 49,963 $ 55,096 $ 52,677 Sales of services 22,391 21,138 18,722 Other income (note 2) 602 1,013 234 Earnings of GECS before accounting changes — — — GECS revenues from services (note 3) 60,536 54,963 54,783 Consolidated, liquidating securitization entities (note 29) 695 — — Total revenues 134,187 132,210 126,416 COSTS AND EXPENSES (note 4) Cost of goods sold 37,189 38,833 35,678 Cost of services sold 14,017 14,023 13,419 Interest and other financial charges 10,432 10,216 11,062 Insurance losses and policyholder and annuity benefits 16,369 17,608 15,062 Provision for losses on financing receivables (note 13) 3,752 3,084 2,481 Other costs and expenses 31,727 29,229 28,665 Minority interest in net earnings of consolidated affiliates 290 326 348 Consolidated, liquidating securitization entities (note 29) 507 — — Total costs and expenses 114,283 113,319 106,715 EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES
19,904 18,891 19,701
Provision for income taxes (note 7) (4,315 ) (3,758 ) (5,573 ) EARNINGS BEFORE ACCOUNTING CHANGES 15,589 15,133 14,128 Cumulative effect of accounting changes (note 1) (587 ) (1,015 ) (444 ) NET EARNINGS $ 15,002 $ 14,118 $ 13,684 PER-SHARE AMOUNTS (note 8) Per-share amounts before accounting changes Diluted earnings per share $ 1.55 $ 1.51 $ 1.41 Basic earnings per share $ 1.56 $ 1.52 $ 1.42 Per-share amounts after accounting changes Diluted earnings per share $ 1.49 $ 1.41 $ 1.37 Basic earnings per share $ 1.50 $ 1.42 $ 1.38
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GE 2003 ANNUAL REPORT GE GECS For the years ended December 31 (In millions; per-share amounts in dollars) 2003 2002 2001 2003 2002 2001 REVENUES Sales of goods $ 47,767 $ 51,957 $ 49,057 $ 2,228 $ 3,296 $ 3,627 Sales of services 22,675 21,360 18,961 — — — Other income (note 2) 645 1,106 433 — — — Earnings of GECS before accounting changes 7,754 4,626 5,586 — — — GECS revenues from services (note 3) — — — 61,356 55,403 55,229 Consolidated, liquidating securitization entities (note 29) — — — 695 — — Total revenues 78,841 79,049 74,037 64,279 58,699 58,856 COSTS AND EXPENSES (note 4) Cost of goods sold 35,102 35,951 32,419 2,119 3,039 3,266 Cost of services sold 14,301 14,245 13,658 — — — Interest and other financial charges 941 569 817 9,869 9,935 10,598 Insurance losses and policyholder and annuity benefits — — — 16,369 17,608 15,062 Provision for losses on financing receivables (note 13) — — — 3,752 3,084 2,481 Other costs and expenses 9,870 9,131 8,637 22,342 20,343 20,320 Minority interest in net earnings of consolidated affiliates 181 183 185 109 143 163 Consolidated, liquidating securitization entities (note 29) — — — 507 — — Total costs and expenses 60,395 60,079 55,716 55,067 54,152 51,890 EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES
18,446 18,970 18,321 9,212 4,547 6,966
Provision for income taxes (note 7) (2,857 ) (3,837 ) (4,193 ) (1,458 ) 79 (1,380 ) EARNINGS BEFORE ACCOUNTING CHANGES 15,589 15,133 14,128 7,754 4,626 5,586 Cumulative effect of accounting changes (note 1) (587 ) (1,015 ) (444 ) (339 ) (1,015 ) (169 ) NET EARNINGS $ 15,002 $ 14,118 $ 13,684 $ 7,415 $ 3,611 $ 5,417
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GE 2003 ANNUAL REPORT STATEMENT OF FINANCIAL POSITION General Electric Company
and consolidated affiliates
