Accounting Conservatism and Cost Decision †MyAssignmenthelp.com

Question: Discuss about the Accounting Conservatism and Cost Decision. Answer: Introduction: The term Depreciation refers to an accounting technique of allocation of the cost of any tangible assets based on its useful life. Most often,a company or an organisation follows two major methods of depreciation. One is the Straight Line Method and the other is the Written-Down-Value Method of Depreciation (Grant, 2016). In such cases, the management must take some correct and concrete decision to ensure profitability in the long run. Here the depreciation policy plays an important role in ensuring long run profitability of the company (Collier, 2015). The management must choose the correct and most efficient method of depreciation so that the valuations of assets are carried out most efficiently and correctly. Depreciation policy of Telstra Corporation limited The Annual Report of Telstra Corporation Limited provides that the company uses Straight Line Method for charging depreciation to its assets. As per the Financial Statement of the company, it is found that amount of depreciation and amortization charges for the year 2015 was $3,974 Million that subsequently increased to $4,155 Million in the year 2016, the change being 4.6%. This implies that due to increase in depreciation and amortization cost, the expense of the company had increased by $181 Million. On comparing the Depreciation and amortization charges, in the year 2015 depreciation of plant and equipment and property was $2915 Million that increased to $2957 Million in 2016. Similarly, in the year 2015 Amortization charges of intangible assets were $1059 Million that also increased to $1198 Million in 2016 (Kim, 2016). As a result, we found that there is a decrease in profit from continuing operations. The profit was $4114 Million in 2015 and decreased to $3832 Million in 2016. In spite of that, it is observed from the financial performances that the net profit for the year 2015 was $4,231 Million that increased to $5,780 Million in the year 2016. The Annual report of TPG Telecom Ltd. we came to know that the company also follows Straight Line Method for charging depreciation. The financial results states that in the year 2016 the amount of depreciation charged was $102.4 Million and in 2016 it was $136.6 Million. Thus, there was an increase of $34.5 Million in depreciation expenses for the year 2016. As per the financial statement of the company, we found that Profit after tax for the year 2015 was $224.1m that increased to $384.6m in 2016. Moreover, from the statement of Comparative Income and Retained Profits we observed that the profit for the year attributable to the owners were $385.7m and $235.4m for the year 2016 and 2015 respectively and retained Earnings at the end of the year were $710.0m and $432.7m for the year 2016 and 2015 respectively. Hence, from the above analysis we found that though the depreciation expenses were increased but still the company was able to make fair amount of profit from every angle. Analysis and interpretation of inventory valuation methods On analysing the Annual Reports of Telstra Ltd. It has been found that the company for its majority of the inventories, it uses the weighted average cost method for valuation of inventories. The Statement of financial Position of the company shows that the amount of inventories for the year 2015 was $491m that increased to $557m in the year 2016. There was an increase of $66m during the period in terms of inventories. In the inventories, it has been found that there are two parts. One is the Current Inventories/ Construction work in progress and the other is the Non-Current Inventories. The current inventories includes Contract cost, progress billings, Raw materials, Finished goods amount to $491m for the year 2015 and $557m for the year 2016. On the other hand the non-current inventories that is the finished goods recorded at net realisable value amounted to $32m in the year 2015 and $29m in the year 2016. Thus, it can be seen that there is a decrease in Non-current Inventories of the company by $3m during the period. Therefore, the total of Current and Non-Current inventories of the firm stands at $523m for the year 2015 and $586m in the year 2016, the total of inventories being increased by $63m during the period. From the above analysis, it is seen that the company adopts weighted average method for valuation of its inventories and as a result of that the profit is increased as the inventories are increased and vice versa. This is because when inventories are raised the sales are also increased and hence the income from operations and net profit are increased. The consolidated statement of financial position states that the inventories of TPG TELECOM LIMITED as on 31st July 2015 was found to be $5.8m and at 31st July 2016 it was $12.0m. During the period the inventories increased by $6.2m. After reconciling the cash