Financial Accounting: Telstra Corporation Limited - Case Study Example

Measurements of assets Name: Lecturer: Course name: Course code: Date: Executive summary The essay describes the concept of measurement fair value to obtain materiality in the financial information. The essay accentuates the company’s assets as the fundamental financial items having higher economic values which determines the material disclosures in the financial statements. Moreover, it embraces the requirement of disclosing of the company’s financial assets according to the disclosures requirement described by international accounting standards board[Can05]. The essay will encircle the conceptual framework such international accounting conceptual framework measures in enhancing materiality in assets disclosures benefits and ensuring that the user obtained analyzed and detail report on the firm’s financial assets. It will conceptualize on defect related with materiality such ineffective analysis and disclosures of assets information that despair with materiality of the company’s asset which is in contrary to critique set by conceptual framework define by IASB[Jim04]. The application of assets measurement and IASB requirement in assets is revealed by Telstra Corporation Limited 2014 annual report as follows; Table of contents Executive summary 1 Introduction 3 Understanding of asset and its measurements 3 Measurement of assets 4 Assets and the problem with the context of current IASB 6 Evaluation of investment’s 11 Deferred tax assets 11 Revaluation of assets 12 Goodwill valuation 12 Impairment of intangible assets 13 Conclusion 13 Bibliography 15 Introduction Telstra Corporation is Australia based largest telecommunications provider which offers a variety of telecom services in Australia. The company conceptualize on sensible setup providing basic access services for each geographically located business firms and homes. The company’s services facilitates a local and long-distance telephone calls, internet services for 3.5 million broadband subscribers and mobile services for more than 15 million subscribers for including. The Telstra pragmatic setup unveils a predetermine progresses which is expected to endure attracting more customers in 4G LTE mobile broadband by taking advantage of the wide based company’s network footprint as compared to the market competitors. The company embraces the offering of wholesale services to meet its extensive market requirements. The company’s encompasses in several strategic investments of 2013 and 2014 financial years which has strengthened its financial position through e-health services. The company’s reports a sequential increase in its assets from $38,527 million in financial year 2013 to $39,360 in financial year 2013. The company notes of financial statement describes the Telstra’s initiatives in applying the requirements of accounting standards in measurements of its assets over the financial years. Understanding of asset and its measurements An asset is defined as a resource owned by an organization from which it expects cash flows in the future. Assets are either tangible assets or intangible, tangible assets are the kind that can be owned and controlled by the owner while intangible assets are those that cannot be seen but can only been felt[Bro08]. Assets exist in three classes which are; current, fixed and intangible assets. Current assets; are the assets that are expected to be used or sold within the financial year that is they do not exist to the next financial year. They are used to run the normal operations in the current financial year. Current assets normally include; cash at bank and at hand, trade receivables and inventory. Fixed assets; are assets that are held in the business for more than one financial year, they are the assets that are not easily converted into cash that is they are not liquid. They are the assets from which the owner expects cash flows from in the future[Ash09]. However, unlike the current assets these kind reduce in value with time due to wear and tear and hence they undergo depreciation. Fixed assets include; land and buildings, machinery, fixtures and fittings. Intangible assets; are assets whose monetary values aren’t identifiable per se, they don’t exist physically. They include assets such as goodwill and copyrights, these assets are written off during liquidation. Measurement of assets There are several methods of measuring assets, the different methods used to value assets include: Historical method valuation: in this method of valuation, the assets are reported in the balance sheet at their historical costs where historical costs are the initial acquisition cost of the asset including transaction costs[Jay09]. The adjustments in the prices that occur with time are not reflected in the amounts that are included in the balance sheet. However a reduction in the initial value due to depreciation and impairment are included in the final value. Fair value valuation: also known as the market value approach, unlike the historical cost approach, this method considers changes in the prices of commodity over time. Fair value therefore is the amount at which an asset can be bought or sold in the market currently between two willing parties. This amount is reflected in the balance sheet and is determined by the market forces of demand and supply. This method is specifically used when the carrying amount of an item is dependent of the market transactions. Replacement cost valuation: here, the value of the asset in the statement of financial position reflects the price at which the asset can be replaced at if it was sold at the current time. This amount in most times is not the market value of the asset as this cost doesn’t include the depreciation of the asset[Jim04]. This amount is at times used to describe the cost of an item that is being disposed at price lower than that which it was bought at. Net selling price valuation: here, the asset is reported in the balance sheet as per the price at which the organization will get as returns if the asset is sold at the current time it is also known as the sales price of the asset. The item however does not need to be sold in an organised market as is the case in market value. Value in use valuation method: here, the asset is reported in the balance sheet as per its present value. The present value being the amount of returns the assets will yield if disposed at the end of its useful life. Assets and the problem with the context of current IASB The International