At December 31 (In millions) 2003 2002 ASSETS Cash and equivalents $ 12,664 $ 8,910 Investment securities (note 9) 120,724 116,862 Current receivables (note 10) 10,732 10,681 Inventories (note 11) 8,752 9,247 Financing receivables (investments in time sales, loans and financing leases)— net (notes 12 and 13) 226,029 198,060 Insurance receivables—net (note 14) 27,053 31,585 Other GECS receivables 9,545 11,432 Property, plant and equipment (including equipment leased to others)— net (note 15) 53,382 49,073 Investment in GECS — — Intangible assets —net (note 16) 55,025 46,180 Consolidated, liquidating securitization entities (note 29) 26,463 — All other assets (note 17) 97,114 93,214 TOTAL ASSETS $ 647,483 $ 575,244 LIABILITIES AND EQUITY Short-term borrowings (note 18) $ 134,917 $ 138,775 Accounts payable, principally trade accounts 19,824 18,874 Progress collections and price adjustments accrued 4,433 6,706 Dividends payable 2,013 1,895 All other current costs and expenses accrued 15,343 15,577 Long-term borrowings (note 18) 170,004 140,632 Insurance liabilities, reserves and annuity benefits (note 19) 136,264 135,853 Consolidated, liquidating securitization entities (note 29) 25,721 — All other liabilities (note 20) 41,357 35,236 Deferred income taxes (note 21) 12,647 12,517 Total liabilities 562,523 506,065 Minority interest in equity of consolidated affiliates (note 22) 5,780 5,473 Common stock (10,063,120,000 and 9,969,894,000 shares outstanding at year-end 2003 and 2002, respectively) 669 669 Accumulated gains/(losses)—net Investment securities 1,620 1,071 Currency translation adjustments 2,987 (2,136 ) Derivatives qualifying as hedges (1,792 ) (2,112 ) Other capital 17,497 17,288 Retained earnings 82,796 75,553 Less common stock held in treasury (24,597 ) (26,627 ) Total shareowners’ equity (notes 24 and 25) 79,180 63,706 TOTAL LIABILITIES AND EQUITY $ 647,483 $ 575,244
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GE 2003 ANNUAL REPORT GE GECS At December 31 (In millions) 2003 2002 2003 2002 ASSETS Cash and equivalents $ 1,670 $ 1,079 $ 11,273 $ 7,918 Investment securities (note 9) 380 332 120,344 116,530 Current receivables (note 10) 10,973 10,973 — — Inventories (note 11) 8,555 9,039 197 208 Financing receivables (investments in time sales, loans and financing leases)— net (notes 12 and 13) — — 226,029 198,060 Insurance receivables—net (note 14) — — 27,053 31,585 Other GECS receivables — — 11,901 12,984 Property, plant and equipment (including equipment leased to others)— net (note 15) 14,566 13,743 38,816 35,330 Investment in GECS 45,308 36,929 — — Intangible assets —net (note 16) 30,204 23,049 24,821 23,131 Consolidated, liquidating securitization entities (note 29) — — 26,463 — All other assets (note 17) 30,448 30,167 67,629 64,082 TOTAL ASSETS $ 142,104 $ 125,311 $ 554,526 $ 489,828 LIABILITIES AND EQUITY Short-term borrowings (note 18) $ 2,555 $ 8,786 $ 132,988 $ 130,126 Accounts payable, principally trade accounts 8,753 8,095 13,440 12,608 Progress collections and price adjustments accrued 4,433 6,706 — — Dividends payable 2,013 1,895 — — All other current costs and expenses accrued 15,343 15,577 — — Long-term borrowings (note 18) 8,388 970 162,540 140,836 Insurance liabilities, reserves and annuity benefits (note 19) — — 136,264 135,853 Consolidated, liquidating securitization entities (note 29) — — 25,721 — All other liabilities (note 20) 18,449 16,621 22,828 18,441 Deferred income taxes (note 21) 1,911 1,927 10,736 10,590 Total liabilities 61,845 60,577 504,517 448,454 Minority interest in equity of consolidated affiliates (note 22) 1,079 1,028 4,701 4,445 Common stock (10,063,120,000 and 9,969,894,000 shares outstanding at year-end 2003 and 2002, respectively) 669 669 1 1 Accumulated gains/(losses)—net Investment securities 1,620 1,071 1,823 1,191 Currency translation adjustments 2,987 (2,136 ) 2,639 (782 ) Derivatives qualifying as hedges (1,792 ) (2,112 ) (1,727 ) (2,076 ) Other capital 17,497 17,288 12,268 12,271 Retained earnings 82,796 75,553 30,304 26,324 Less common stock held in treasury (24,597 ) (26,627 ) — — Total shareowners’ equity (notes 24 and 25) 79,180 63,706 45,308 36,929 TOTAL LIABILITIES AND EQUITY $ 142,104 $ 125,311 $ 554,526 $ 489,828
