Sasktel's Subsidiaries And Other Investments example essay topic

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Introduction Intercorporate investments, business combinations, joint ventures. These are all ways in which companies today can grow and diversify their operations. The following discusses how SaskTel uses and accounts for these practices. ACCOUTRING FOR EQUITY INTERESTS For someone with little knowledge of accounting for equity interests, attempting to comprehend how Saskatchewan Telecommunications Holding Company (SaskTel) is structured can be very difficult. SaskTel's investments make it a very complex company. It has investments in a large number of other companies, which are accounted for by different methods of accounting.

Some of the investments are accounted for as subsidiaries, some as significant influence investments, and some as portfolio investments. The reason why SaskTel accounts for its different investments in different ways is very simple once you learn the basic rules behind accounting for equity interests. This section lays out the accounting guidelines dealing with SaskTel's equity interests and explains why each investment is accounted for the way it is. To help guide you trough this discussion, refer to the organizational structure of SaskTel found in Appendix B. The first major type of accounting treatment that SaskTel uses for its investments is the consolidation method. The CICA Handbook in Section 1590 states that a company must consolidate an interest's financial results whenever it is evident that the company has control over that interest. Control is defined as having "the continuing power to determine the strategic operation, investing and financing policies without the cooperation of others".

Section 1590 goes on to state that "an enterprise is presumed to control another enterprise when it owns, directly or indirectly, an equity interest that carries the right to elect the majority of the members of the other enterprise's board of directors, and is presumed not to control the other enterprise without such ownership". In simple terms this means that a company should account for an investment in another company under the consolidation method if it can demonstrate that it controls that company (usually accomplished when own 50% of voting shares). Consolidation means that the parent company (the company who has the control) combines the results of the two companies. The reason this is done is because since the parent owns that company (subsidiary), combining their results into one set of financial statements provides more relevant information for investors. It must be noted that a subsidiary can either be 100% owned or less than 100% owned. The accounting treatment for a less than 100% owned subsidiary is slightly different, which will be discussed later.

SaskTel has five different investments that it classifies as 100% owned subsidiaries: Saskatchewan Telecommunications, Saskatchewan Telecommunications International, DirectWest Publishing Partnership, SecurTek Monitoring Solutions Inc., and RSL COM Canada Inc. The financial results of these five companies are consolidated on an ongoing basis with the results of SaskTel. SaskTel has four subsidiaries in which it does not own 100% of the company yet still owns enough of the company to exercise control. These companies are Hospitality Network Canada Inc., Hospitality Network Canada Partnership, Business Watch International Inc., and The Ag Dealer Ltd.

These four subsidiaries are accounted for the same as the 100% owned subsidiaries are with the one small difference. When SaskTel combines the results of these companies, they combine 100% of the results. The problem that then exists is that SaskTel has included the portion of the company it does not own. The solution to this problem is the use of a minority interest account, which recognizes the amount of these subsidiaries that SaskTel does not own.

The minority interest item is found both on the balance sheet in an account with a credit balance and the income statement as a reduction to earnings. The second type of accounting treatment that SaskTel uses for its investments is the equity method. This method is used when the company is accounting for its significant influence investments. The CICA Handbook lays out in Section 3060 that a significant influence investment is one in which the investing company has the ability to influence the operating, investing, and financing decisions of the investee company. This is typically accomplished by owning 20 - 50% of the company's outstanding stock. However, the criteria for determining significant influence are not that simple.

Instead of looking at ownership percentage, it is better to look at the underlying business relationship and use professional judgement to see if the ability to exercise influence exists. The most common things to look for are representation on the board, participation in policy-making decisions, interchange of managerial personnel, interchange of technology, and key intercompany transactions. Each period, the investing company (SaskTel) recognizes their proportionate share of income (or loss) as revenue (or an expense), and the value of the investment account is increased. The account is decreased by any dividends the company receives because these are considered to be a liquidation of the investment. SaskTel has four interests that they consider to have a significant influence in. These companies are Retx. com, Craig Wireless International Inc., Soft Tracks Enterprises Ltd, and Tappedinto. com, Inc.

These investments are shown on the consolidated balance sheet of SaskTel as "Investments" and on the income statement as "Net share of loss from significantly influenced companies". From looking at the financial statements you can see that the recorded value of these investments fell in 2001. This means that these companies recorded a net loss in the period and SaskTel had to record their share of this loss, thus decreasing the amount of the investment account. The fact that these companies have experienced losses for the year can also be realized from the fact that SaskTel recorded an expense from significantly influenced companies instead of revenue.

