Financial Accounting Report: A Comparative Analysis of Two Firms

This financial accounting report provides a comprehensive analysis of TPG Telecom Limited and Telstra Corporation, two major competitors in the Australian telecommunications sector. The report examines key financial statements, including owner's equity, cash flow, and other comprehensive income, to assess the financial viability and stability of each company. It delves into the components of owner's equity, such as share capital, reserves, retained earnings, and non-controlling interests, highlighting the changes in these elements between 2016 and 2017. Furthermore, the report analyzes the debt-equity positions of both companies, revealing differences in their liquidity and risk profiles. The cash flow analysis evaluates operating, investing, and financing activities, providing insights into how each company manages its cash inflows and outflows. The ultimate goal of this analysis is to inform potential investors about the financial health of each company, aiding them in making sound investment decisions, with the report concluding that TPG Telecom presents a more favorable investment opportunity due to its lower debt levels compared to Telstra.

Financial Accounting
Assignment

By student name
Professor
University
Date: 5th Oct, 2018.
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Executive Summary
Overall financial analysis of two companies has been done in this report. Conclusion on
important elements of income statement, cash flow statement and debt equity position of the
shareholders is done based on the annual reports of the company. A comprehensive analysis on
the success of the company and its stakeholders with potential investors is the main aim of this
project. The financial viability of the company can be determined through this analysis which
will further help the investors in making correct investment decision.
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Table of Contents
Introduction.................................................................................................................................................4
Owner’s Equity Analysis..............................................................................................................................4
Statement of Cash Flows Analysis.............................................................................................................10
Statement of Other Comprehensive Income.............................................................................................16
Treatment related to Corporate Tax:........................................................................................................19
Conclusion.................................................................................................................................................19
References.................................................................................................................................................21
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Introduction
Listed under the Australian stock exchange, TPG Telecom Limited and Telstra Corporation are
two companies analysed in this assignment. Both are strong competitors of each other under
telecommunication sector. In this assignment an analysis of both the companies have been given.
A comprehensive analysis on the success of the company and its stakeholders with potential
investors is the main aim of this project. The financial viability of the company can be
determined through this analysis which will further help the investors in making correct
investment decision.
TPG Telecom is a company which provides mobile related services and is specialised in
providing IT related services to business and consumers. With second largest ADSL2+ network,
the company is the second largest internet service provider in Australia with 671000 ADSL2+
subscribers and the largest mobile virtual network operator with 358000 and 360000 landline
subscribers and mobile subscribers respectively (Abdullah & Said, 2017).
Telstra Corporation limited is a leading provider of pay television, mobiles, telecommunication
network and market voices, internet access and other product and services. Originally founded in
1991, this government owned company was formed under the act of parliament. The company
was privatised in 3 stages in 1997, 1999 and 2000. One third of its shares were sold in 1997 by
the Government for 14 billion Australian dollars when the company was first listed under the
Australian Stock Exchange (Naci & Hasan, 2012).
Owner’s Equity Analysis
1. The own capital of the shareholders is the amount of funds invested by the owners of the
company. It is also known as Owner’s equity. This equity bears more return in comparison to
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the debt because of involvement of high risk factor in case of equity. The equity shares,
preference shares, dividends, net profit, retained earnings and other reserves are part of
owner’s equity and are distributable to the shareholders of the company (Visinescu, Jones, &
Sidorova, 2017).
The components of equity can be described in the following manner:
 Share Capital: The total fund invested by the owners in the company is known as share
capital. The owners of the company are called the shareholders of the company. The total
capital of the company is divided into small denominations called shares which are traded
in the market from where the shareholders can buy these shares (Charles H, Giovanna,
Dennis M, & Robin W, 2015). The total share capital of Telstra Corporation Limited was
$5167 Mn. in 2016. The company bought back shares in 2016-2017 which resulted in the
overall decrease in share capital to $4421 Mn. In case of TPG Telecom Limited, the
company issued new shares in 2016 -17 resulting in an increase in share capital from
$1051.9 Mn. in 2016 to $1449.4 Mn. in 2017 (Linden & Freeman, 2017).
 Reserves: The amount of profit that is kept aside by the company for future use is known
as Reserves. It consists of the comprehensive income of the year, forfeited employee
share awards, employee share awards net of employee contribution and unexercised
awards. The total reserves of TPG Telecom Limited decreased from $41.2 Mn. in 2016 to
a negative $18.1 Mn. in 2017 because of a huge decrease in the other comprehensive
income of the company in 2017. The same faith was faced by Telstra Corporation
Limited when the reserves of the company decreased from $62 Mn. in 2016 to a negative
$105 Mn. in 2017 because of the same reason.
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 Retained Earnings: This is the total amount of cumulative past year profits of the
company which is utilised by the company for the purpose of distribution of dividends to
the shareholders (Knechel & Salterio, 2016). Telstra Corporation limited bought back
shares in 2017 and paid dividends in the same in year resulting in the total retained
earnings of the company remaining unchanged for the year. TPG Telecom Limited paid
dividends in 2017 but the same was very low as the company did not distribute the entire
profits earned in 2016-17 as dividends resulting in the overall increase in the retained
earnings of the company from $681 Mn. in 2016 to $963.3 Mn. in 2017.
 Non-Controlling Interest: These are the shareholders of the company who does not have