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GE 2003 ANNUAL REPORT STATEMENT OF CASH FLOWS General Electric Company
and consolidated affiliates
For the years ended December 31 (In millions) 2003 2002 2001 CASH FLOWS — OPERATING ACTIVITIES Net earnings $ 15,002 $ 14,118 $ 13,684 Adjustments to reconcile net earnings to cash provided from operating activities Cumulative effect of accounting changes 587 1,015 444 Depreciation and amortization of property, plant and equipment 6,956 6,511 5,873 Amortization of goodwill — — 1,252 Earnings (before accounting changes) retained by GECS — — — Deferred income taxes 1,127 2,414 1,426 Decrease (increase) in GE current receivables 534 (409 ) 197 Decrease (increase) in inventories 874 (87 ) (485 ) Increase (decrease) in accounts payable 802 227 4,676 Increase (decrease) in GE progress collections (2,268 ) (5,062 ) 3,446 Increase in insurance liabilities and reserves 1,679 9,454 8,194 Provision for losses on financing receivables 3,752 3,084 2,481 All other operating activities 1,244 (1,264 ) (8,296 ) CASH FROM OPERATING ACTIVITIES 30,289 30,001 32,892 CASH FLOWS — INVESTING ACTIVITIES Additions to property, plant and equipment (9,767 ) (14,056 ) (16,394 ) Dispositions of property, plant and equipment 4,945 6,357 7,591 Net increase in GECS financing receivables (14,273 ) (18,082 ) (13,837 ) Payments for principal businesses purchased (14,407 ) (21,570 ) (12,429 ) Investment in GECS — — — All other investing activities 10,599 (15,111 ) (5,742 ) CASH USED FOR INVESTING ACTIVITIES (22,903 ) (62,462 ) (40,811 ) CASH FLOWS — FINANCING ACTIVITIES Net increase (decrease) in borrowings (maturities of 90 days or less) (11,107 ) (17,347 ) 20,482 Newly issued debt (maturities longer than 90 days) 67,545 95,008 32,071 Repayments and other reductions (maturities longer than 90 days) (43,155 ) (40,454 ) (37,001 ) Net dispositions (purchases) of GE shares for treasury 726 (985 ) (2,435 ) Dividends paid to shareowners (7,643 ) (7,157 ) (6,358 ) All other financing activities (9,998 ) 3,873 2,047 CASH FROM (USED FOR) FINANCING ACTIVITIES (3,632 ) 32,938 8,806 INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 3,754 477 887
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GE 2003 ANNUAL REPORT GE GECS For the years ended December 31 (In millions) 2003 2002 2001 2003 2002 2001 CASH FLOWS — OPERATING ACTIVITIES Net earnings $ 15,002 $ 14,118 $ 13,684 $ 7,415 $ 3,611 $ 5,417 Adjustments to reconcile net earnings to cash provided from operating activities Cumulative effect of accounting changes 587 1,015 444 339 1,015 169 Depreciation and amortization of property, plant and equipment 2,277 2,199 1,919 4,679 4,312 3,954 Amortization of goodwill — — 545 — — 707 Earnings (before accounting changes) retained by GECS (4,319 ) (2,661 ) (3,625 ) — — — Deferred income taxes 389 1,005 564 738 1,409 862 Decrease (increase) in GE current receivables 585 (486 ) 207 — — — Decrease (increase) in inventories 909 (149 ) (881 ) (35 ) 62 396 Increase (decrease) in accounts payable 676 708 364 666 (880 ) 4,804 Increase (decrease) in GE progress collections (2,268 ) (5,062 ) 3,446 — — — Increase in insurance liabilities and reserves — — — 1,679 9,454 8,194 Provision for losses on financing receivables — — — 3,752 3,084 2,481 All other operating activities (913 ) (590 ) 530 2,215 (556 ) (8,688 ) CASH FROM OPERATING ACTIVITIES 12,925 10,097 17,197 21,448 21,511 18,296 CASH FLOWS — INVESTING ACTIVITIES Additions to property, plant and equipment (2,158 ) (2,386 ) (2,876 ) (7,609 ) (11,670 ) (13,518 ) Dispositions of property, plant and equipment — — — 4,945 6,357 7,591 Net increase in GECS financing receivables — — — (14,273 ) (18,082 ) (13,837 ) Payments for principal businesses purchased (3,870 ) (8,952 ) (1,436 ) (10,537 ) (12,618 ) (10,993 ) Investment in GECS — (6,300 ) (3,043 ) — — — All other investing activities 236 203 1,508 9,788 (15,234 ) (7,741 ) CASH USED FOR INVESTING ACTIVITIES (5,792 ) (17,435 ) (5,847 ) (17,686 ) (51,247 ) (38,498 ) CASH FLOWS — FINANCING ACTIVITIES Net increase (decrease) in borrowings (maturities of 90 days or less) (6,704 ) 7,924 327 (4,035 ) (34,687 ) 23,634 Newly issued debt (maturities longer than 90 days) 7,356 66 1,303 59,939 96,044 30,752 Repayments and other reductions (maturities longer than 90 days) (277 ) (1,229 ) (950 ) (42,878 ) (39,225 ) (36,051 ) Net dispositions (purchases) of GE shares for treasury 726 (985 ) (2,435 ) — — — Dividends paid to shareowners (7,643 ) (7,157 ) (6,358 ) (3,435 ) (1,965 ) (1,961 ) All other financing activities — — — (9,998 ) 10,173 5,090 CASH FROM (USED FOR) FINANCING ACTIVITIES (6,542 ) (1,381 ) (8,113 ) (407 ) 30,340 21,464 INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR
591 (8,719 ) 3,237 3,355 604 1,262
Cash and equivalents at beginning of year 1,079 9,798 6,561 7,918 7,314 6,052 Cash and equivalents at end of year $ 1,670 $ 1,079 $ 9,798 $ 11,273 $ 7,918 $ 7,314 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest $ (248 ) $ (155 ) $ (358 ) $ (10,313 ) $ (9,499 ) $ (10,767 ) Cash recovered (paid) during the year for income taxes (2,685 ) (2,331 ) (1,616 ) 1,146 1,383 129
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GE 2003 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Our financial statements consolidate all of our affiliates–companies that we control and in which we hold a majority voting interest. In 2003, we added certain non-affiliates that we do not control to our consolidated financial statements because of new accounting requirements that require consolidation of entities based on holding qualifying residual interests. Associated companies are companies that we do not control but over which we have significant influence, most often because we hold a shareholder voting position of 20% to 50%. Results of associated companies are presented on a "one-line" basis. Financial statement presentation We have reclassified certain prior-year amounts to conform to this year's presentation. Financial data and related measurements are presented in the following categories:
• GE This represents the adding together of all affiliates other than General Electric Capital Services, Inc. (GECS), whose operations are
presented on a one-line basis. • GECS This affiliate owns all of the common stock of General Electric Capital Corporation (GE Capital) and GE Global Insurance Holding
Corporation (GE Global Insurance Holding), the parent of Employers Reinsurance Corporation (ERC). GE Capital, GE Global Insurance Holding and their respective affiliates are consolidated in the GECS columns and constitute its business.
• CONSOLIDATED This represents the adding together of GE and GECS. Effects of transactions between related companies are eliminated. Transactions between GE and GECS are immaterial and consist primarily of GECS services for material procurement and trade receivables management, aircraft engines and medical equipment manufactured by GE that are leased by GECS to others, buildings and equipment leased by GE from GECS, and GE investments in GECS commercial paper.
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AMERADA HESS CORPORATION
Amerada Hess has an investment in HOVENSA L.L.C., a 50% joint venture with Petroleos de Venezuela, S.A. (PDVSA). HOVENSA owns and operates a refinery in the Virgin Islands. The Corporation accounts for its investment in HOVENSA using the equity method.
