Telstra's Financial Performance Analysis

This assignment requires a thorough analysis of Telstra Corporation Limited's 2016 Annual Report. The focus is on understanding the company's financial performance, examining its key assets like Property, Plant & Equipment, Goodwill, and Investments in Controlled Entities. The analysis should also delve into amortization details provided in Table-D and consider specific transactions like the sale of AUTOHOME detailed in Table-B.

Company and Financial Reporting
EXECUTIVE SUMMARY
‘Conceptual Framework’ is a concise presentation of a company’s financial aspects,
especially those which demonstrate its financial strengths. AASB has framed three
standards for this, namely AASB 101, AASB 136 and AASB 138.
AASB 101 is related to the financial statements which provide information about
financial position, financial performance and cash flows of the entity. This can be used
by a wide range of users for making economic decisions. In the case of Telstra, this
information assists this report in understanding Telstra’s future cash flows, in particular,
their timing and certainty.
AASB 136 Impairment of Assets deals with the issue of impairment of an asset and it
defines this as –
‘An asset is impaired when its carrying amount exceeds its recoverable amount.’
This report concludes that when estimating an asset’s recoverable amount from the
financial statement of Telstra, the management uses a great degree of judgement and
estimation.
Objective AASB 138, which deals with Intangible Assets, is to account for how these
non-monetary assets which have no physical presence, can be recognised, measured and
disclosed within financial statement of Telstra.
PART – I
ANSWER – 1 (a)
Management of Telstra has the practice of identifying all profit earning segments as
Cash Generating Units (CGUs), Telstra, (2016). With the commencement of the revised
NBN Definitive Agreements (NBN DAs), the company is going to transfer the Hybrid
Fibre Coaxial (HFC) cable network, which was functioning as a separate CGU for

impairment assessment, to the assets of NBN Co. The transfer will include assets such
as Lead-in Conduits (LICs), HFC and certain other external infrastructure assets
associated with this CGU. The management has acknowledged that after the revised
NBN Das coming into force, it is not possible to separate the cash inflows jointly
generated by both the networks, as per Baker & Riddick, (2013). (See Extract-01 of
Table-B showing Cash Generating Units (CGUs) from Page-100 of Telstra’s Annual
Report 2016 in Appendix)
This is also in conformation with the Australian Conceptual Framework which
prescribes AASB 101, the standard which prescribes the following segments to be
reported cohesively.
Acquisition
Property, Plant and Equipment are to be recorded at cost price less the accumulated
depreciation and impairment. Telstra capitalises all borrowing costs, attributing them
directly to an acquisition of a qualifying asset. Telstra then recognises as expense all
other borrowing costs in its income statement, assert Greuning, Scott & Terblanche,
(2011).
Depreciation
All items of Property, Plant and Equipment are depreciated by Telstra on a straight-line
basis over their estimated useful lives, Telstra, (2016). Depreciation of assets starts after
their installation. The useful lives of the Property, Plant and Equipment assets are
shown in Table B, as per Janousek et al, (2015). (See Extract-02 of Table-B showing
Useful Life of Assets in Years from Page-97 of Telstra’s Annual Report 2016 in
Appendix)
ANSWER – 1 (b)
Telstra transferred its assets valued at $1,004 million, as explained above, to NBN Co.
under the revised NBN DAs as at 30 June 2016. This was 4.9 per cent of Telstra’s Net
Book Value of its total Property, Plant and Equipment (See Extract-03 of Table-A
showing Details of Property, Plant and Equipment from page 96 of Telstra Annual
Report 2016 in Appendix). Management judgement was applied by Telstra in assessing