Accounting Standards Board (IASB) defines a conceptual accounting framework as a consistent system of unified aims and basics that leads to reliable accounting information that stipulates the materiality reporting in financial statements. For the firm’s financial assets, the standard defines prime reason within the conceptual framework that provides a guide in evaluation and reviewing of the company’s financial assets. The International Accounting Standards moderates the role of a conceptual framework in enhancing assets evaluation of the values of financial assets using the predetermine evaluation techniques[Chr09]. Furthermore, the accounting standards acknowledges the essence of maintaining consistency by operating through predetermine rules and procedures stipulated within the accounting standard conceptual framework. Although the International Accounting Standards Board (IASB) purportedly follows the policies of harmonizing conceptual frameworks and accounting standards, inconsistencies in the conceptual frameworks of the IASC are still acknowledged. The challenges are consequentially experience as a result of additivity problem resulting from the internally generated intangible assets such as goodwill which is result as an aggregation of the company’s interacting assets. Value additivity principal is the principle that the total of the value of individual class of assets adds up to an equal total of a group of assets. This could also mean that the total of the cash flows from independent projects is equal to the total of all projects combined also known as portfolio[Mou04]. The essence of valuing assets is subject to additivity problem since the company’s valued assets can be valued within a financial year. Consequently, the aggregation of the assets results in sensible assets changes resulting from internally generated assets from advancement of the company’s operations incentives. This principle implies that the market value of a portfolio (group of assets invested) is exactly equal to the market value of the individual assets that make up the portfolio[Bea09]. However, the pragmatic overview of IASB’s valuation conceptual initiatives falls short of internally generated assets valuation. It could as well imply that the net present value of a portfolio is equally compared to the total of the net present value of independent assets contained in the portfolio but the consequent advancing valuation measures articulates of non-considerate framework design in valuing internally generated assets. Generally assets are measured in two approaches depending on the type of assets being measured. For the assets that are used to directly provide services to the clients or customers, the initial amounts approach is used where these amounts are determined at the time of the asset acquisition that is at the point in time when the assets where being purchased to be used in the business[Haa05]. For the rest of the assets that are not used to provide services directly to the customers, the re-measured amounts approach is used where the values are determined at the end of each respective financial year when the financial statements are being prepared. This is mostly appropriate for assets that are liquid that is they can readily be converted into cash. The measurement of assets however is not an easy process especially when it comes to measurement of intangible assets of the company[Pea82]. This is contributed by the fact that intangible assets are those assets that are not physically present that is do not have physical embodiment, but instead those that can only be felt. Measurement of intangible assets is a challenge due to the fact that a standard method of their measurement has not yet been established by the accounting body[Can05]. The International Accounting Standards Board conceptual framework accentuates consistent system of valuation of the company’s exact assets with basic aims of enhancing reliability of accounting information that stipulates the quality and consideration decision making based on reported financial statements. The measurement of fixed tangible assets on the other hand is relatively less complicated as compared to measurement of intangible assets. This is attributed to the fact that they are physically present and can therefore be verified for existence. Fixed tangible assets have always been measured on historical cost basis; this is whereby the initial costs of acquisition are only recognized[Edw07]. The initial costs however include other costs associated with the cost of the asset and include such costs as insurance, transport costs, discounts, taxes and other overhead costs such as; construction, site preparation and initial testing costs. Since the changes in prices in the market for the assets are not recognized during valuation, wear and tear is computed and accounted for as depreciation. The amount of depreciation is deducted from the initial cost of the asset so as to reach a final figure that is used in the preparation of final books of accounts. The defects resulting from poor interpretation of assets valuations over accounting periods result to the inconsistencies of accounting data, the variation of accounting data reveal the unreliability of records of the organization. The theme of inconsistency that comes as a results manipulation of entries shows initiative reflection of bankruptcy, insolvency and the element of fraudulent theme in the organization. The International Accounting Standards Board provides a pragmatic setup that entails prevalent measures in capacitating the role of a conceptual framework in acknowledging the valuation of financial assets by promoting consistent rules and procedures that specifies valuation techniques with the company’s financial assets[Chr09]. The consequent valuation procedures set by the International Accounting Standards Board purportedly for allowing the organizations to follow the policies which is harmonize within the conceptual frameworks and accounting standards in elimination inconsistencies arising from measurement of the company’s financial assets. The acknowledgement of the internally generated assets is defined by the standards to redress the accounting analysis in valued assets in the company’s financial statement to enhance stakeholder’s transparency. The management engagement in the policies and procedures set by international standards board in enhancing consistency and accuracy in the assets valuation and presentation[Haa05]. The poor and inconsistency brought about by the problem