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME
For the Years Ended December 31 2004 2003 2002 (Millions of dollars, except per share data) REVENUES AND NON-OPERATING INCOME Sales (excluding excise taxes) and other operating revenues $ 16,733 $ 14,311 $ 11,551 Non-operating income (expense) Gain on asset sales 55 39 143 Equity in income (loss) of HOVENSA L.L.C. 244 117 (47 ) Other 94 13 85 Total revenues and non-operating income 17,126 14,480 11,732 COSTS AND EXPENSES Cost of products sold 11,971 9,947 7,226 Production expenses 825 796 736 Marketing expenses 737 709 703
Exploration expenses, including dry holes and lease impairment 287 369 316
Other operating expenses 195 192 165 General and administrative expenses 342 340 253 Interest expense 241 293 256 Depreciation, depletion and amortization 970 1,053 1,118 Asset impairments — — 1,024 Total costs and expenses 15,568 13,699 11,797
Income (loss) from continuing operations before income taxes 1,558 781 (65 )
Provision for income taxes 588 314 180 Income (loss) from continuing operations 970 467 (245 ) Discontinued operations Net gain from asset sales — 116 — Income from operations 7 53 27 Cumulative effect of change in accounting principle — 7 — NET INCOME (LOSS) $ 977 $ 643 $ (218 ) Less preferred stock dividends 48 5 — NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 929 $ 638 $ (218 )
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AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET
At December 31 2004 2003 (Millions of dollars; thousands of shares)
ASSETS CURRENT ASSETS Cash and cash equivalents $ 877 $ 518 Accounts receivable Trade 2,185 1,717 Other 182 185 Inventories 596 579 Other current assets 495 187 INVESTMENTS AND ADVANCES HOVENSA L.L.C. 1,116 960 Other 138 135 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment — net 8,505 7,978 NOTES RECEIVABLE 212 302 GOODWILL 977 977 DEFERRED INCOME TAXES 834 306 OTHER ASSETS 195 139 TOTAL ASSETS $ 16,312 $ 13,983
LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 3,280 $ 1,542 Accrued liabilities 920 855 Taxes payable 447 199 Current maturities of long-term debt 50 73 Total current liabilities 4,697 2,669 LONG-TERM DEBT 3,785 3,868 DEFERRED LIABILITIES AND CREDITS Deferred income taxes 1,184 1,144 Asset retirement obligations 511 462 Other 538 500 Total deferred liabilities and credits 2,233 2,106 STOCKHOLDERS’ EQUITY Total stockholders’ equity 5,597 5,340 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 16,312 $ 13,983
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AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS
For the Years Ended December 31 2004 2003 2002 (Millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 977 $ 643 $ (218 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation, depletion and amortization 970 1,053 1,118 Asset impairments — — 1,024 Exploratory dry hole costs 81 162 157 Lease impairment 77 65 41 Pre-tax gain on asset sales (55 ) (245 ) (117 ) Provision (benefit) for deferred income taxes (211 ) 107 (258 ) Undistributed earnings of HOVENSA L.L.C. (156 ) (117 ) 47 Non-cash effect of discontinued operations (7 ) 46 280 Changes in other operating assets and liabilities (Increase) decrease in accounts receivable (519 ) 47 (104 ) (Increase) decrease in inventories (16 ) (107 ) 51
Increase (decrease) in accounts payable and accrued liabilities 783 18 (217 )
Increase (decrease) in taxes payable 131 (39 ) 50 Changes in prepaid expenses and other (152 ) (52 ) 111 Net cash provided by operating activities 1,903 1,581 1,965 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures Total capital expenditures (1,521 ) (1,358 ) (1,534 ) Proceeds from asset sales 57 545 412 Payment received on notes receivable 90 61 48 Other 3 (25 ) (22 ) Net cash used in investing activities (1,371 ) (777 ) (1,096 ) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in debt with maturities of 90 days or less — (2 ) (581 ) Debt with maturities of greater than 90 days Borrowings 25 — 637 Repayments (131 ) (1,026 ) (686 ) Proceeds from issuance of preferred stock — 653 — Cash dividends paid (157 ) (108 ) (107 ) Stock options exercised 90 — 28 Net cash used in financing activities (173 ) (483 ) (709 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 359 321 160
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HOVENSA L.L.C.