the useful lives of these assets and was based on the anticipated NBNTM network rollout
period, Telstra, (2016). The full impact on the useful lives of these assets cannot be
assessed fully as of now and will depend on the selection of access technologies by
NBN Co. in each of the rollout region and also on the sequence in which this rollout
progresses, as per Cichosz, (2014). (See Extract-04 of Table-A Goodwill and other
Intangible assets from Page-99 of Telstra’s Annual Report 2016 in Appendix). During
the financial year 2016, Telstra has made assessment of its telecommunications network
CGU based on the identify indicators of impairment, as has been specified by AASB
standard 136. This has been done by using both the external as well as the internal
sources of information, asserts Yona, (2011).
PART – II
ANSWER – 2 (a)
Rolling out the services of 4G voice by using the small cells technology was part of
Telstra’s long standing commitment towards expansion of its 4G coverage in the
regional Australia. This has made Telstra, the first carrier in Australia which is going to
provide 4G voice services to customers using the small cell technology. During this
financial year itself, Telstra has identified 50 small cell sites with 4G voice services and
have already become operational in rural Australia, Telstra, (2016). A further 10 more
such sites are expected to be activated by the end of June. This technology is based on
the ongoing investment commitments under the revised NBN DAs which Telstra is
making in the rural areas of Australia for its mobile network used by the rural
customers, as per Kurth, (2011).
A small cell is kind of a miniature version of the large size standard base station which
are set up by telcos, mostly in highly congested networks found in densely populated
urban areas. The purpose of the small cell is also to boost coverage and capacity of the
4G voice calls in rural areas. Being a technical hardware, the small cells are also
classified under the Property, Plant and Equipment head in the Annual Report of 2016,
Telstra, (2016). Since Telstra’s commitment is part of its support to the Federal
Government’s Mobile Black Spots program, the management is committed to funding

up to 250 small cells during its overall expansion program. In this regard, full funding is
being provided by Telstra from its internal resources, say Marchildon & McDowall,
(2013).
Deferred Expenditure
A Deferred Expenditure is not only related to the direct incremental costs associated
with the establishment of a customer contract, it also relates to the costs incurred for
installation and connection fees for providing basic access to existing and new services.
It also relates to the deferred costs which are related to the costs incurred on small cell
installations under the revised NBN DAs, Telstra, (2016). All such costs, incurred in
excess of the future revenues earned, shall be recognised in the subsequent income
statement reported in the Annual Report of 2017. The amortised deferred expenditure,
which is expected to be realised, shall be recognised in the subsequent operating
expenses of 2017, as explained by Cichosz, (2014).
ANSWER – 2 (b)
Telstra’s intangible assets mainly include the following three items –
A. All IT related development costs of designing, building and testing of new or
improvised IT systems.
B. Research costs which are expensed when incurred.
C. Capitalised development costs, which include:
(a) External direct costs related to materials and services consumed.
(b) Payroll and payroll-related costs for employees associated with a project.
(c) Borrowing costs which are directly attributed to a qualifying asset.
All internally generated intangible assets are assessed as having a finite life and hence
are amortised over their useful lives on a straight-line basis. Recognition of the
development costs are done on the basis of management judgement (Refer to
‘Capitalisation of development costs’), Telstra, (2016).
PART – III

ANSWER – 3 (a)
Telstra accounts for its acquired joint ventures as well as the associated entities using
the equity method. The company recognises the investment under this method at
acquisition cost and this is subsequently adjusted by the share of profits or losses
received. Such receipts are duly recognised in the relevant income statement of the
company under comprehensive income, assert Greuning, Scott & Terblanche, (2011).
Telstra entered into venture capital investments in the year 2008, investing mainly in
controlled entities and a list of its investments in such controlled entities is detailed in
Table –A, Telstra, (2016).
This table gives details of the company’s material operating controlled entities as at 30
June 2016. This presentation is segregated on the basis of the percentage of earnings
before interest, income tax expense, depreciation and amortisation (EBITDA) of each
entity and includes the details of Ooyala too, Telstra, (2016). The company’s ownership
percentage in Ooyala represents that portion of equity which was held by Telstra in the
subsidiary as well as in its immediate parent respectively, according to Mudra, (2014).
(See Extract-05 of Table-A showing Investments in Controlled Entities from Page-139
of Telstra’s Annual Report 2016 in Appendix)
The statement confirmed that the fair value of trade and other receivables was equal to
the gross contractual amount which the company expected to collect. The goodwill
component describes the cost synergies, revenue growth opportunities, workforce talent
and the future profitability of the acquired business. No goodwill, recognised at present,
is going to be claimed as a deductible expense for income tax purposes. All acquisition
costs, incurred during acquisition, have been included under the head ‘other expenses’
in the income statement of the relevant year, assert Keown et al, (2012).
ANSWER – 3 (b)
There are two reasons why companies do this and the first reason is strategic. This
happens because the processes have been in-built over the years and hence, it is difficult
for managements to avoid or innovate them. The second reason is financial. Companies

