Essay On Non-Controlling Interests, Goodwill, And Impairment Testing In Telstra's Annual Report.

The Assignment is designed to test the following skills:

1. Your knowledge and your ability to research the issues and then apply the information appropriately using judgement
2. Your communication skills and teamwork: team presentations and written: memowriting.

Part A Technical Component (15%) – This mark covers the technical content of your advice and the explanation on each of the issues, the calculations and the sources and references used, and the format of the memo as well as the group technical knowledge during the presentation.

Part B Professional Competency Skills: Communication Skills – Oral presentations (10%) – This mark covers the presentation skills of the individual student of 5% and a team mark of 5% for the content, structure and visual aids for the presentation.

Please make sure you follow the guidelines relating to presentation of written work, late policy and academic integrity. Please familiarise yourself with the assessment marking rubric (attached) to guide you in how you can score marks.

Some of the aspects that you need to cover as a team are:

1. The composition of the group; namely the subsidiaries, associates, any joint ventures and any other significant investments – summarise for the memo
2. Why did the parent entity have to prepare consolidated financial statements when the subsidiary company is a separate legal entity in its own right? Is there a need for disclosure in the financial statements? Legal requirement or otherwise?
3. The non-controlling interest – where would you find it in the financial statements and what does it represent? Details of any direct and indirect non-controlling interest? What do these mean? Is it important to show them separately? Why or why not?
4. Has there been any goodwill on acquisition? Or any gain on bargain purchase? Where would you find it in the financial statements and what does it mean? Have there been any impairments to assets during the period?
5. Intra-group transactions and balances: How much are they? In which set of financial statements will we be able to locate them? Are they an important part of the consolidation process? Why or why not?
6. Does the group have any foreign subsidiary companies? How have they been accounted for in the financial statements? How have the subsidiary company’s financial statements been translated?
7. Does the published set of group financial statements reveal the company’s policy on any of the following areas, namely Sustainability; Corporate governance; Audit committees; Solvency? If so, where is the information located and why is it included? Is it compulsory to disclose these statements? Why or why not?
8. Any other relevant matter that you may wish the board of directors to make note of in respect of some transaction or event, balance of account or disclosure that will assist them in understanding the financial statements of the group.

Part A Technical Component

Non-controlling interest is termed as minority interest and it is a position of ownership, in which a shareholder owns below 50% of the outstanding shares having no control over decisions (Barth 2015). Thus, non-controlling interests are gauged at net asset values of the organisations and they do not account for potential voting obligations. The non-controlling interests of an organisation are represented in the income statement and other comprehensive income statement as well as in the balance sheet statement. From the annual report of Telstra Corporation, it could be stated that the organisation has disclosed its non-controlling interests in the above-mentioned statements as well. In the income statement and other comprehensive income statement, the non-controlling interests of the organisation amounted to ($17 million) in 2017 compared to $69 million in 2016. On the other hand, in the balance sheet statement, the non-controlling interests of Telstra Corporation amounted to $19 million in 2017 compared to $36 million in 2016.

Generally, there are two types of non-controlling interests, which include direct non-controlling interests and indirect non-controlling interests. In the words of Francis et al. (2015), direct non-controlling interests obtain a proportionate apportionment of all the recorded subsidiary equity that includes pre-acquisition as well as post-acquisition amounts. On the other hand, indirect non-controlling interests obtain proportionate apportionment of only the post-acquisition amounts of a subsidiary. However, after critical evaluation of the annual report of Telstra Corporation in 2017, no segregation of controlling interests has been disclosed. At the time of adjusting the non-controlling interests for the impact of intra-group transactions, no differences could be observed between direct non-controlling interests and indirect non-controlling interests (Gleim, Kustanovich and Irwin 2017). However, in situations, where a subsidiary has paid or is yet to pay dividends containing indirect non-controlling interests, it is essential to make adjustments for eliminating the chance of double counting. In case of Telstra, no such transactions are inherent from its 2017 annual report and thus, it has not differentiated between direct non-controlling interests and indirect non-controlling interests.

As commented by Henderson et al. (2015), goodwill constitutes a portion of the premium, which is paid in the acquisition of an organisation. If an organisation is bought at a price above the book price, the acquiring firm is incurring for intangible components like brand recognition, skilled staffs and other identical items. It is significant to mention that items like trademarks or patents are accounted for in various line items. Some instances of goodwill include customer loyalty, brand name and methods of proprietary reduction (Martin and Roychowdhury 2015). Telstra Corporation has conducted certain mergers and acquisitions in the year 2017. It has made necessary adjustments related to acquisition of controlled organisations, contingent considerations and businesses. This takes into account the acquisition of Mercury Holdings Corporate Private Limited and its controlled organisations (Telstra.com.au 2018). Telstra has made certain other mergers and acquisitions in the year 2017 as well, which are stated as follows:

• Mobile Gateway Payment Limited
• Cognevo Business from Wynard Group
• Company 85 and its subsidiary, DVC Channel Services Limited
• Inabox Group Limited
• Investments in Vonage Holdings Corporation

From the critical evaluation of the annual report of Telstra Corporation in 2017, it has been found that the organisation has goodwill on acquisition amounting to $22 million. This has been identified from the investment section of the organisation, as evident in “Page 130 of the Annual Report”. However, no evidence or disclosure has been identified regarding gain on bargain purchase from the annual report of Telstra Corporation in 2017.

