Analysis Of Financial Statements Of Telstra Corporation Limited

Importance of Financial Statements for Business Entities

The financial statements developed by a business entity play a very critical role in making significant decisions relating to its future expansion and growth. It depicts the financial strength of an entity by providing an analysis of its major financial items such as assets, liabilities and equity. The major financial statements that are developed by a business entity are statement of profit and loss, balance sheet and cash flow statement. The business entities around the world are required to develop and disclose their financial statements in their annual reports and the relevant methods used for their preparation as per the international accounting standards. The business entities operating within Australia also need to develop their financial statements as per the international accounting standards. Australian business entities need to adopt the relevant accounting standards of AASB for development and disclosure of their financial information.

In this context, the report has undertaken the analysis of financial statements and the notes section of a public limited company listed on the ASX. The report has provided an analysis of the cash flow statement of the selected company by providing an in-depth understanding of each of its items such as operational, investment and financing activities. Also, it carries out an analysis of the items reported in the income statement and also provides a discussion in relation to the items that are not reported in the profit and loss statement of the company. In addition to this, it also examines and evaluates the tax treatment provided in the latest financial statements of the selected company. The company selected in this context is Telstra Corporations Limited a recognized telecommunication entity in Australia listed on stock exchange.

Telstra Corporation Limited is a recognized leading telecommunication and technology company of Australia that is involved in providing telecommunication services within Australia market. The company is involved in retail mobile, fixed voice and broadband services to its consumers within Australia and at international level. The company by providing technology efficient and content solutions has attained the position of largest and fastest mobile network within the country. It is also actively involved in providing digital communication services to the consumers of Australia. The company besides providing its operations within Australia and also has international presence across 20 countries. The company since its establishment is known to providing innovative communication solutions to customers and improving their quality of life and work with the help of better connection services. The major telecommunication product and services provided by the company includes mobile phones, mobile devices and broadband internet and entertainment products and services. The telecommunication and information services provided by the company are utilized by businesses, governments, communities and individuals within Australia and at international level (Annual report 2017: Telstra Corporation).

About Telstra Corporation Limited

Below table shows the important items that are listed in the cash flow statement of the Telstra Corporation.

(Annual report 2017: Telstra Corporation) and (Annual report 2016: Telstra Corporation)

• Receipts from customers: The cash received from the customers when goods and services are provided to them are shown under the cash flow from the operating activity. From the above table it can be said that there has been increasing trend in the cash receipts from the customers. The possible reason for increase in the cash inflow from the customer can be increase in sales or increase in efficiency level of management to collect the debtors.
• Cash Payment to suppliers and employees: The main outflows of cash are payment made to suppliers and employees. There has been increasing trend in cash payments that clearly indicates increase in cost of goods sold because of increase in net sales from year 2015 to 2017.
• Tax Payment: It can be seen from the above table that Telstra Corporation has been paying taxes on regular basis (Baker and Nofsinger, 2010).

• Cash paid for buying the property, plant and equipment: It has been that Telstra Corporation is regularly making investment in the plant, property and equipment so that it can maintain necessary assets required for increasing the sales revenue. There has been increase in cash paid for buying the property, plant and equipments.
• Cash received from the sale of plant, property and equipment: Management at Telstra Corporation is continuously involved in retiring its main assets after they have become obsolete. It helps the Telstra to make enough cash for making investment in new plant, property and equipments.
• Cash received from the sale of business or share in any controlled entity: It has seen from the above table that Telstra has sold its major business unit in year 2016 that has raised its cash to $1340 million.

• Cash receipts from the borrowings from the financial institutions: Telstra Corporation uses debt as the major source of finance to fund their assets. Cash received from the borrowing are regularly increasing that give an indication that Telstra is planning to make debt source of capital as the major source of finance and make the Telstra a leverage firm.
• Cash payment for borrowing: As the debt capital rise through borrowing the fund from the banks it also creates a responsibility to pay the borrowing on time. In this context, it can be seen that Telstra has been paying the borrowing funds to banks on time and also paying the finance cost together with it.
• Dividend payment: It has been seen that Telstra has been paying same level of dividend to their shareholder with very less increase in total dividend (Baker and Nofsinger, 2010).

(Annual report 2017: Telstra Corporation) and (Annual report 2016: Telstra Corporation)

• Cash flow from operating activity: Net cash flow operating activity is decreasing despite of increase in sales receipt. It clearly signifies that Telstra has failed to maintain the proper flow from its operating activity. There has been constantly decrease in cash inflow from the operating activity and possible reasons for such decrease are decrease in sales revenue, lower efficiency level of management to collect the cash from the debtors and increase in cash expenses. The decrease in operating cash inflow affects the company performance as there is lower availability of cash and cash equivalents and management has take conservative decisions regarding investment in assets and in prospective projects.
• Cash outflow from the investing activity: This activity provides information on how cash has been used to buy the assets and amount used for investment purpose. It has been seen that Telstra focus on investing huge sum of money in new assets.
• Cash used in financing activity: This activity provides the information on how cash has been utilized and generated from the sources of finance. It also provides information on cash outflow to pay the dividends and interest cost (Arnold, 2013).

