Financial Reporting Telstra Corporation Limited

Question: Describe about the Financial Reporting for Telstra Corporation Limited. Answer: Introduction Telstra Corporation Limited is the largest telecommunication company in Australia. Incorporated as early as 1901, Telstra has a long history. By 1990s the deregulation of telecommunications industry in Australia opened up new opportunities and with Telstras marketing strategy, it has remained on the top leaving its competitors Optus and Vodafone far behind. It has consistently performed well and has ensured dividends and earnings growth. As it is operating in a dynamic environment, customer is the top priority as the company caters to the ever changing customer demands and satisfaction. Technological advancement is also dynamic and competitive transforming the world we live in. Financial Analysis As the assignment requires the analysis from the view point of a lending institution, the basic principles to be touched upon are relevance, reliability and faithful representation. Though there are a lot of items on the financial statements, the analysis has been narrowed down to three areas of potential importance. The financial statements are general purpose financial statements prepared in accordance with the requirements of the Australian Corporations Act, 2001, the applicable Accounting Standards and the various other pronouncements of the AASB. Property, Plant Equipments (point no ii) Property, plant and equipment is recorded at its cost and depreciated over straight line basis over the estimated service life of the asset. All costs incurred in the construction of the asset and bringing it to its location and to a condition necessary for the operation of the asset are also included in the cost of the asset (Graham Smart, 2011). Management judgment and estimation is required in determining the costs that are to be capitalized in case of constructed assets and internally generated assets. This is a significant point of audit as the management might for its own benefit and for the benefit of the company, chooses to capitalize a few such unreasonable costs. So the audit should be conducted to rule out the possibility of such instances. A suitable comparison with a similar transaction with an outside party can potentially reveal the arms length price of the transaction and the profits hidden in the same. The assessment of costs directly attributable to the construction requires more vigilant supervision. This would satisfy the quality of relevance and reliability of the financial statements. The various assets are reviewed on an annual basis and this is to ensure that the assets are still in a good form and capable of completing the projects on hand. This is a reasonable proposition as technological advancements are making assets redundant earlier. The resultant loss arising from any such write offs is accounted under impairment gains and losses account (Laux, 2014). Deprecation is charged on the asset when it is installed and ready for use. Depreciation is on a straight line basis over the service life of the asset. This service life of the asset is the management estimation and the service lives are reviewed every year to ensure that the required changes in the lives of the assets are incorporated and applied accordingly (Laux, 2014). The management does this assessment by comparison with the international trends and this helps in determination of when the asset can become obsolete or supersede the technology. The residual value of the assets is also reviewed by the management every year. There are specific standards and tests to be satisfied to be classified as a leased asset and these requirements are in line with the requirements of the Accounting Standards (Palepu et. al, 2007). Thus these are the measures used to determine the value of Property, plant and equipment on the financial statements. These measures are reasonable and it is also valid to add the items. The Total amount displayed under the head Property, plant and equipment is interpreted as the Acquisition Cost of the Asset less accumulated depreciation till the balance sheet date and this is tested against the residual value or the net realizable value for accounting of impairment (Telstra, 2015). In short, this figure depicts the true and fair value of the assets adjusted for all the additions and deletions on the balance sheet date. Intangible Assets (point iv) Intangible assets are those which cannot be seen or touched but carry a value. Hence the recognition of the same is required and for this reason it should either be separable or arise from a contractual or legal contract or obligation. The most popular intangible assets are goodwill, softwares, internally generated assets, acquired intangible assets and deferred revenue expenditure (Whittington, 2008). The company has set out the criteria for the recognition of these assets and these tests are applied for recognition, measurement and valuation of the intangible assets. Goodwill is usually recognized when an acquisition or a joint venture takes place and the amount paid as the acquisition price is more than the fair value of the assets acquired and so this difference is accounted and recognized as Goodwill. Goodwill is not amortized but tested for impairment on an annual basis. Internally generated intangible assets are usually the research costs and development costs and the management judgment is required for the assessment and measurement of the same. Software assets are for use by the company and so this is amortized on a straight line basis over the finite useful life of the software (Telstra, 2015). The acquired intangible assets are recorded at their fair values on the date of acquisition and management judgment is applied in determination of the fair values of the assets. The intangible assets that have a finite life are amortized on straight line basis over the service life of the assets whereas the intangible assets that have indefinite lives are tested annually for impairment (Gibson, 2008). Conservatism requires that the company should account for all the impairment losses but not book gains on the same until there is virtual certainty regarding the realization of the same. This principle is suitably followed which is a good practice (Brigham Ehrhardt, 2011). The expensing off the intangible assets values to the income statement is a principle that is in line with the accounting standards and enables the shareholders to know the real profit. The financial statements should portray a true and fair view of the business and hence this impairment accounting and expensing off the expenses helps in the decision making for the shareholders (Gibson, 2008). This will not lead to the misevaluation of the shares selected but rather is more useful in forming an opinion. The company has followed the usual disclosure policy for providing information about the intangibles and provided explanations regarding the same in Notes to Financial Statements. Cash Flow Statement Analysis (point vi) Typically, according to the requirements of the AASB 107/IAS7, Telstra has prepared the Cash Flow Statement under three major heads namely Operating activities, investing activities and financing activities. As the Income Statement is a combination and mixture of all types of expenses, it becomes necessary to segregate the expenses into operating, financing and investing activities to know the performance of the respective segments and see which of these areas have a negative cash flow. The increase or decrease in the balance of Cash and Bank is more effectively understood by the relative movements of these items in the Cash Flow Statement (Hitchner, 2013). In a business organization, these are the three significant activities and operating activities depict a picture of the operations of the company for the current year, investing activities are usually indicative of a long term business decision taken by the company whereas financing activates can be either trading related activities or non trading activities (Telstra, 2015). This break down is required as the investors can have an in-depth view as for instance how a single sale of Unit has shot up the cash balance or a similar such acquisition has wiped out the entire cash balance (Telstra, 2015). The source and utilization of the funds can be better understood and interpreted by the cash flow statement. The rationale behind the management decisions is also portrayed by the various items on the cash flow statement. The Notes to Financial Statements should contain details and explanations about the cash realized from the disposals and cash spent on the various acquisitions. If a share buyback has taken place, then the details of the same have to be disclosed. Thus disclosures are decided upon the veracity, volume and significance of the items on the cash flow statement. It is usually seen that businesses follow credit policy and accrual basis of accounting. The Sales made is not necessarily equivalent to the Cash and Bank Balance of the company as the realization of the sales takes tie. The same is the case with expenses which depicts that some expenses might be deferred while a few others might be prepaid. The accounting of the incomes and expenses has to be done on an accrual basis ( Maines Wahlen, 2014). This gap between the accounting and realization is captured by this reconciliation between the accounting profit and net cash flow from operations. It helps in the decision making for the users in a way that the users get an idea about the non cash expenditures, the composition of the same and the relative proportion of the items. 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