Accounting Standards and Risk Assessment: TCL Financial Performance

This report provides an in-depth analysis of Transurban Holdings Ltd (TCL), a toll road operator, based on its 2018 financial report. It begins with an executive summary highlighting the company's profitability challenges and its acquisition of the Sydney Cross City Tunnel. The report assesses TCL's adherence to accounting standards (AASB 16 and AASB 13), particularly in relation to toll road concessions, and examines the accounting policies used for asset valuation. It identifies and explains the flexibility management has in determining asset values, including fair value measurement of various financial elements like trade receivables, derivatives, and concession assets. The report also explores the market and financial risks impacting TCL's operations, such as foreign exchange, interest rate, and credit risks, as well as the potential impact of increased fuel prices on the company's financial statements. It concludes by discussing the effects of these factors on TCL's income, expenses, and overall financial performance, providing a comprehensive evaluation of the company's financial position and risk exposures.

Accounting Standards 1
Accounting Standards and Theory
Subject name and number
Student name and number
Word count: 1551

Accounting Standards 2
Executive summary
Transurban Holdings Ltd (TCL) operates a toll road operator in Australia. The Australian toll
operator has experienced profitability problems recently. TLC is taking over the Sydney
Cross City Tunnel that was previously operated by the Sydney Morning Herald and the Cross
City Tunnel. The previous operators did not realise profit from the project. Transurban
Holdings Ltd (TCL) is taking over the project with the hopes of making profits from it.
However, the company’s risk management committee is concerned about the viability of the
Sydney Cross City Tunnel project. As an accounting graduate I am tasked with evaluating the
operations of TLC based on its 2018 financial report. The evaluation seeks to; a) establish the
company’s adherence to accounting standards and policies when preparing its financial
statements; b) examine the accounting policies used by the TLC management to value assets;
c) assess the risk factors that impact the operations in the toll business; and d) examine of an
increase in the price of fuel would affect financial elements of the company.

Accounting Standards 3
Introduction
Accounting regulations and risk exposures have a significant impact on the operations of
concession services. Transurban Holdings Ltd (TCL) is a toll road operator in Australia
which has invested in several road concession services. The company’s risk management
committee is concerned about the viability of the Sydney Cross City Tunnel project. The
committee has maintained that the project is surrounded by uncertainties. Previous operators
of the project did not earn profit from the project. This paper addresses the risk and exposures
surrounding the project and how it would impact the general financial performance of TCL.
The paper is divided into four parts which address the accounting regulations and policies
that govern concession services as well as the possible risks associated with the project.
Accounting policies relating to the toll road concessions as used by TLC
Construction of roads is based on a public-private partnership (PPP). The government is a
representative of the public and act as the guarantor. On the other hand, companies represent
the private sector hence known as the operators. Operators lease properties and equipment
from the public to facilitate their operations. There two accounting regulation and standards
that are commonly used by the toll road operates to account for the elements of financial
reports are AASB 16-Lease and AASB 13- Fair Value Measurement. AASB 16-Lease seeks
to establish ownership of the infrastructure assets used by toll road operators (AASB, 2015,
p. 65).
AASB 16 maintains that operators should account for their operating leases as an on-balance
sheet. Accounting for property and equipment leases as either lease liability or right to use
assets enhance transparency in financial reporting. The amendment of AASB 16 from off-
balance-sheet to on-balance sheet have changes financial metrics such as asset turnover,
EBITDA, and gearing ratios (AASB, 2019). AASB 13 addresses fair value measurement of
assets and liabilities. AASB 13 helps to measure the initial value of infrastructure assets as
recognised by the guarantor when the right-to-use is transferred to an operator. AASB 13
enhance consistency in measuring and recognising the infrastructure assets at their fair value
(Australian Accounting Standards Board, 2014).
TLC applies several accounting policies in an attempt to adhere to both AASB 13 and AASB
16 accounting standards and regulations. TLC uses three accounting procedures to recognise
its policies. First, toll revenue is recognised when the company has determined it as a