The final type of accounting treatment used by SaskTel is the cost method. The cost method is used to account for investments that are considered to be portfolio investments. A portfolio investment is a long-term investment where the investing company does not have significant influence or control. In most cases, this means that the company owns less than 20% of the investee's shares. The cost method involves maintaining the investment on the balance sheet at its original acquisition cost and dividends received are recorded as revenue. You can see that this type of accounting treatment differs from the previous two in that the investing company does not record any share of the investee's income.

The only way the value on the balance sheet changes under the cost method of accounting is if a liquidating dividend is paid or there is a permanent impairment in the investment's value. SaskTel has three investments that are portfolio investments. These companies are Austar United Communications Limited, Persona Inc., and NSI Global. These investments are shown on the balance sheet as "Investments" and on the income statement as "Other income". A special note must be made with respect to Austar and Persona.

These two investments are shown on the balance sheet at their original acquisition cost of $58,528,000 when their market value is currently $15,100,000. Under the cost method this is acceptable if SaskTel feels that this impairment is not permanent. Thus, SaskTel is able to defer the losses from these investments until a time they feel the impairment is permanent. The proceeding has been a summary of the three different ways in which SaskTel accounts for its equity interests. While it may be overwhelming at first to look through an annual report and try to understand how investments are being accounted for, once the simple rules are learned it becomes comprehensible. Now that you can understand how investments are accounted for, it is time to turn to determining the results of the investments.

RESULTS OF SASKTEL'S EQUITY INTERESTS The consolidated financial statements of SaskTel are highly aggregated. The statements include the results of all subsidiaries, as well as SaskTel itself, and the results of the company's investments. However, while the statements are highly aggregated, we are still able to find results for each of the company's investments, if you know where to look. While this information is not disclosed on the face of the financial statements, the answers can be found in the notes. This section discusses SaskTel's equity interests and determines if they were profitable.

Turning to SaskTel's reported net income, we can analyze how well each of SaskTel's subsidiaries and other investments has contributed to the company's "bottom line" of $101,497,000. A problem with looking at each subsidiary's operating income is that it will include profits made off intercompany revenues. However, since information is not provided regarding the exact breakdown of intercompany revenues, we cannot determine each subsidiaries exact contribution to net income. We can however determine that Saskatchewan Telecommunications, Saskatchewan Telecommunications International, and DirectWest were very profitable because they contributed $140,017,000, $624,000, and $1,636,000 respectively to SaskTel's operating income. Determining how SaskTel's other six subsidiaries contributed to the bottom line is not as simple. Through the disclosure in Note 15, we can see that the "other" subsidiaries etc. contributed $18,073,000 to operating income.

However, the problem is that we cannot determine how this amount was made up from each of the six companies that it includes. From carefully examining the notes to the financial statements we can find out some useful information on this matter. Remember earlier we said that when you consolidate the results of a subsidiary that is not wholly owned, the reporting company must include a minority interest on the income statement to account for the portion of income earned by the subsidiary that does not belong to the parent. Since the minority interest found in Note 4 is a positive amount of $223,000, it means that the aggregate total of net income from the four non-100% owned subsidiaries must have been negative. This means that it can be said that these four companies actually hurt SaskTel's bottom line. Since the total operating income from the six subsidiaries was positive and the four non-100% owned subsidiaries had an aggregate loss, it means that the other two wholly owned subsidiaries, SecurTek Monitoring Solutions and RSL COM Canada, must have had an aggregated income from operations in excess of $18,073,000.

Turning to the investments that SaskTel accounts for as significant influence investments, we are able to determine through examining the consolidated financial statements how these investments affected the bottom line. Recall from earlier that SaskTel only records their proportionate share of the investee company's income (or loss). This amount is shown in Note 4 as "Net share of loss from significantly influenced companies" in the amount of a $12,462,000 loss. This means that, on an aggregate basis, these four companies recorded a loss for the year, which forced SaskTel to recognize its share of the loss. This means that SaskTel's significant influence investments negatively affected the bottom line for the year. The final set of investments that SaskTel has is the ones being accounted for as portfolio investments.