2004 2003 2002 (Millions of dollars) Summarized Balance Sheet At December 31 Cash and cash equivalents $ 518 $ 341 $ 11 Other current assets 675 541 509 Net fixed assets 1,843 1,818 1,895 Other assets 36 37 40 Current liabilities (606 ) (441 ) (335 ) Long-term debt (252 ) (392 ) (467 ) Deferred liabilities and credits (48 ) (56 ) (45 ) Partners’ equity $ 2,166 $ 1,848 $ 1,608 Summarized Income Statement For the years ended December 31 Total revenues $ 7,776 $ 5,451 $ 3,783 Costs and expenses (7,282 ) (5,212 ) (3,872 ) Net income (loss) $ 494 $ 239 $ (89 ) Amerada Hess Corporation’s share $ 244 $ 117 $ (47 )
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Illustration of Minority Interests The objectives of this exercise are to:
• Understand the role of Minority [Non Controlling] Interest in Analysis • Practice the distinction between legal and accounting entities • Practice the Journal Entries and T Accounts for Minority Interest
Barry M Frohlinger
Barry M Frohlinger, Inc. copyright 1981 - 2015 www.learnfrombarry.com page 33
Minority Interest occurs only in consolidation and that minority interest is the share of ownership of a subsidiary NOT owned by the group. Minority Interest on the balance sheet represents the share of equity [net assets] of subsidiaries not owned by the parent. Minority Interest on the Income Statement represents the share of profit of the subsidiaries not owned by the parent.
The journal entries for Minority Interest are:
When the subsidiary has profits:
Dr. Minority Interest [IS] XXX Cr. Minority Interest [BS] XXX
When the subsidiary has losses:
Dr. Minority Interest [BS] XXX Cr. Minority Interest [IS] XXX
When distributions are made to minority investors: Dr. Minority Interest [BS] YYY Cr. Cash YYY
The Minority T-Account is:
Open Share of
losses Share of
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A financial analyst must know how to treat minority interest. For capital structure analysis, minority interest can generally be treated as equity (because it has no
claims on future cash flow unless management declares a dividend). Mechanically, minority interest on the balance sheet works like a shareholders’ equity account (combining the stock and earnings retained in the business into one account).
For profitability analysis, the numerator and denominator of each ratio must be consistent. In
consolidated statements, the assets, liabilities, revenues and expenses include 100% of the subsidiary. On the other hand, net income and stockholders’ equity include only the majority share (80% here) of the subsidiary. Therefore, typical profitability ratios would be calculated as follows;
profit margin ratios (% of sales) => without deduction for minority interest
return on assets => without deduction for minority interest
return on equity => with deduction for minority interest
For cash flow analysis, minority interest in consolidated subsidiaries is similar to undistributed equity in earnings of unconsolidated subsidiaries. The change in the minority interest balance sheet account is shown as an adjustment to net income in the operating section of the statement of cash flows and consists of two parts: • the minority’s share of earnings which should be removed to arrive at “potential cash from
operations” • the minority’s share of dividends paid which, if significant, the analyst should adjust by moving to
financing activities.
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Verizon Communications Inc., was formed on June 30, 2000, with the merger of Bell Atlantic Corp. and GTE Corp. GTE and Bell Atlantic had each evolved and grown through years of mergers, acquisitions and divestitures. Each had proven track records in successfully integrating business operations.
Outside the 50 states, GTE operated wireless networks serving approximately 6.7 million customers with 34.8 million potential wireless customers through subsidiaries in Argentina, Canada and the Dominican Republic, and affiliates in Canada, Puerto Rico, Venezuela and Taiwan. Bell Atlantic was even larger than GTE. Its Domestic Telecom unit served 43 million access lines, including 22 million households and more than 2 million business customers. Its Global Wireless unit managed one of the world's largest and most successful wireless companies, with 7.7 million Bell Atlantic Mobile customers in the United States, and international wireless investments in Latin America, Europe and the Pacific Rim.
