Analysis And Comparison Of Annual Reports Of TPG Telecom Limited And Telstra Ltd

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Analysis and Compare the Annual report of TPG Telecom Limited and Telstra Ltd.

TPG Telecom Limited & Telstra Ltd

Telstra corporation is one of the largest telecom and media companies in Australia and offers a variety of services to over 30 million customers. It consists of over 18 million mobile connections, over 6.8mn fixed telephony and over 3 and half a million of fixed broadband customers. It employs little over 14,500 employees and has reached a revenue of over $27 billion in FY 2016 and a net operating profit of over $5.8 billion for the same year. It operates through a number of subsidiary companies newly Foxtel, Telstra media, Pac net and Ooyala etc. Despite facing stiff competition from emerging company named Optus in the early part of 1990s Telstra continues to be the largest telecom operator in Australia and continues to expand into new services (Weygandt, 2014).

TPG Telecom Limited is one of the emerging telecom and internet service provider in Australia and New Zealand. It is recognized as the second largest ISP in Australia. The company is actively involved in areas such as mobile telephony, ADSL based internet service and fixed lined telecom and broadband services. The TPG Telecom Limited was formed in 2008 through a merger between the Total Peripherals Group and SP Tele media in 2008. As of 2016 the company undertakes networking works along with OEM and accounting software services as well for its clients. It employs a little over 1450 employees and revenue reached approx. $971 million in 2016 and operating profit reached a little over $246 million. It has a no of subsidiaries including the AAPT limited, Agile communications, west net and Net space etc (Wood, 2005).

Telstra Corporation Limited

Telstra company uses the Straight-line method to depreciate assets of long term nature such as PPE and also the building and leasehold property. The amount of depreciation is calculated by using the assets useful life. The depreciation is estimated form the time the assets are installed and ready to use.

Buildings of the company are having an estimated life of 4 to 48 years  in 2016 and the other PPE had an useful life term of 4 to 20 years. Communication long term assets of the company are estimated to have useful life of 2 to 57 years and depreciated over the same.

Assets which are taken under the regulations of financial lease gets capitalized in the beginning of the terms of lease ( either at fair value of the asset or the PV of the lease payments which is lower) and is then depreciated under the benefits of the Straight-line method (Hoggett, 2011).

Telstra Corporation Limited

TPG Telecom Limited

TPG Limited company uses the Straight-line method to depreciate assets of long term nature such as PPE and also the building and leasehold property. The amount of depreciation is calculated by using the assets useful life. The depreciation is estimated form the time the assets are installed and ready to use.

Buildings of the company are having an estimated life of 40 years in 2016 and Leasehold improvements had a useful life term of 8 years. Network infrastructure of the company are estimated to have useful life of 3-25 years and depreciated over the same period. For the purpose of the estimation of depreciation the residual values of all the long term depreciable assets are reassessed at least once each year.

The group’s overall PPE increased by $302.3m in 2016 when compared to 2015. There was an increase of $178.4 million of long term assets which was there because of the company’s acquisition of the iiNet and capital expenditures were incurred to the tune of $260.8m ad form the same the company made a depreciation adjustment of $136.9m in the last fiscal period (Annual Report TPG, 2016).

The benefits of the Straight-line method is that the company is able to assess the amount of deprivation on a continuous basis and the provides consistency to the income statement. Unlike other methods there is less fluctuation in the amount and the depreciation is spread equally over the life term. this makes it possible for the comparison of profitability over a long term a possibility and reality. The Declining balance method is avoided by the two companies because under the Declining balance method the reported income would be lower in the early years of reporting as opposed to the straight-line method and this would not be considered a fir and justifiable practice by most board of directors.

Telstra Corporation Limited

Inventories were reported in the financial statements at $586mn in 2016 and $ 523m in 2015.

The finished goods maintained by the company includes the goods which were marked as available for sale and other materials and spare parts kept for use in the construction and maintenance of the telecom equipment’s in the next 12 months period. The company also has been using the practice of maintaining non-current inventories which is estimated to be sued in the maintenance and repair of the telecom related long term assets beyond a period of 1 year. In estimating the net realizable value, the management of the company has applied the judgement of the relevant managerial personnel in the determination of the NRV by using relevant market assumptions and extending he assumptions into the foreseeable future. The current and existing and future expected technological state has also been assumed and used for this purpose. Other inventory assets have been presented using the weighted average method of inventory valuation (Eisen, 2013).

TPG Telecom Limited

The details of the inventory maintained by the company is as follows:

	30.6.2016	30.6.2015
	In $ million	In $ million
Construction work in progress:
Contract costs incurred	510	655
Progress billings	(391)	(561)
	119	94
Raw material stocks at cost (current)	113	86
Finished goods (at cost)	228	234
Finished goods recorded at the net realizable value	97	77
	438	397
	557	491
Non-current:
Finished goods recorded at the net realizable value	29	32
	586	523

The inventories maintained by the Telstra limited is recognized in the books at the lower of the cost or the net realizable value (less probable selling costs for the same). The costs however are allocated through the Weighted average cost basis.

On the other hand, the construction contract related inventories are the work in progress items which are actually recognized at the gross unbilled amounts which would be estimated be collected form the clients later. The gross unbilled amounts are the costs incurred and recognized and the same includes the profit margins and after subtracting the progress billings made so far and any foreseeable loss if any. Both variable expenses any fixed expenses are included in the cost for estimation of the gross unbilled amounts.

TPG Telecom Limited

The Company reported Inventories worth $12m in 2016. However, being primarily a services company, the company has not kept too much inventory in its books and minimized the same. The inventory of the TPG Telecom Limited is recognized in the books at the lower of the cost or the net realizable value (less probable selling costs for the same) (Cottrell, 2012).