The actual dividend income received from these companies is not certain but one can reasonably assume to find them included in "other" section shown in Note 4. Recall from earlier that this means the amount of dividends from these three companies. Thus, SaskTel's portfolio investments positively affected the bottom line. RECENT ACQUISITIONS OF SASKTEL An acquisition can be accomplished in one of four different ways; amalgamation, business combination, merger, and takeover. A business combination is a "transaction whereby one economic unit unites with or obtains control over another economic unit regardless of the legal avenue by which such control is obtained and regardless of the form of economic unit emerging from the transaction". There are many reasons why SaskTel would have business combinations and intercorporate relationships.

SaskTel may want to: 1) have a stronger global position through acquiring subsidiaries in other countries; 2) decrease competition by horizontal integration 3) vertically integrates to combine business with suppliers or customers. A list of SaskTel's recent business acquisitions are as follows: . Purchased a 100% interest in RSL COM Canada, Inc. (RSL) and its subsidiaries. SaskTel paid $16.72 million in cash for this interest... Purchased an 84.4% interest in The Ag Dealer Ltd.

(Ag Dealer). SaskTel paid $5.98 million for this interest... Purchased 100% of the shares issued by two corporations providing security services in Alberta and British Columbia. The full amount of the shares was $2.4 million, the full amount of which was assigned to customer contracts. These two companies are in a transition stage and will soon be controlled by Securtek Monitoring Solutions...

Purchased an 85.6% interest in Business Watch International Inc. for a total consideration of $1.0 million cash. The total amount of consideration given up for the business's acquired was $23.11 million of which was cash. The total net assets acquired were $20.47 million, which included goodwill in the amount of $5.62 million. In addition to the interests SaskTel made in the previous list of companies, it also invested in some significant influence investments. The following is a list of these investments: . Craig Wireless International for a total consideration of $3.0 million.

The investment was raised from 29.9% interest to 37.7% interest... SaskTel raised its equity position in Retx. com, Inc. from 49% to 63.3% for a total consideration of $5.5 million. The reason why SaskTel treats this investment as an equity investment and not as a consolidation is because SaskTel is seeking additional equity partners, which would reduce its investment below 50%... SaskTel also purchased a 45% interest in Tappedinto. com, Inc. for $3.8 million. RECENT DIVESTURES When a corporation decides that it no longer wants an interest in one of its subsidiaries, it decides to divest that interest. In SaskTel's case, divestures are not a frequent occurrence.

The most recent divestures of SaskTel was in 2000. In that year SaskTel divested its equity position in Regional Cable TV (Western) Inc. resulting on a gain on sale of $7.7 million and as consideration The Corporation received 1,223,491 common shares in Regional Cable systems Inc, which did not affect the cash flow position of SaskTel. SaskTel also disposed of 4,109,000 shares in Austar which, resulted in a gain on sale of $13.7 million. Finally, a non-cash gain of $1.7 million was recorded on a deemed disposition of Soft Tracks Enterprises Ltd THE QUALITY OF SASKTEL'S DISCLOSURE SaskTel owns numerous and diverse companies in that it must consolidate. Historically, all a company had to do was report on the industry segments. The standards behind this issue have since changed.

Handbook Section 1701 now states that a company must disclose information about its operating segments, additional information about its products and services, the countries in which it operates, and its major customers. SaskTel has four reportable segments: Sasktel Wireline, Sasktel Wireless, Sasktel International and Directwest. They disclose these segments in accordance with the quantitative threshold rules. These rules state that a company has to report a segment separately if: 1. Reported segment revenue is 10% or more of total revenue; 2. The absolute amount of its reported profit or loss is 10% or more of the greater of: a) the combined reported profit of all operating segments that did not report a loss, or b) the combined reported loss of all operating segments that did report a loss; and 3.

Its assets are 10% or more of the combined assets of all operating segments. SaskTel also reports an "Other" category as it falls outside these thresholds. This is acceptable as long as 75% of a company's total external revenue is included in reportable segments. Other issues that arise that may ask SaskTel to go beyond the required amounts from the CICA handbook or GAAP, but beneficial to all investors are as follows: .

Intercompany revenues are not addressed in a company by company basis. SaskTel could make the notes on intercompany sales easy for the investor to distinguish between subsidiaries... There could be a greater amount of information on subsidiaries and their economic positions... Also a clearer position on "other income" would allow investors to see whether this includes dividend revenue or not. NEW ACCOUNTING STANDARDS The effect of new accounting standards 1581 and 3062 will have both positive and negative impacts for Sasktel. In simplest terms, the new rules will change how all companies account for goodwill.