Overall cash position of Telstra Corporation in year 2017 was worst as compare to cash position in year 2016. In year 2016 there was increase of $ 2149 million cash and cash equivalents whereas in year 2017 it has decreased to $2608 million, reflecting the poor management of cash by management of Telstra.

(Annual report 2017: Telstra Corporation) and (Annual report 2016: Telstra Corporation)

Other comprehensive income statement contains all those changes that are not permitted to be included in the profit and loss account. The two major categories of items that cannot be included in the profit and loss and has to be presented in the income statement are as follows:

• Items that will not be reclassified to the income statement: This section contains all those items that cannot be treated as items of income statement but has significant impact on the profit and loss of the company. Some of the important items that are shown under this heading are Changes in revaluation surplus, Gains and losses from investments in equity instruments (Fair value) and Actuarial gains and losses.
• Items that may be subsequently reclassified to the income statement: The financial items that can be shown in the profit and loss statement but does not belong for the particular period has been shown in other comprehensive income statement. Some of the examples of items presented in this section are foreign exchange gains and losses and gains and losses on hedging instruments presented as cash flow hedge (Brealey, Myers and Marcus, 2007).

The main reason why above items are shown in other comprehensive income statement is that above items does not impact the current accounting profit but has significant impact on net profit in any subsequent year and there are some items that does not belong to profit and loss statement but impact the profit attributable to the equity shareholders.

Telstra Corporation has reported corporate income tax of $1773 million dollar for year 2017 and $1768 million in year 2016. Income tax expenses has been reported in income statement of the company and this amount represent the accounting tax expenses adjustable to changes in tax expenses due to prior year items, tax on associates, impact of non deductible items and any change in tax rate (Annual report 2017: Telstra Corporation).

On the basis of information presented in income statement and notes to account it can be said that tax reported in income statement and tax calculated at flat rate of 30% is not similar. The accounting tax expense is also called as notional tax expenses and it is adjustable to many financial changes such as tax rate impact of other countries on profit of the company, any changes due to tax of prior year and various non taxable and non deductible items (Deegan,  2013).

Following items have been reported as deferred tax assets and deferred tax liabilities in the statement of financial position:

The difference in book profit and taxable profits give rise to timing differences and it can be temporary or permanent in nature. The temporary timing differences are capable for reversing in any subsequent year while permanent differences cannot be reversed. The timing difference of treatment of expenses or income as per book and tax provisions give rise to deferred tax assets and deferred tax liabilities. Deferred taxes assets refer to those assets are created to reduce the future tax liabilities. It means company has to pay more taxes in current year and can avail future tax credits on them. Deferred tax liabilities refer to those tax liabilities that are due in current year but they are not paid or subsequent paid after the due date. This the reason why deferred tax assets are recognised in balance sheet as there is reasonable confirmation that company will realize these assets in subsequent year. While deferred tax liabilities are due to be paid in subsequent year that create obligation on management to recognize as liabilities in balance sheet (Brigham and Houston, 2012).

The current tax payable reported by the Telstra in the statement of financial position was $161 million for year 2017 and $176 million for year 2016. The amount of tax payable and tax expense is not same because current tax payable represent the tax due to tax authorities while tax expense shows the balance of tax calculated as per accounting policies and it also includes tax payable (Annual report 2017: Telstra Corporation).

No, the income tax expenses shown in income statement is not same as income tax paid reported in the cash flow statement because tax paid shown in cash flow statement represent that cash outflow that has been actually paid to tax authorities and it can be related to previous year or current year as well (Firer, 2012).

It found very confusing the treatment of deferred tax assets and deferred tax liabilities by Telstra and also it is interesting to that tax treatment done in normal accounting situation is totally different from tax treatment as per tax provisions (Annual report 2017: Telstra Corporation).

Conclusion

Understanding the financial statement of the company is very difficult task and it requires high level of knowledge to extract the exact information required. In this report financial information of Telstra has been examined from various points.

References

Annual Report 2016. Telstra Corporation. [Online]. Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-Annual-Report.pdf  [Accessed on: 23 May, 2018].

Annual report 2017. Telstra Corporation. [Online]. Available at: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-2017.PDF [Accessed on: 23 May, 2018].

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and Markets. John Wiley & Sons.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw Hill, New York.

Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition. Berkshire.McGraw-Hill Companies, Inc.