Raising Funds and Liabilities in Corporate Accounting Report

This report provides a detailed analysis of corporate accounting practices, specifically focusing on the sources of funds, liabilities, and asset measurement for two Australian companies: Telstra and IBM. The report examines various funding sources, including retained earnings, share capital, and debt capital, and their evolution over a three-year period. It discusses the merits and shortcomings of each funding method, considering factors like bank loans, overdrafts, and venture capital. The report also delves into the types of liabilities, such as trade payables, borrowings, and deferred tax liabilities, as they appear in the companies' balance sheets. Furthermore, it summarizes the key concepts of AASB 137, concerning provisions, contingent liabilities, and contingent assets, and identifies the asset measurement bases used by Telstra and IBM. The analysis is based on financial data, providing a comprehensive overview of the companies' financial strategies and accounting practices.

Running head: CORPORATE ACCOUNTING
CORPORATE ACCOUNTING
Name of the Student
Name of the University
Author Note:

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Executive Summary
The purpose of the study is to analyze the importance of financing in the rapid growth and
expansion of the telecommunication industry and venture capital firm. It focuses on the sources
and the use of the funding by the two listed Australian companies which are Telstra and IBM-
Australia. A critical examination of both companies has been done concerning the merits and
shortcomings of the use of funds and the use of AASB standards.

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Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................4
Sources of Fund...............................................................................................................................4
Evolution..........................................................................................................................................6
Merits and Shortcomings.................................................................................................................7
Merits and Demerits:...................................................................................................................7
Types of Liabilities..........................................................................................................................9
AASB 137......................................................................................................................................11
Asset Measurement........................................................................................................................13
Measurement Basis of Telstra...................................................................................................13
Measurement basis of IBM:.......................................................................................................14
Conclusion.....................................................................................................................................15
Reference.......................................................................................................................................16

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Introduction
The report focuses on the different sources of funds raised by companies and how it
benefits the company in its evolution. Maintaining a dominant position in the Australian
telecommunication market, Telstra is competing in over 20 countries. Founded in 1975, it is the
largest and the fastest mobile network in Australia with over $17 million services and is facing
firm competition from Optus. This telecommunication company provides a wide range of
communication and digital content service that are easy to use (Telstra.com.au. 2020). On the
other hand, IBM Australia Ltd. offers business consultancy, IT services, security services and
business strategy services. It also manufactures services and products related to information
technology (Ibm.com. 2020). In this report, an analysis of both the company’s performance has
been made based on their performance in the last three years. The report provides information
found on the factual, quantitative data which are sourced from the latest financial accounts of the
company.
Discussion
Sources of Fund
Telstra
There are various sources of raising finance for the business some of them are retained
earnings, equity financing, debt financing, term loans, venture funding, etc (Creamer,
Dobrovolsky, and Borenstein, 2015). The Australian telecommunication company, Telstra, is
financed by the following sources (Telstra.com.au. 2020):
 Retained Earnings: It is the essential source of finance and the volume of finance through
retained earnings depends on the performance of the company (Hogan, Hutson and

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Drnevich, 2017). The retained earnings of the company on 1st July 2016, 2017, and 2018
are $10642 million, $10225 million, and $10716 million respectively.
 Share Capital: This is the most used method of raising finance under which the company
sells a part of itself in the form of shares and is also known as equity funding (Hornuf and
Schwienbacher, 2018). As of 2018, the company has a shares capital of $4428 million. In
the year 2017, the total shares capital was $4421 million, and in the year 2016, it was
$5167 million.
 Debt Capital: The company can borrow loans from a financial institution, or it can be
done publically through a debt issue. Such issues are known as corporate bonds and it
allows numerous investors to invest in the company and become the lenders of the
company (Dorfleitner, Röhe and Renier, 2017). The company has a total borrowing of
$16951 million, $17284 million and $17302 as on 1st July 2018, 2017 and 2016,
respectively.
IBM
The sources of finance used by the venture capital firm are as follows (Ibm.com. 2020):
 Retained Earnings: Since the amount depends on the performance of the company,
therefore, higher the amount better is the performance of the company. The retained
earnings of the firm are $152759 million, $153126 million, and $159206 million as of 1st
July 2016, 2017 and 2018.
 Share Capital: The share capital of the firm remains a primary source of financing. The
company has been able to generate $16929 million in the year ending 30th June 2018,
$17725 million in 2017, and $18392 million in the year ending 2016.