The new rules also will eliminate the widely used pooling-of-interests method for business combination bookkeeping as an accounting option. Purchase accounting will be the only method allowed for mergers and acquisitions begun after June 30, 2001. In the long-term, the rule changes will force manufacturing executives to more closely examine the continuing value of the factories, equipment, and other assets they " ve acquired. SaskTel is currently accounting for their business combinations using the purchase method, so they are acceptable in that regard. However, they are currently amortizing goodwill on a straight-line basis over 20 years. The new standard will initially have a positive effect on net income as it is no longer expensed.

Currently, goodwill is carried on the books at $18,036,000, so this amortization expense is saved. This does not allow a company to forget about goodwill. SaskTel will have to carry it on their balance sheets, periodically review the performance of the assets it has acquired, and take charges against income for any impairment or under performance of those assets. Another major accounting change is Section 1650.

Formerly the section allowed a company to defer and amortize unrealized translation gains on foreign currency monetary items and now the objective of translation is to express such transactions in a manner that achieves consistency with the accounting treatment for domestic transactions. The effect it has on Sasktel is that they are forced to realize a foreign currency loss of $25,000,000 at the beginning of the year retained earnings balance. FURTHER EXPLAINING There were two occurrences in the consolidated financial statements that warrant further explanation. The first is why SaskTel is accounting for Retx. com on an equity basis despite the fact that it has a 63% ownership interest. This is allowed under Section 1590.26 of the CICA Handbook because the section states that the company must qualify under Section 1300 (Differential Reporting) and then account for the differences following Section 1590.30. Section 1590.30 states that an alternative method is allowed as long as it has disclosed: (a) the basis used to account for subsidiaries and (b) the particulars of any shares or other securities issued by the enterprise that are owned by non-consolidated subsidiaries.

SaskTel explains the basis used and share information on page 40. The second occurrence regards the Austar portfolio investment. It is being held at its purchase price of $43.846 million, despite its market rate being $2.1 million. This is a significant drop in balance and may be subject to be written down in accordance with section 3040.07-. 12. Herein, it states that an investment may be written down under permanent impairment of value due to a number of specifics, one being a prolonged period (IE- 3-4 years) by which the market value of the investment is less than the carrying value.

This has occurred with Austar, but SaskTel is able to use the historical cost due to its explanation given on page 46. Conclusion The preceeding discussion has enabled us to apply our knowledge of accounting standards and principles to an actual company. Appendices APPENDIX A - Description of Subsidiaries Subsidiary Description of Company 1. Saskatchewan Telecommunications Is the principle supplier of telecommunications in Saskatchewan.

It is part of the national and global communications network. It is divided into two segments on the financial statements: (a) SaskTel Wireline which has a full range of communication solutions including high speed internet, data storage, web-hosting all on a fibre-optic based fully digital network and (b) SaskTel Wireless which has a comprehensive base of wireless products and services. 2. Saskatchewan Telecommunications International - SaskTel International markets advanced technological and software solutions including network integration, advanced network management and interactive services to clients around the world. 3. DirectWest Publishing Partnership Provides directory services through ten directories within the cities and districts of Saskatchewan as well as interactive services through the internet.

4. Hospitality Network Canada Inc. and 5. Hospitality Network Canada Partnership Information is not specific about which subsidiary it refers to, but Hospitality Network strives to improve its customer's value proposition in the Canadian healthcare and hotel networks. Accomplished by implementing technology advancements, adding new communication services and increasing efficiency. 6. Securtek Monitoring Solutions A Yorkton-based security monitoring business.

Products provided include residential alarm monitoring and the monitoring for oil well sites across Canada. 7. Navigate Communications (Formerly RSL COM Canada) A regional network provider of telecommunications services: long distance, toll free, local voice, data networking, private line and internet. Poised to become a specialized provider of integrated telecommunication services to small / medium enterprise customers. 8.

Business Watch International A Saskatchewan-based company that is setting a new standard for internet-based crime prevention by providing police agencies with a computer program that captures and monitors transactions involving second hand goods. 9. Ag Dealer Ltd Provides advertising services, including an e-commerce business-to-business web site, to agricultural equipment dealers in Canada and the United States. A leading e-commerce company that brings buyers and sellers together within the used farm equipment market in both print and online mediums.

Appendix B - SaskTel Ownership Structure.