of additivity in measuring of exact values of assets can stimulate the management to act by hiding the company stakeholders the crooked transactions they are engaged in and secondly the fallacious data can be done by the board of directors to protect the reputation[Mou04]. Moreover, the problem of additivity in assets valuation can despair with the company’s goodwill and loss of trust with the company’s major customers from essence of insolvency and bankruptcy that data may reveal which is subject to undervaluation arising from the additivity problem. By the act of the company being incapable of meeting or honoring its obligation the resultant battle is to alter the accounting data thus this brings inconsistencies in the accounting data. According to the international accounting standard board (IASB) framework, there should be define tradition of assets valuation and accounting reporting framework. The accounting standards framework accentuates on the consistency, transparency, relevancy and reliability of accounting information[Bro08]. Foundation strengths of accounting standards should have comprehensive sets of rules and principles governing the representation of accounting information that requires the consistency, comparability, reliability and relevancy of accounting information. However the consequential additivity problem should be mitigated through a pragmatic consideration of assets generated internally such as goodwill. Evaluation of categorization and treatment of Telstra Corporation Limited assets in 2014 annual report Telstra Corporation Limited 2014 annual report sensibly present the company’s measurement techniques of valuing its assets at the end of financial period. The increasing trend described in the company’s annual report, accentuates that the Telstra adopt the requirement of IASB in valuing its assets to reduce the problem of additivity[Boo03]. The pragmatic overview of the company’s evaluation and treatment is depicted in the table below; Evaluation of investment’s Telstra Corporation Limited 2014 annual report describes the evaluation and treatment of the company’s investments. The company evaluates its investment current assets using equity method that is prescribed by international accounting standards as the precise evaluation tool enhancing materiality in reporting of investment assets. The investments is treated as company’s non-current assets and their fairs values obtained is reported in the balance sheet while the loss are treated in income statement. Deferred tax assets Deferred tax assets are recognized as non-current assets when the carrying amount of business asset in the consolidated statement of balance sheet differs from its tax base. According to note 24 of Telstra Corporation Limited 2014 annual report, the company’s reveals its materiality disclosures as the deference arises due as a result of investments in business subsidiaries[Can05]. The primary recognition of business asset in a transaction which has no subsidiaries and during the transaction time, accounting for taxable profit will be affected. Also during the creation of good will the taxable amount will be decreased. Deferred tax business assets is offset when the Group has a legally enforceable right to offset current tax assets to enhance materiality in deferred tax asset evaluation Revaluation of assets Revaluation is the process of giving the assets fair value in the financial statements. Assets are either revalued downwards or upwards. Upward revaluation is credited in into revaluation account while the downward revaluated result to decline of the net value of the assets[Bea09]. According to note 2.9 (b) of Telstra Corporation Limited its subsidiaries assets were revalued the assets were revalued downwards and the loss arising from revaluation is accounted for in the income statement. Goodwill valuation Telstra Corporation enhance a sensible presentation of the company’s internal generated assets. The company determine and allocates the CGU according to the lowest level of aggregation to attain a realizable of market value prices of the internally generates asset. The company’s treat goodwill as non-current assets and is reported to largely generate by the company’s independent cash inflows. Impairment of intangible assets Provisions are recognized as an intangible asset with any of impairment in carrying cost being charged to the consolidated statement of comprehensive income. Note 2.9 (a) of Telstra Corporation Limited 2014 annual report describes its sensibility in measuring the correct value of identifiable assets impairment at the annual basis. Telstra Corporation Limited evaluation of fair value basis to enhance material of assets values is measured used cost basis and written down to recoverable amount in accounting period[Ash09]. The company enhances materiality over its assets measurement by intense evaluation of the amount by which assets carrying amount exceeds its recoverable amount considered as loss of impairment. In assessing the impairment, IASB institutes that assets are grouped into lower levels that can be separately identifiable cash flows from the other assets and the group assets. Conclusion In conclusion, measurement of the company’s assets is successively aided by International Accounting Standards Board IASB requirement in facilitating fair values of the company’s asset over the financial period. Telstra Corporation encompasses policies and procedures ascertained by the International Accounting Standards Board in providing a pragmatic setup that entails prevalent measures in capacitating acknowledgement the valuation of financial assets. The company measures its financial assets according to the conceptual framework aided in promoting consistent valuation techniques in determining the exact values of company’s financial assets. The consequent assets measurement procedures set by the International Accounting Standards Board purportedly allows the company to follow harmonizing policies within the frameworks in elimination inconsistencies arising from measurement of the company’s financial assets. Bibliography Can05: , (Canadian Accounting Standards Board staff, 2005), Jim04: , (Jim.C. Leisenring, 2004), Bro08: , (Bromwich, 2008), Ash09: , (Ashwinpaul C. Sondhi, 2009), Jay09: , (Jay S. Rich, 2009), Chr09: , (Christensen, 2009), Mou04: , (Mourik, 2004), Bea09: , (Beaver, 2009), Haa05: , (Haase, van Harmelen, Huang, & Stuckenschmidt, 2005), Pea82: , (Peasnell, 1982), Edw07: , (Edwards, 2007), Boo03: , (Booth, 2003), Read More