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 Debt Capital: The debt capital includes the total borrowings taken by the company. The
total debt of the IBM firm includes borrowing, and as per the financial statement, the
total borrowings were $42168 million in 2016, $46824 million in 2017, and $45812
million. The total borrowings include short-term borrowings and long term borrowings.
Evolution
Telstra
Sources of funds used by the Telstra has been evolved every year according to the needs
and objectives of the company.
 Share capital: The share capital of the company has increased over the years which means
that the company has issued more shares to raise finance as the specific focus of the
company is to create a standalone infrastructure business unit which will consist of
Telstra wholesale and Telstra’s NBN co commercial work activities that are part of the
company operation. The share capital has been increased by $7 million, while in 2017,
the company has reduced its share capital by $746 million.
 Retained Earnings: The retained earnings are based on the company performance in the
previous year. It has been increased by $491 million as compared to the last year.
 Debt Capital: The company repaid $853 million of debt, during the financial year while
the company issued debt $718 million. The debt capital has been decreased by $333
million during the financial year as compared to the previous year.
The internally generated funds by the company are in the form of retained earnings
(Omodero, Ekwe, and Ihendinihu, 2018). As per the latest financial report, the internally

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generated funds are 50.12%, approximately which included retained earnings of $10716, and
externally generated funds are $21379.
IBM
 Share capital: The share capital has been increased as the company is looking for
expansion, and the same shareholders were paid off during the year.
 Retained earnings: The retained has been increased by $6080 million, which has provided
the company financial stability.
 Debt capital: The company has increased its short term debt by $3220 million and
decreased its long term debt by $4232 million in the financial year.
The internally generated funds are retained earnings, which is $159206 million, while the
externally generated fund is share capital and borrowings ($55151 + $10207+ $35605). The ratio
of the internally generated fund to externally generated funds is 1.5:1.
Merits and Shortcomings
The use of funds from different sources has advantages and disadvantages as follows
(Negasa, 2016):
Telstra
Merits and Demerits:
 Bank loans: Apart from getting financial assistance, the ownership also lies with the
company, and there exists no obligation once the loan is paid off. The company has even
opted for fixed-rate and fluctuating rate loans and can pay at their flexibility. However,
the drawbacks are that interest rates are high and the company also faces the possibility
of seizure of assets in some cases (Rostamkalaei and Freel, 2016).

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 Overdraft: The overdraft is flexible as the company takes it only when it requires, which
allows the company to make necessary payments while maintaining its expenses. The
cash flow of the company remains stable with the flexibility option provided by the
overdraft facility from the banks. However, the company has to pay a high rate of interest
and legal charges are applicable if the limit of overdraft is exceeded. The bank has the
right to recall the overdraft anytime and security has secured the overdraft facility with
the company’s asset. These are expensive sources in the long-run and the company has
borrowed it for short term purpose (Storey et al., 2016)
 Share Capital: It is the primary source of finance that is used by every organization as
these sources are beneficial in raising the long-term capital of the company. The amount
from these sources originated by the company is sufficient to generate assets and expand
the business (Garanina and Dumay, 2017). The is no liability to pay off the share capital;
instead, the company agrees to distribute future profits to the shareholders in return for
their investment. However, the owners of the company do not have complete control over
the business and shareholders can also become a barrier in the plans of the business if
they think that such a plan can possess a significant risk to their investment.
 Retained Profit: The amount of retained profit depends on the company’s performance.
Therefore, the company remains self-dependent to generate finance from such sources,
and it does not have to pay interest on such sources of finance. The company can
maintain secrecy since there is no interest payment and no documents need to be released
to the lenders. The retained earnings of the company can be used to pay dividends and
issue bonus shares. However, retained earnings deprive the owners of their investment

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and it can be misused by the management. Sometimes retained earnings also leads to
overcapitalization (Hasan, Hossain and Habib, 2015)
 Leasing: In leasing, the start-up cost is lower than buying equipment and the payments
can be claimed as a business expense, and the property can be given back to the owner
once the purpose for which it was taken is achieved instead of selling the same in case of
purchase. However, the company does not own the item and any defects should be
rectified or the payment for the same needs to be made (Orlova and Afonin, 2015).
IBM, apart from using the above sources it has following more sources of finance:
 Venture Capital: The venture capital provides the company with advice related to their
ongoing strategic, operational, and financial areas by playing the role of mentor. It
alliances the company with a network of strategic partners. They are also experienced at
organizing IPOs. However, the venture capitalist drives harder for a bargain and plays the
role of intrusion by influencing the strategic plan of the organization. If the management
is unable to drive the business then the venture capital try to take the control over the
company (Kaplan, S.N. and Lerner, J., 2016).
 Trade Credit: It improves the cash flows of the business as the business can purchase
anything and can pay later and can focus on profit by selling the products and then paying
off the creditors. However, if the company has a poor payment history with missing
deadlines, then it can damage the business's ability to secure loans.
Types of Liabilities
Telstra

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The company has the following liabilities arising in its balance sheet during the last three
financial years:
 Trade payables: These are the balance at the year-end which the company has to pay to
its creditors for the goods or services obtained from them in credit. The company does
not have to pay any interest on it.
 Borrowings: It is the loan obtained by the company to expand its funding and perform its
operation. The borrowings obtained by the company carry a fixed rate of interest which
the company has to pay irrespective of the profits.
 Derivative financial liability: These are the financial instrument under a contract and
which the company has committed to pay it within twelve months. It does not carry any
interest rate.
 Current tax payable: These are the current liabilities of the company, and the company
has to pay the amount shown in the balance sheet as current tac within twelve months.
The inability to pay the tax within the due date will result in payment of interest and even
some hefty fines to the Government.
 Revenue received in advance: These are the revenues that the company gets before
earning it. Since the revenue can be earned within a year, therefore, the company has
treated it as a current liability. It does not carry any interest rate.
 Deferred tax liability: These are the tax liabilities which the company is required to pay
after a year. These are the long term liabilities of the company, and it does not carry any
fixed rate of interest unless the company does not pay the payment for the same within
the due date.
IBM