Accounting Standards 4
recoverable amount. Second, construction revenue is recognised as a percentage of project
completion. And third, other revenues are recognised based on the ability to recover the
incurred cost. Likewise, TLC relies on Australian tax laws to recognise its tax benefits and
expenses. Liability method is used to account for deferred income tax. Generally, the
company applies fair value, and amortization accounting policies to recognise its financial
elements (Australian Accounting Standards Board, 2014).
Flexibility TLC management to determine asset values
The management of TLC continually evaluates the company’s professional judgments and
estimates. Expert opinions and estimates are based on professional experience, historical
facts, and future expectations. However, the management only includes future expectations
which are considered to have reasonable financial impact on the company. TLC financial
reports comprise of notes that have elaborated on assumptions and estimates which have
significant risk on the carrying values of financial elements (Transurban Group, 2019, p. 61).
The determination of asset value by the management was done as below.
a) The company uses fair value to initially measure its trade receivables. Subsequently,
TLC uses amortisation to recognise trade receivables based the effective interest
method. The amortised cost is less impairment loss. The management continuously
reviews its trade receivables. Unrecoverable debts are written off and subsequently
their carrying value is reduced (Transurban Group, 2019, p. 91).
b) The company initially recognise its derivatives at fair value based on the date such
derivatives were entered. Subsequently, TLC remeasures its derivatives every
financial year (Transurban Group, 2019, p. 85). There are two circumstances under
which changes in derivatives’ fair value can be realised. One, if such a derivative was
designed for a hedging instrument. And two, the nature of items being hedged
(Bychuk & Haughey, 2011, p. 78).
c) The management uses fair value to approximate the carrying value of assets. The fair
value of TLC’s assets is measured, disclosed and recognised using observable market
inputs. The management uses professional judgment to select suitable measurement
methods based on market conditions. For example, present value of the projected
future cash flows is used to determine the fair values of interest rate swaps and cross-
currency interest rate swap. Likewise, forward exchange market rates are used to
determine the fair value of forward contracts (Transurban Group, 2019, p. 93).

Accounting Standards 5
d) The company classifies its concession assets based on AASB 12-Service Concession
Arrangements. AASB 12 framework provides the basis of categorising financial and
intangible asset models. The straight-line basis is used to amortise concession assets
over the concession period.
e) The company tests its intangible and goodwill assets for impairment on a yearly basis.
Assets are impaired is the recoverable amount is lower than the carrying amount. The
calculation of recoverable amount of goodwill and intangible assets was based on the
forecast operational costs and projected traffic flows (Australian Accounting
Standards Board, 2015).
f) TLC Group is responsible to maintain and repair the public roads it operates. The
company records a maintenance provision account which is used to roads held under a
concession contract. Calculation of maintenance provision is based on the present
value of the projects future payments.
g) Lastly, TLC uses the acquisition method to recognise its business combinations and
acquisitions. Business combinations are initially measured at fair value.
Impacts of deterioration of the toll road business on the financial reports of TCL
Toll road industry is influenced by several markets/ financial risks. There are several market
risks that have impact on TLC’s financial reports and elements such as assets, liabilities,
income, and expenses. TLC operates in the international market and is exposed to foreign
exchange risk. The company’s international transactions and financial elements are
denominated using different currencies besides the Australian dollar. Foreign exchange risk
has both positive and negative impact of the company’s operating and financial investments.
An increase of the financial exchange risks would increase liability and expenses of the
company hence reducing the income. Financial exchange risks are likely to increase inflation
and depreciation, thus reducing the value of financial, concession and intangible assets
(Groome & Kim, 2006, p. 67).
Interest rate risks also impact Toll’s assets and liabilities. Interest rate risks arise from
borrowings and cash and cash in hand. The company uses different strategies to control the
impact of interest rate risks on its financial elements. One, TLC use interest rate swaps to
convert its floating rates to fixed rates. And two, the company enters into fixed interest rate
borrowing (Bychuk & Haughey, 2011, p. 101). TLC is also exposed to credit risks which
arise from its financial operations. TLC is an operator of infrastructure assets and engages in
leasing business. Some debts from company debtors might never be recovered leading to