The merger closed nearly two years after announcement, following review and approvals by Bell Atlantic and GTE shareowners, 27 state regulatory commissions and the Federal Communications Commission (FCC), and clearance from the U.S. Department of Justice (DOJ) and various international agencies.
In the meantime, on Sept. 21, 1999, Bell Atlantic and London-based Vodafone AirTouch Plc (now Vodafone Group Plc) announced that they had agreed to create a new wireless business -- with a national footprint, a single brand and a common digital technology -- composed of Bell Atlantic's and Vodafone's U.S. wireless assets (Bell Atlantic Mobile, AirTouch Cellular, PrimeCo Personal Communications and AirTouch Paging).
This wireless joint venture received regulatory approval in six months. The new "Verizon" brand was launched on April 3, 2000, and the wireless joint venture began operations as Verizon Wireless on April 4. GTE's wireless operations became part of Verizon Wireless -- creating the nation's largest wireless company -- when the Bell Atlantic - GTE merger closed nearly three months later. Verizon then became the majority owner (55 percent) of Verizon Wireless, with management control of the joint venture.
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Consolidated Statements of Income Verizon Communications Inc. and Subsidiaries –
(dollars in millions, except per share amounts) Years Ended December 31, 2010 2009 2008 Operating Revenues $ 106,565 $ 107,808 $ 97,354 Operating Expenses
Cost of services and sales 44,149 44,579 38,615 Selling, general and administrative expense 31,366 30,717 41,517 Depreciation and amortization expense 16,405 16,534 14,610
Total Operating Expenses 91,920 91,830 94,742 Operating Income 14,645 15,978 2,612 Equity in earnings of unconsolidated businesses 508 553 567 Other income and (expense), net 54 91 283 Interest expense (2,523 ) (3,102 ) (1,819) Income Before (Provision) Benefit for Income Taxes 12,684 13,520 1,643 (Provision) benefit for income taxes (2,467 ) (1,919 ) 2,319 Net Income $ 10,217 $ 11,601 $ 3,962 Net income attributable to noncontrolling interest $ 7,668 $ 6,707 $ 6,155 Net income (loss) attributable to Verizon 2,549 4,894 (2,193) Net Income $ 10,217 $ 11,601 $ 3,962
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Consolidated Balance Sheets Verizon Communications Inc. and Subsidiaries (dollars in millions, except per share amounts) At December 31, 2010 2009 Assets Current assets
Cash and cash equivalents $ 6,668 $ 2,009 Short-term investments 545 490 Accounts receivable, net of allowances of $876 and $976 11,781 12,573 Inventories 1,131 1,426 Prepaid expenses and other 2,223 5,247
Total current assets 22,348 21,745 Plant, property and equipment 211,655 229,743
Less accumulated depreciation 123,944 137,758
87,711 91,985 Investments in unconsolidated businesses 3,497 3,118 Wireless licenses 72,996 72,067 Goodwill 21,988 22,472 Other intangible assets, net 5,830 6,764 Other assets 5,635 8,756 Total assets $ 220,005 $ 226,907 Liabilities and Equity Current liabilities
Debt maturing within one year $ 7,542 $ 7,205 Accounts payable and accrued liabilities 15,702 15,223 Other 7,353 6,708
Total current liabilities 30,597 29,136 Long-term debt 45,252 55,051 Employee benefit obligations 28,164 32,622 Deferred income taxes 22,818 19,190 Other liabilities 6,262 6,765 Equity
Series preferred stock ($.10 par value; none issued) – – Common stock ($.10 par value; 2,967,610,119 shares issued
in both periods) 297 297 Contributed capital 37,922 40,108 Reinvested earnings 4,368 7,260 Accumulated other comprehensive income (loss) 1,049 (1,372) Common stock in treasury, at cost (5,267 ) (5,000) Deferred compensation - employee stock ownership plans 200 89 Noncontrolling interest 48,343 42,761
Total equity 86,912 84,143 Total liabilities and equity $ 220,005 $ 226,907