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The following liabilities arise in the balance sheet of the company during the last three
years:
Current liability:
 Taxes: These are the current tax liability which the company has to pay within 12
months. The liability does not bear any interest unless the payment of the same is not
made within the due date by the company.
 Short term debt: These are debt taken for a shorter duration to improve the flexibility in
the operation of the company. These debts bear interest, and the rates are generally high.
 Accounts payable: It represents the creditors from whom the goods or services are
acquired and payments for the same have not been made. It does not bear any interest.
 Deferred Income: These are the payments that have been received in advance and the
payments for which has not been made. This income does not carry any rate of interest.
 Other accrued expenses and liabilities: These are the expenses that the company has to
incur since the benefits from this have already derived. It does not bear any interest.
 Long-term debt: This is debt that has a low rate of interest and is taken for a period of
more than a year. It bears a fixed rate of interest.
AASB 137
The AASB 137 outlines that appropriate criteria and measurements should be made with
sufficient information that needs to be disclosed in the notes to accounts. The key principle of the
standard is that provision should be recognized only when there is a liability (Standard, 2015).
The standard aims at ensuring that only genuine obligation is shown in the financial statement.
The key provision that is addressed on this accounting standards standard is (Act, 2017):

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 Income Taxes
 Leases
 Employee benefit
 Insurance contract
 Revenue from contract with the customer
Telstra
The company has applied new standards for future reporting date in transiting with the operating
lease where the company is a lessee and has used following expedients for similar leases
consistently:
 The single discount rate has been applied to a portfolio of the lease with similar
characteristics
 Instead of conducting an impairment review, the company has elected to decide whether
the lease is onerous.
 The company has not made any adjustment on the transition of lease on the company’s
personal computers and other devices which are the underlying assets having low value
and therefore the lease payment under this contract has been continued to be recognized
on a straight-line basis over the term of lease and will be shown as an operating expense
in the profit and loss statement.
 At the initial application of the standard, no direct cost has been included in the
measurement of right-to-use asset.
IBM

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No particular reference has been made with respect to particular standard in the annual
report of IBM.
Asset Measurement
Telstra
The different categories of assets recorded by the company are in the form of current,
non-current, physical and intangible (Adebisi, Alaneme and Ofuani, 2015). The current asset
includes cash and cash equivalent, deferred contract cost, inventories, derivative financial assets,
prepayments, current tax receivables, trade and other receivables and contract assets and assets
classified as held for sale.
The non-current assets include deferred contract cost, trade, and other receivables and
contract asset, inventories, investment, property plant and machinery, intangible asset, derivative
financial asset, deferred tax asset and defined benefit asset and its measurement has been done as
follows (Bauman and Shaw, 2016):
Measurement Basis of Telstra
 Property, plant, and equipment: The PPE including work in progress, has been estimated
at cost less depreciation. The cost includes the cost that is directly attributable and
purchases price of the asset which is incurred to bring the asset to the present location and
making it ready for use. Directly attributable borrowing cost incurred to purchase the
asset is also capitalized to the cost of the asset.
 Goodwill and Intangible asset: The goodwill acquired has been measured at cost. The
amortization of goodwill is not done; instead, the goodwill is tested for impairment on an
annual basis (Carvalho, Rodrigues and Ferreira, 2016). While the intangible asset

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includes IT development costs that are incurred to improve IT products. The research cost
is expensed when they are incurred. The development cost is capitalized and it includes
the external direct cost of material and services consumed, payroll and payroll-related
costs and borrowing costs. The development cost is capitalized when the project is
commercially and technically feasible.
 Receivables and contract assets: These assets are recorded at their fair values and are
measured at amortized cost by using the effective interest method. Contract assets arise
from the contract with customers are recorded at the transaction price that is allocated to
the customer as compensation of goods and services.\
IBM
IBM Australia consists of the following assets:
 Current assets: It includes cash and cash equivalent, marketable security, inventories,
accounts receivable, prepaid expenses and other current assets.
 Non-Current assets: It includes Plant and Machinery, investment, sundry assets, and other
assets.
 Intangible assets: It includes goodwill and other intangible assets.
Measurement basis of IBM:
The measurement has been done using the fair value as the company measures certain
assets on a recurring basis (Barker and Schulte, 2017). These assets include debt securities that
are available for sale, and derivatives have also been measured at the fair value using the
discounted cash flow model. The remaining assets have been measured at book value.

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Conclusion
The above report provides information regarding the two companies which are Telstra
and IBM- Australia, with respect to the sources and use of the funds by the company. The above
information is based on the last three financial years 2016, 2017 and 2018. This report critically
examines the merits and shortcomings of different sources of funds and the types of liabilities the
company has and is represented in the balance sheet. An examination of the key provision on
AASB 137 has been done and has been mentioned if the same is applied by the company, if any.
It also represents categories of assets and the measurement basis used by the company while
preparing the financial statement.

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