Part B Professional Competency Skills

Telstra considers all its non-current assets for impairment testing. The first item that the organisation has tested for impairment includes property, plant and equipment, which is recorded at cost minus accumulated depreciation and impairment. For impairment assessment of this item, cash generating units are identified, which is the smallest asset classes fetching cash flows not reliant on cash flows from other asset groups (Hoyle, Schaefer and Doupnik 2015). Any minimisation in the carrying amount is recognised in the form of expense in the income statement in the reporting year where impairment loss occurs. Moreover, the organisation considers useful lives and residual values of different line items included in property, plant and equipment. It has been identified that Telstra has recognised $4 million as impairment losses in property, plant and equipment in 2017 compared to $13 million in 2016, which could be seen from “Page 91 of the Annual Report”.

Telstra considers goodwill, software assets, licences, deferred expenditure and other intangible assets for impairment testing as well. For these intangible assets having indefinite useful lives, they are assessed for impairment at least yearly or when there is an indication of impairment (Khan 2015). Moreover, the cash generating units are identified to which goodwill is apportioned, since it could not be greater than an operating segment. Telstra recognises impairment losses on these intangible assets in the income statement in the reporting year when the recoverable amount is not higher than the carrying value. It has been identified that impairment losses on intangible assets amounted to $80 million in 2017 compared to $250 million in 2016, which could be found from “Page 94 of the Annual Report” of Telstra Corporation.

In the words of Marshall (2016), intra-group transactions are perceived as a portion of the consolidation process, since they are eliminated at the time of consolidation. Thus, intra-group transactions are commercial or financial transactions involving two organisations of the same group simultaneously. The most inherent instance is the issuance of a sales invoice for service supply. The organisation issuing the invoice would recognise receivable in its statement of financial position and revenue from sale on the income statement, while for the purchasing organisation, payable and expense would be recognised on the balance sheet statement and the income statement respectively. At the closing date, the consolidated statement of financial position would constitute of an asset and a liability arising from a reciprocal transaction, which is not inherent within the group. Along with this, there would be overvaluation of revenue and expenses, since all the internal transactions are included within the year (Maynard 2017).

From the 2017 annual report of Telstra Corporation in 2017, the financial report takes into account all assets and liabilities of the group and its controlled entities along with the consolidated results as well as cash flows at the end of the reporting year. The organisation considers an entity to be a controlled entity, in which there is exposure or variable return rights from engagement with the organisation and having the ability to influence such returns via power so that the activities could be directed accordingly. Telstra consolidates the results of its controlled organisations from the time control is obtained until it is ceased. It is evident from “Page 79 of the Annual Report” of Telstra Corporation in 2017; the impact of intra-group transactions and balances is eliminated totally from the consolidated financial statements. However, it has shown the non-controlling interests separately in the income statement, statement of other comprehensive income, balance sheet statement and statement of changes in equity for all the controlled organisations.

Telstra Corporation is deemed to have 13 foreign subsidiaries in US, Asia and other European nations It has been identified from the 2017 annual report of Telstra Corporation that the organisation has translated the financial reports of its foreign subsidiaries to AUD by using a method, which is termed as the temporal accounting method. This method helps in foreign currency translation of the various items listed in the financial statements of the organisation (Miller-Nobles, Mattison and Matsumura 2016). The ways through the financial statements of the foreign subsidiaries are accounted and translated are enumerated briefly as follows:

• Items like cash and receivables are translated into AUD by utilising the exchange rates in the market at the balance date
• Non-monetary items are translated at the exchange rates in the market applicable at the transaction date or at the revaluation date
• The financial performance statements are translated into AUD at average exchange rates for the period
• Any gains or losses in currency translation are recorded at the balance sheet statement
• The liabilities as well as assets are translated into AUD by utilising the rates of market exchange at the balance date
• The shareholders’ equity at the investment date is translated into AUD at the spot exchange rate (Nobes 2014)
• The post-acquisition movements are translated at the spot rates of exchange
• Gains and losses in currency translation are recorded in the translation reserve of foreign currency

The above are the major ways through which Telstra Corporation accounts for its various items included in the financial statements of the foreign subsidiaries and accordingly, currency translations are made. Moreover, it uses the current rate accounting method for translating and accounting the various transactions of its foreign subsidiaries.

References:

Barth, M.E., 2015. Financial accounting research, practice, and financial accountability. Abacus, 51(4), pp.499-510.

Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting decision making: Evidence from accounting conservatism. Contemporary Accounting Research, 32(3), pp.1285-1318.

Gleim, I.N., Kustanovich, M. and Irwin, G.M., 2017. CPA Review: Financial Accounting & Reporting. Gleim Publications.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.

Marshall, D., 2016. Accounting: what the numbers mean. McGraw-Hill Higher Education.

Martin, X. and Roychowdhury, S., 2015. Do financial market developments influence accounting practices? Credit default swaps and borrowers? reporting conservatism. Journal of Accounting and Economics, 59(1), pp.80-104.

Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.

Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., 2016. Horngren's Financial & Managerial Accounting: The Managerial Chapters. Pearson.

Nobes, C., 2014. International classification of financial reporting. Routledge.

Telstra.com.au., 2018. Telstra - Annual reports - Investors. [online] Available at: https://www.telstra.com.au/aboutus/investors/financial-information/reports [Accessed 8 Sep. 2018].