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Consolidated Statements of Cash Flows Verizon Communications Inc. and Subsidiaries (dollars in millions) Years Ended December 31, 2010 2009 2008 Cash Flows from Operating Activities Net Income $ 10,217 $ 11,601 $ 3,962 Adjustments to reconcile net income to net cash provided by operating
activities: Depreciation and amortization expense 16,405 16,534 14,610 Employee retirement benefits 3,988 2,964 16,077 Deferred income taxes 3,233 2,093 (3,468) Provision for uncollectible accounts 1,246 1,306 1,085 Equity in earnings of unconsolidated businesses, net of
dividends received 2 389 212 Changes in current assets and liabilities, net of effects from
acquisition/disposition of businesses: Accounts receivable (859 ) (1,393 ) (1,085) Inventories 299 235 (188) Other assets (313 ) (102 ) (59) Accounts payable and accrued liabilites 1,075 (1,251 ) (1,701)
Other, net (1,930 ) (986 ) (1,993) Net cash provided by operating activities 33,363 31,390 27,452 Cash Flows from Investing Activities Capital expenditures (including capitalized software) (16,458 ) (16,872 ) (17,133) Acquisitions of licenses, investments and businesses, net of cash acquired (1,438 ) (5,958 ) (15,904) Proceeds from dispositions 2,594 – – Net change in short-term investments (3 ) 84 1,677 Other, net 251 (410 ) (114) Net cash used in investing activities (15,054 ) (23,156 ) (31,474) Cash Flows from Financing Activities Proceeds from long-term borrowings – 12,040 21,598 Repayments of long-term borrowings and capital lease obligations (8,136 ) (19,260 ) (4,146) Increase (decrease) in short-term obligations, excluding current maturities (1,097 ) (1,652 ) 2,389 Dividends paid (5,412 ) (5,271 ) (4,994) Proceeds from access line spin-off 3,083 – – Proceeds from sale of common stock – – 16 Purchase of common stock for treasury – – (1,368) Other, net (2,088 ) (1,864 ) (844) Net cash provided by (used in) financing activities (13,650 ) (16,007 ) 12,651 Increase (decrease) in cash and cash equivalents 4,659 (7,773 ) 8,629 Cash and cash equivalents, beginning of year 2,009 9,782 1,153 Cash and cash equivalents, end of year $ 6,668 $ 2,009 $ 9,782
See Notes to Consolidated Financial Statements
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Consolidated Statements of Changes in Equity Verizon Communications Inc. and Subsidiaries (dollars in millions, except per share amounts, and shares in thousands) Years Ended December 31, 2010 2009 2008 Amount Shares Amount Shares Amount Reinvested Earnings Balance at beginning of year 7,260 7,676 14,931 Net income attributable to Verizon 2,549 4,894 (2,193) Dividends declared (5,441 ) (5,310 ) (5,062) Balance at end of year 4,368 7,260 7,676 Accumulated Other
Comprehensive Income (Loss) Balance at beginning of year (1,372 ) (1,912 ) (4,484) Spin-off of local exchange businesses
and related landline activities 23 – 27 Benefit plan accounting changes – – 2,930 Foreign currency translation (171 ) 78 (231) Unrealized gains (losses) on
marketable securities 29 87 (97) Unrealized gains (losses) on cash
flow hedges 89 87 (40) Defined benefit pension and
postretirement plans 2,451 288 (17) Other comprehensive income (loss) 2,398 540 (385) Balance at end of year 1,049 (1,372 ) (1,912) Noncontrolling Interest Balance at beginning of year 42,761 37,199 32,266 Net income attributable to
noncontrolling interest 7,668 6,707 6,155 Other comprehensive income (loss) (35 ) 103 (30) Total comprehensive income 7,633 6,810 6,125 Distributions and other (2,051 ) (1,248 ) (1,192) Balance at end of year 48,343 42,761 37,199 Total Equity $ 86,912 $ 84,143 $ 78,791 Comprehensive Income Net income $ 10,217 $ 11,601 $ 3,962 Other comprehensive income (loss) 2,363 643 (415) Total Comprehensive Income $ 12,580 $ 12,244 $ 3,547 Comprehensive income attributable
to noncontrolling interest $ 7,633 $ 6,810 $ 6,125 Comprehensive income (loss)