any control over the decisions of the company. These shareholders do not enjoy any
voting rights as their total shareholding in the company is less than 50%. So these
shareholders are also known as minority interest shareholders and the profits of these
shareholders are calculated on the basis of net assets position (Covaleski, Evans, Luft, &
Shields, 2003). Due to losses incurred in the current year, the total value of the minority
interest decreased considerably for Telstra Corporation Limited. For TPG Telecom
Limited there was just a minor fall in the value of non controlling interest due to payment
of dividends (Heminway, 2017).
(Amount in USD Million)
TPG Telecom - Owner's Equity
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Particulars 2017 2016
Equity 1,449 1,051
Reserves -18 42
Retained Profits 963 681
Total Equity 2,394 1,774
The equity position of TPG Telecom limited is affected due to a fall in the retained earnings of
the company. The company has increased the owner’s equity by issue of new shares and has
negative reserves in the current period. These negative reserves indicate that the company has
accumulated losses and is unable to pay dividends (Gooley, 2016). Thus although the equity
share capital of the company increased from 2016 to 2017, the negative reserves has a bad
impact on the capital structure.
(Amount in USD Million)
Telstra Corporation - Owner's Equity
Particulars 2017 2016
Equity 4,421 5,167
Reserves -105 62
Retained Profits
10,22
5
10,642
Total Equity
66,53
0
16,323
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From 2016 to 2017, the overall equity of Telstra Corporation Limited has reduced as the
company has bought back shares in 2017 although the overall equity shareholders have increased
from 2016 to 2017. The reserves of the company after paying off the dividends and the retained
earnings have helped in improving the equity position of the company.
2. Depending upon the amount of risk that the management of the company is ready to take on
behalf of the return they get from the company, they decide the proportion of debts and
equity of the company. The total amount of fund generated from either source is decided by
the management (Goldmann, 2016). Debt is a very risky source but the return from debt is
also very high. But in case of equity the total risk element is very low due to which the return
from equity shares is also very low. The shareholders of the company must have good
knowledge about the liquidity position and the debt equity analysis helps in studying the
overall liquidity position of the company. Since a shareholder is investing money in a
company he should know how the company is managing their funds. This can be determined
by analysing the liquidity position of the company. The debt-equity position of both the
companies is analysed below:
(Amount in USD Million)
Telstra Limited - Owner's Debt-Equity Position
Category Description 2016 2017
Debt
Loans and
Borrowings
14808 14647
Total Debt 14808 14647
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Equity
Equity attributable
to shareholders of
14,56
0
15,90
7
Total Equity
14,56
0
15,90
7
Debt-Equity ratio 102% 92%
The percentage of borrowings is very high for Telstra Corporation in comparison to the
equity element which destabilise the financial position of the company. The company has
bought back equity shares and invested in large amount of debts since 2016 resulting in
overall increase in risk element that the company will face if the need to pay off the debts
arises (Fay & Negangard, 2017).
(Amount in USD Million)
TPG Telecom Limited - Owner's Debt-Equity Position
Category Description 2016 2017
Debt
Loans and
Borrowings
872.4 1350.4
Total Debt 872.4 1350.4
Equity
Equity attributable
to shareholders of 2,399 1,779
Total Equity 2,399 1,779
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Debt-Equity ratio 36% 76%
In 2017, TPG Telecom has issued new equity shares to reduce the risk of debt which was
very high in 2016. The company tried to balance its financial position by bringing down the
debt equity ratio from 76% to 36% in 2017. This is beneficial for the investors along with the
company.
From the above analysis it is seen that TPG Telecom Limited has a lower debt in comparison
to Telstra Corporation. This is the major difference in the liquidity position of both the
companies due to which the Investors will try to invest in TPG Telecom Limited in
comparison to Telstra Corporation (Eddy, Filip,R, & Warlop, 2004). This decision of the
Investors will be a very wise one if they take investment decision on the basis of the liquidity
position of the company. The aim of investors is to invest in a company with a more stable
financial position to fulfil their ultimate need of high returns from the company.
Statement of Cash Flows Analysis
The flow of cash in and out of the company during the financial year is determined with the help
of the Cash Flow Statement. The net amount of cash available with the company at the end of the
financial year can also be seen in this statement. The company needs to consider some major
segments in the cash flow statement which are very helpful for the Investors of the company. For
the purpose of formulation of cash flow statement the company follows the provisions of the
Australian Accounting Standards and Corporations Act 2001.
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 Cash Flow from Operating Activities: Cash from all activities relating to the day to day
business of the company is recorded under this head which often leads to increase and
decrease in cash. Elements covered under this section are payment of interest, operating
expenses, operating incomes, payment to creditors, cash received from customers, payment
of taxes, etc. The operating cash flow of TPG Telecom Limited included cash paid to
creditors, received from debtors and payment of taxes. The net cash from Operating
Activities of the company is $722.7 Mn. On the other hand Telstra Corporation has received
government grants along with cash from customers as a major part of inflow. The main
sources of outflow were payment towards tax liabilities and payment to the creditors (Dan,
1995).
 Cash Flow from Investing Activities: The cash invested by the company in the assets or for
the purpose of expansion forms a major part of investing activities. It also includes cash
invested in other securities, plant and machinery, property, selling of assets, etc. The interest
received by the company from any investment also forms part of this section. Purchase of
plant and machinery, property, intangible assets, investments, payment of contingent
consideration formed part of investing activities for TPG Telecom Limited. Just like this,
Telstra Corporation Limited is also trying to expand its business operations by investing in
property, plant and machinery, intangible assets, etc.
 Cash Flow from Financing Activities: This section includes all activities that are related to
the capital of the company. So through this the company tries to increase its share capital.
Activities such as issue of shares, buy back of shares, issue of debentures, redemption of
debentures, etc. are part of financing activities. For TPG Telecom Limited, interest paid,
dividend paid, issue of shares, payment of finance cost, etc. were the major reasons for the
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