like Telstra, who are aspiring tech companies are often found to have piled a large
amount of excess cash, Telstra, (2016). Hence, acquisitions become an easy way out to
invest this excess cash. Moreover, investments made in start-up entities provides Telstra
with fresh insight into the emerging industries, as stated by Kurth, (2011). Theoretically,
the factor most widely considered by an investing company is to create a hedge against
any new, potential competitor. Telstra accounts for the acquisition of its controlled
entities by using the Acquisition Method of accounting, Telstra, (2016). This method
involves the recognition of the acquiree entities identifiable assets, liabilities and
contingent liabilities taken at their fair values as on the acquisition date. Goodwill is
recognised as the excess amount over and above the fair value. Telstra deducts the
expenses of acquisition as incurred expenses in its income statement, assert Marchildon
& McDowall, (2013).
Current Year Disposals
Telstra’s receipts from sale of businesses including its share in the controlled entities,
taken at net of cash disposed, for the current financial year, are $1,340 million. Of this,
$1,323 million is from the sale of controlling rights in Autohome Inc. and its controlled
entities, on 23 June 2016. (See Extract-06 of Table-B showing Sale of Autohome Group
from Page-149 of Telstra’s Annual Report 2016 in Appendix)
Non-controlling Interests
Non-controlling interests, on the date of acquisition, are measured either at their fair
value or at non-controlling shareholders’ proportion of the assumed net fair value of the
asset. Such transactions are recorded directly under the statement of comprehensive
income, as stated by Marchildon & McDowall, (2013).
Contingent Consideration
This is recognised at the fair value of the asset at the time of acquisition, with any
changes in the recognised fair value taken in the income statement. In case a business is
acquired in stages, Telstra re-measures the previously held equity interest at the
acquisition fair value and the resulting gain or loss is shown in the income statement,
say Greuning, Scott & Terblanche, (2011).
PART – IV
ANSWER – 4 (a)

Capitalisation of Development Costs
Once the rollout of NBN is completed, Telstra may have to replace all those earnings
which will be lost because of this huge outlay. A simple logic is behind this. Whenever
a company tries to convert the Development Costs into Capitalisation of Assets, it
must suffer the consequences of lost revenues, as per Cichosz, (2014). Development
costs should only be capitalised when the project has been, technically and
commercially, assessed to be feasible. This in fact depends on the following two factors
–
(a) Amortisation
The company applies a managed judgement for determining the amortisation period
which is based on the expected useful lives of each class of assets. At present, the
average amortisation periods of Telstra’s identifiable intangible assets are as shown in
Table-D. (See Extract-07 of Table-D showing Amortisation Details from Page-103 of
Telstra’s Annual Report 2016 in Appendix)
(b) Useful Lives of Intangible Assets
In addition to the above, the company also applies a managed judgement for assessing,
on an annual basis, the indefinite useful life assumption which is required to be applied
in certain acquired intangible assets. The net calculated effect of such a reassessment of
the useful lives, for the financial year 2016, was found to be $67 million as compared to
$51 million in 2015, Telstra, (2016). Telstra has already given indications that the
rollout of National Broadband Network is bound to cut $2 to $3 billion annually from
its earnings. Telstra is sure to remain the biggest telco in Australia, but the management
will need to find newer revenue streams or must reduce its debt, once the NBN is active,
if it wants to maintain its current A2 credit rating, as stated by Keown et al, (2012).
ANSWER – 4 (b)
The two factors which are going to affect Telstra’s choices, shown above, of its
amortisation of software assets are –
1. Trade and Other Receivables
Once the NBN rollout is completed and it is due by 2020, Telstra may find its earnings
margin contracting down to high 30%. Telstra will not be compensated for loss of its

