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A Quick Look At ARM Holdings Plc’s Balance Sheet

In this series of articles looking at financial statements, we are going to see if we can delve into ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US)’s balance sheet for the year ended 31 December 2012.  If you are new to investing, or are just baffled by some of the terms that make up a balance sheet, then read on.

Again, I will start by noting the balance sheet is only one of three main financial statements. Both the cash flow and income statements are as important, and should be viewed in conjunction to gain the full picture.

In addition to cash, ARM has short-term deposits of £340m.  Short-term deposits simply refers to a bank account with a set maturity date, which we can see from the notes is an average of 190 days.  The long-term deposits of £141m attract the higher return but have a maturity of 489 days on average.

Cruel accruals

A quick note on prepaid expenses, too.  Financial statements are prepared on an accrual accounting basis.  What that means is that anything not relating to 2012 should not be reported in the profit for that year.  ARM’s prepayments have jumped from £31m to £136m, meaning there is something paid for during the year which is going to be utilised in the future.  Note 11 explains that £104m was used to acquire rights to MIPS technologies.  This balance will be re-classed in intangible assets in the subsequent year assuming all goes ahead.

It’s interesting to see ARM’s business model in action in the balance sheet.  The company generates revenue by designing and not by manufacturing products.  This can be seen in the £36m of fixed assets (property, plant and equipment) in comparison with £519m of intellectual capital in the form of goodwill.  Note 15 reveals that the acquisition of Artisan in 2004 still represents £485m of that total because of a continued contribution from its ability to develop faster and more power-efficient microprocessors.

I’ll take that income later

Finally, I would mention deferred revenue, which is split into current (less than one year) and non-current for a total of £150m of the £577m in revenue ARM generated in the year.  ARM have invoiced for but not necessarily received the cash for this £150m and are committed to providing the service.  This is accrual accounting in action again, and it is especially useful to see as this revenue stream will be released into profits in the next few years.

Hopefully that whistle-stop tour was helpful although as ever there are many more terms that could be cleared up, too.

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> Barry does not own shares in ARM Holdings.