flow from operation activities, it is found that changes in inventories during the year 2016 was $3.9m and that of in 2015 was -$3.1m (negative). However, the net cash flow from operating activities showed positive results that was $381.9m for the year ended 31st July 2015 and was $620.4m at the end of 31st July 2016 therefore increasing by $238.5m during the period. The inventories are valued at the lower of cost and net realisable value i.e. whichever is lower. The company also considers the net realisable value as the estimated selling price in the regular or normal course of business. The net realisable value is the estimated selling price minus estimated selling expenses. The company adopts Fair Value method for the valuation of its inventories (Li, 2015). The annual reports of the company provide that, it is clear company uses fair value method for valuation of inventories. Though the profit of the company have increased but as the company uses fair value method which is based on the market price thus it is expected that the profit will fluctuate with the fluctuation of market price i.e. the profit will not be stable or it will not follow any trends. It will be better in terms of profitability of the firm if it uses cost method for valuation of its inventories. Identification and analysis of intangibles listed within the statement of financial position The financial position statement of the company states that total intangibles of the company for the year 2015 was $9,332m and as on 30th June 2016 was $9,229m. Hence, there is a decrease for assets of the company during the period by $103m. The amortizations of intangible assets were $1,198m and $1,059m for the year ended 30th June 2016 and 30th June 2015 respectively. In the details in the annual report it can be seen that amongst the Intangible assets, the amount of goodwill at the end of 2015 as per the net book value was $1,652m, Software Assets were $4,465m, Licence were $2,042m, Deferred expenditure were $955m and other intangibles were $218m. Similarly these details for the year ended 2016 for goodwill was $1,346m, for Software Assets were $4,660m, for Licence were $1,869m, for deferred expenditure $1,143 and for other intangibles were $211m. Apart from this during the financial year 2016, the transactions that impacted goodwill balances are: Goodwill amounting to $64m was recognised for acquisition of controlled entities and businesses. The company also recognised impairment loss against Goodwill for the Ooyala Holding Group CGU amounting to $246m. Further $137m of Goodwill of the company was disposed of. TPG Telecom Limited The Balance Sheet of TPG Telecom Ltd. is showing the balances of Intangible assets for the year ended 2016 and 2015 are $2,485.2m and $685.6m respectively. Getting into the detailsit came to the knowledge that there is an increase of $1,799.6m in intangible assets during the period which comprises of Goodwill of amount $1,364.9m for the acquisition of iiNet, for acquiring iiNet customer base amounting to $316.8m, $185.0m for other intangible assets. Payment that were made during the year for International Capacity IRU and Spectrum were $20.2m and $15.3m respectively. Besides this other intangible assets amounted to $12.5m. During the year, 2016 net amortization expenses amounted to $115.1m that was $71.8m more than that of previous year. Comparison and Recommendations BASIS Telstra Corporation Ltd. TPG Telecom Ltd. Recommendations Depreciation Policy Follows Straight Line Method for charging Depreciation. The amount of depreciation for the year 2015 was $3,974m and it increased to $4,155m in the year 2016. Follows Straight Line Method for charging Depreciation. The amount of depreciation for the year 2015 was $102.4m and it increased to $136.9m in the year 2016. It is recommended to follow the Written Down Value method for charging depreciation as it is suitable for companies having large number of fixed assets and it is also accepted by Income Tax Act. Inventories Valuation Inventories are valued on Weighted Average method. Inventories are valued on Fair Value method. It is recommended for TPG Telecom Ltd. to adopt cost method over fair value method of inventory valuation to avoid the fluctuations for profit. Intangible Assets. The amount of intangible assets in the year 2015 was $9,332m and it reduced to $9,229m in the year 2016. Intangible assets amounted to $685.6m in 2015 that had increased to $2,485.2m at the end of the year 2016. The reporting of the intangible assets does not have many discrepancies. However, it is recommended that the companies should follow the requirements of AASB 136. Reference Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley Sons. Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis.Journal of Business Finance Accounting,42(5-6), 555-582. Telstra - mobile phones, prepaid phones, broadband, internet, home phones, business phones. (2017).Telstra.com.au. TPG Investor Relations. (2017).Tpg.com.au.