earnings by the wholesale business which it is expecting from the rollout, says Mudra,
(2014).
2. Current and Non-current Trade and Other Receivables
Although Telstra will remain the industry leader, it will lose a huge portion of its fixed
retail voice and broadband market share. Moreover, its mobile market share is also
going to stagnate or may fall due to competitors getting stronger. To permanently fill
this earnings gap, Telstra needs to find new revenue streams and to increase its existing
streams, Telstra, (2016). Assuming that Telstra has an earnings gap in 2020, it could
maintain its credit ratings by either reducing the dividend payments and using the extra
cash for cutting its debt or by acquiring extra cash from other sources, such as NBN
payments or sale of some of its non-core business, asserts Mudra, (2014).
(See Extract-08 of Table-A showing Current and Non-current Trade and Other
Receivables from Page-103 of Telstra’s Annual Report 2016 in Appendix)
LIST OF REFERENCES
Baker, H.K. and Riddick, L.A. 2013. International Finance: A Survey. OUP USA,
Oxford.
Cichosz, P. 2014. Data Mining Algorithms: Explained Using R. John Wiley & Sons,
West Sussex.
Greuning, H., Scott, D. and Terblanche, S. 2011. International Financial Reporting
Standards: A Practical Guide. World Bank Publications, Washington DC.
Janousek, V., Moyen, J., Martin, H., Erban, V. and Farrow, C. 2015. Geochemical
Modelling of Igneous Processes. Springer, Berlin.
Keown, A.J., Martin, J.D., Petty, J.W. and Scott, D.F. 2012. Financial Management:
Principles and Applications (10th ed). Pearson Education India, New Delhi.
Kurth, S. 2011. Discuss covered interest rate parity (CIRP) with reference to foreign
exchange market efficiency. GRIN Verlag, Norderstedt.
Marchildon, G.P. and McDowall, D. 2013. Canadian Multinationals and International
Finance. Routledge, New York.

Mudra, J. 2014. International Financial Management (12th ed). Cengage Learning,
Stamford, CT.
Telstra Corporation Limited. (AU) Annual Report 2016. Extracted on 1 October 2017
from https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-
Annual-Report.pdf
Yona, L. 2011. International Finance for Developing Countries. Author House,
Keynes.
APPENDIX

Extract-01 of Table-B showing Cash Generating Units (CGUs)
from Page-100 of Telstra’s Annual Report 2016
Extract-02 of Table-B showing useful life in years
from Page-97 of Telstra’s Annual Report 2016

Extract-03 of Table-A showing Property, Plant and Equipment
from Page 96 of Telstra Annual Report 2016

Extract-04 of Table-A showing Goodwill and other Intangible Assets
from Page-99 of Telstra’s Annual Report 2016

Extract-05 of Table-A showing Investments in Controlled Entities
from Page-139 of Telstra’s Annual Report 2016

Extract-06 of Table-B showing Sale of AUTOHOME
from Page-149 of Telstra’s Annual Report 2016
Extract-07 of Table-D showing Amortisation Details
from Page-103 of Telstra’s Annual Report 2016

Extract-08 of Table-A showing Current, Non-Currrent and Other
Receivables from Page-103 of Telstra’s Annual Report 2016