Accounting Standards 6
financial losses. Lastly, the inability to financial short term financial obligations have an
impact on TLC’s current assets and liabilities. However, the company holds sufficient liquid
cash to finance its short term liquidity needs. Sufficient funds in the liquidity reserves have
enhanced the ability of the Group to control its liquidity risks (Transurban Group, 2019, p.
89).
Impact of increased oil prices on TCL’s financial statements
Private motor vehicles have to pay for using motorways that are operated by toll road
companies. An increase in the number of private cars using the roads, the higher the revenue
realised by toll road companies. Moreover, the consumers’ ability to purchase commodities is
determined by the price. The lower the price, the higher the sales volume. An increase in fuel
price would reduce the consumers’ ability to buy fuel for their cars. Consequently, most
consumers would prefer to use public transport over private motor vehicles hence reducing
the revenue collected by TLC Company (Deegan, 2013, p. 98).
According to the monetary unit assumption theory, is based on whether or not the value of
the dollar remains stable. Companies operating in the global market are mostly affected by
the fluctuation of dollar value. Companies would either decrease or increase their purchases
or productions when the dollar value is projected to fluctuate. Likewise, fuel is a mostly
imported from the Middle East. A fluctuation in the price of fuel will either increase or
decrease the consumers’ purchasing power (Deegan, 2012, p. 71).
In the scenario above, the price of fuel would reduce the consumers’ ability to buy. The
number of vehicles that drive on tolled roads would reduce leading to the reduction of
revenue realised by the TLC Company. Several financial elements would be affected by the
increase of fuel price and the subsequent decline of the number of motor vehicles using the
road. First, TLC’s income realised from toll road services would reduce. Second, the
companies operating expenses would increase because an increase of fuel price has a direct
impact its operations. A decrease in income and an increase in costs would reduce TLC’s
operating profit. Third, the Group’s liquidity would reduce because operating activities will
not generate adequate current assets to finance current liabilities. As a result, TLC would be
exposed to liquidity risks.

Accounting Standards 7
References List
AASB/ AUASB, 2018. Climate-related and other emerging risks disclosures: assessing
financial statement materiality using AASB Practice Statement 2, Sydney: AASB/ AUASB.
AASB, 2015. Accounting Policies, Changes in Accounting Estimates and Errors, Sydney:
AASB.
AASB, 2019. AASB 16 Leases - Assess The Financial Impact Now. [Online]
Available at: https://www.pkf.com.au/blog/2018/aasb-16-leases-assess-the-financial-impact-
now/
[Accessed 18 May 2019].
Australian Accounting Standards Board, 2014. Framework for the Preparation and
Presentation of Financial Statements, West Victoria: Australian Accounting Standards
Board.
Australian Accounting Standards Board, 2015. AASB 116: Property, Plant and Equipment,
Sydney: Australian Accounting Standards Board.
Bychuk, O. V. & Haughey, B., 2011. Hedging Market Exposures: Identifying and Managing
Market Risks. New York: John Wiley & Sons.
Deegan, C., 2012. Australian Financial Accounting. Sydney: McGraw-Hill Education
Australia.
Deegan, C., 2013. Financial accounting theory. 4th Edition ed. North Ryde, N.S.W:
McGraw-Hill Education.
Groome, T. & Kim, Y. S., 2006. The Limits of Market-Based Risk Transfer and Implications
for Managing Systemic Risks. New York: International Monetary Fund.
Transurban Group, 2019. 2018 urban Annual Report, Sydney: Transurban.