Intangible assets are those assets which are non-physical in nature. These assets can be either created in house or they can be acquired through a commercial transaction. For example, brand names can be recognized in the books of a company when it pays for acquiring a rival company or purchases a division of another company. Intangible assets can also be categorized as either definitive in nature or indefinite. For example, the brand name of a company like Telstra would be considered to be the indefinite intangible because it would be there in use as long as the company remains a going concern. However, patents of the company can have a definite life depending upon the life term of the patent after which the same can’t be extended. The in-house developed intangible assets can’t be amortized by the company concerned. However intangible assets acquitted through purchases etc. would be allowed to be amortized (BAKER & CORTRELL, 2011).

Telstra Corporation Limited

Telstra Limited has 5 different types of intangible assets. Under the indefinite useful life term the company had 1 assets such as goodwill whereas under the definite life term the company has four  different intangible assets such as:

1. Software assets
2. Licenses
3. Deferred Expenses
4. Other intangible assets

The goodwill recognized by the company is recognized in the financial statements at cost less the relevant accumulated impairment.

Analysis and Explanation of the Depreciation Policy

The details of the goodwill and other intangible assets reported by the Telstra company is as shown in the table below:

	Goodwill	Software assets	Licenses	Def Expenditures	Other Intangibles	Total
Book value at 1 July	1652	4465	2042	955	218	9332
Additions during the year 2016	0	1194	7	1056	1	2258
acquisition of business	3	1	0	0	4	8
acquisition of controlled entities	61	5	0	0	19	85
impairment losses from continuing operations	-246	-4	0	0	0	-250
amortization expense from continuing operations	0	-1003	-168	-868	-27	-2006
amortization expense from discontinued operations	0	-1	0	0	0	-1
disposal through sale of controlled entities	-137	-2	0	0	-7	-147
net foreign currency exchange difference	13	3	0	0	3	19
transfers	0	2	-12	0	0	-10
Net book value at 30 June 2016	1346	4660	1869	1143	211	9229
Intangibles at cost	1592	10431	2436	2186	336	16981
Accumulated amortization and impairment	-246	-5771	-567	-1043	-125	-7752

The Telstra limited has gone on to recognize an amount of $61 million for goodwill on account of acquisition of the same and which includes $32 million related to acquisition of Readify Limited and $29 million for acquisition of Sliverlining consulting group. During the last year the company has also proceeded to amortize $246 million worth goodwill  related to Ooyola holdings group on account of impairment. Total amount of goodwill disposed of includes$130mn related to the Autohome Inc (Annual Report (Telstra), 2016).

TPG Telecom Limited

TPG has 5 different types of intangible assets. Under the indefinite useful life term the company had 2 assets such as goodwill and brand name whereas under the definite life term the company has three different intangible assets such as:

1. Acquired customer bases
2. Indefeasible rights of use of capacity
3. Other intangible assets

The goodwill recognized by the company is recognized in the financial statements at cost less the relevant accumulated impairment.

Brand names of the company were recognized by the company as the subsidiary company was acquired. The company valued the amount of the brand names under the Relief form Royalty method. The intangible assets of the company increased in 2016 by an amount of $1,799.6m and the same included an amount of $1,364.9m and an amount of ($316.8m on account of acquired customer base form iiNet and $185m of other intangible assets and Spectrum costs of $20.2 million (Annual Report TPG, 2016).

The detailed intangibles of TPG is shown below: (all values in $ million)

	goodwill	brands	ACB	IRU of capacity	Other intangibles	Total
Balance as of Aug 1,2015	546.1	20.1	247.9	106.4	24	944.5
additions	0	0	0	20.2	27.8	48
Acquisition through Business combinations	1364.9	70.5	316.8	52.3	62.2	1866.7
	1911	90.6	564.7	178.9	114	2859.2
Amortization and impairments
balance as of Aug 1,2015	0	0	219.1	33.9	5.9	258.9
Amortization for 2016	0	0	74.5	10.6	30	115.1
Balance of July 31, 2016	0	0	293.6	44.5	35.9	374
Balance of July 31, 2016	1911	90.6	271.1	134.4	78.1	2485.2

Acquired customer bases or the ACB are recognized in the books when the company acquired the subsidiary and estimated the value of the total customer bases on the basis of their future economic benefits that is expected to accrue to the company and the same has been calculated on the basis of the discounted cash flow techniques and shown in the books as definite intangible assets (Atrill & Eddie, 2012).

Indefeasible rights of use or IRUs on the basis of the present value of the estimated future cash flows which is estimated to be payable for using the same rights. These assets are used with their fair value at their respective acquisition dates.

Other intangible assets of the TPG includes software’s being used, costs of subscriber acquisition costs, payments made to purchase spectrum, many other licenses being held by the company another expenses incurred to develop income generating services and products. These assets ae shown in the books at cost of acquisition less the amount of amortization etc. the software’s of the company being used is however shown at the amortized replacement value.

The intangible assets of the TPG limited has bene amortized in 2016 by an estimated $115.1million of which the last amortization has been with respect to the other intangible assets. The amortization is transferred to the statement of income under the SLM method (Annual Report TPG, 2016).

Both Telstra and TPG have detailed notes to the financial statements but the depreciation and amortization of the Telstra group is not explained and exhibited in detail. However, the same for TPG has been exhibited and the long term and intangible assets have been explained and exhibited well for last two fiscal periods. Telstra being a larger company has more intangible assets. But the TPG groups failed to explain the details of the inventory recognized in its books since the amount of the inventory is very small – TPG being a service provider. However, the exhibits in the Telstra financial statements has been very detailed as to the inventory recognized in the books (Atrill & Eddie, 2012).

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Annual Report TPG. (2016). Annual Report 2016(TPG). TPG Groups limited.

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