Holmes Institute: Corporate Finance Assignment - Funds and Liabilities

This report provides a comprehensive analysis of corporate finance principles, focusing on the sources of funds, liabilities, and asset measurement practices of Telstra Ltd and Wesfarmers Ltd. The report examines the different methods employed by these companies to raise capital, including retained earnings, debt capital (bonds, loans), and equity capital (share issuance). It explores the evolution of these funding sources, highlighting changes over time and the reasons behind them. The report also evaluates the advantages and disadvantages of each funding source, such as the lower cost of debt capital versus the dilution of ownership with equity capital. Furthermore, it delves into the application of AASB 137 regarding provisions, contingent liabilities, and contingent assets. The report concludes with a discussion of asset categories and measurement bases, offering insights into the financial reporting practices of both companies and their commitment to transparency in financial reporting. The analysis aims to develop a clear understanding of different sources of funds used/raised by companies, merits of different sources of funds and also sheds lights on the use of AASB 137 standard and different categories of assets recorded by the selected companies.

CORPORATE
FINANCE

INTRODUCTION
 Telstra Ltd is a telecommunications and technology company that has a
leading brand connectivity of media and content in Australia. The company
is aimed at delivering exceptional experiences for their customers.
 Wesfarmers is a Conglomerate industry of Australia and predecessor
industry of Coles group. It is the largest company in Australia in terms of
revenue.

Sources of Funds Raised by the
companies
Telstra Ltd
 Retained Earnings- Telstra group is sourcing its
fund from the profits generated by the business.
The dividends from the profits are not distributed
among the shareholders and instead, the
company raise its funds from these profits to do
business investments.
 Debt capital- Telstra source its funds by raising
debts in the form of bonds, short-term
commercial paper, loans, AUD private
placements and Finance leases (Telstra.com.au,
2020). Recently it has issues a 10 year long term
debt of EUR bond of worth $959.
 Equity Capital- Telstra release its company stock
to the shareholders. The shareholders invest
their funds in the company stock.
Wesfarmers Ltd
 Debt capital- Funds are raised by issuing global
market bonds and form various banking
facilities.
 Equity capital- The funds are raised from equity
capital. Some of the equity capital of
Wesfarmers is share capital, retained earnings
and reserves (Wesfarmers.com.au, 2020). The
company issue their shares and keep the
shareholder's reserves to source their fund.
They focus more on internal sources to fund
their business operations.

Evolution of Sources of Funds
Wesfarmers Ltd
The company has purchased more of its
reserved shares for its future use. These shares
include shares issued by the employees.
Therefore, capital reserves are used to gain
more profits. This debt has been raised from the
interest in the form of loans and borrowings. No
new bonds were issued in the current year. The
bank facilities were extended for three years as a
source of funds.
Telstra Ltd
The debt capital in the form of borrowings
includes; domestic borrowings, offshore
borrowings, commercial paper, finance leases
and bank loans. In 2018, Telstra Ltd formed a
new fund by investing with HarbourVest. This
investment has reduced capital commitments in
the future

Percentage of the funds
From the above analysis, it can be revealed that both companies are
trying to maintain their funds to improve their business efficiency. The
management of both companies is trying to maintain the risks.

Advantages of sources of funds
Equity Capital
 In this type of source of funds, no interest
payment is not compulsory. The funds raised from
the equity sources are not related to the interest
payment.
 The funds received from the equity sources are
non-refundable on their obligations. This is
considered as the permanent source of receiving
funds.
 Equity capital or share capital does not create
any negative impact on business assets.
 The company can easily raise funds from this
capital.
 It increases the creditworthiness of the company
(Berge et al. 2018).
 It is not compulsory to pay dividends to the
shareholders.
 Risk is comparatively lower than debt capital.
Debt Capital
 The main advantage of this type of source is that it is
less costly as compared to equity capital. The
cost of capital is very less as compared to the
equity capital. This improves the cash flow in the
business operations.
 It maintains the ownership of the company. It
helps to control the cost of business operations.
 It is tax-deductible. Tax is not included in
business loans, interest fees, private loans and
various other debts. The business pays the tax
deduction.
 The management of the company is more flexible
in conducting business operations.
 Debt capital helps in increasing the profit by
controlling the business operations and
maintaining the assets. Debt capital adds
pressure to the management and helps in the
proper management of the business inventories.

Drawbacks of sources of funds
Debt Capital
 It does not enhance the investment opportunity of the
business.
 It affects the credit rating of the business. Lower credit
rating will help the company to issue the bond at a
lower interest rate. In a higher credit rating, the
company will have to issue the bonds at a very higher
interest rate.
 The higher amount of debt capital is riskier for the
company.
 Debt capital may be affected if it results in cash
infusion. In such a case, the lenders with the cash
requirement will be affected. Companies will have to
pay the cost of debt capital irrespective of business
failure.
 The burden on this type of source of the fund is higher
for the company as compared to the equity capital.
The company will have to pay interest additionally with
the amount borrowed within the maturity period.
Equity Capital
 The most important drawbacks are that
the owners are distributed, which is a loss
for the company. The ownership stake is
diluted in this case.
 The cost of equity capital is higher as
compared to debt capital. The equity
investors demand a higher return on the
company shares. Therefore, the equity
holders sell up more stock at a lower price
to compensate for risks and time.
 Equity capital requires more time and
effort to get the funds. It is more time-
consuming and effort. It requires the right
connections and relations to get equity
funds.

Provisions under AASB 137
 The main objective of this standard to properly recognise the criteria that
are required for measuring the provisions, contingent liabilities and
contingent assets.
 It explains the meaning of provisions, contingent liabilities and contingent
assets.
 It also describes the management responsibility towards the above
provisions.
 It helps the investors in getting relevant information related to the company

Reporting for AASB 137
standard
Telstra Ltd
 Contingent liabilities like common law
claims by the employees & third
parties, claims of legal & regulatory
complaints.
 No contingent assets have been
reported.
Wesfarmers Ltd
 Various contingent liabilities are
related to trading guarantees that
cannot be estimated. Provisions are
properly disclosed in the annual
report.

Categories of Assets
Telstra Ltd Wesfarmers Ltd

CONCLUSION
The management of both the companies have maintained a transparency
level in the financial reporting process. From the annual report of the Telstra
group and Wesfarmers Ltd, it can be found that the business operations are
flexible and reliable. The contingent liabilities, current assets and non-current
assets are recognised in their annual report. Both companies have properly
explained the elements of business operations in the notes to account for
statements of the company’s balance sheet.

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