Financial Reporting Disclosures in the Australian Corporate Sector Essay Example

Financial Reporting Disclosures in the Australian Corporate Sector


1Executive Summary


2 the Conceptual Framework for Financial ReportingThe objective of purpose financial reporting and the qualitative characteristics of useful financial information as per

3The disclosure requirements for PPE as per AASB 116

5of useful financial informationone of the enhancing qualitative characteristics and at least fundamental The disclosures on PPE satisfy the

6of general purpose financial reporting and, as a conclusion, recommend actions for improvementobjective The disclosures on PPE alignment with the


Executive Summary

This report on objective and purpose financial reporting, the qualitative characteristics of useful financial information and Corporate Reporting in Australia looks at Australian Accounting Standards Board Standard 116 Property, Plant and equipment where historical cost principle has been applied. Telstra Corporation ltd with assets are recorded at cost of $117,13 less accumulated depreciation of $ 40,146 million in the 2013 which is thus providing an excellent case study for Application of AASB 116 and application of Historical cost principle.


Property, plant and equipment valuation is a cardinal concept of accounting everywhere and as per Accounting Standard AASB 116 “The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably’and as per the standard circumstances where these criteria may be met is defined. In the valuation of PPE, the first issue is the stage of cost of the asset. The second problem lies in determining the correct value of the asset, its estimated life, future economical benefits, and the rate of attrition of the asset. For recognizing the asset generated, the standard lays down certain conditions.

Telstra Corporation which is the largest telecommunications service provider in Australia has been chosen to examine application of this concept. Their PPE is recorded based on Historical cost convention in the reporting period that ended on 30 June 2013 and were $60984million with accumulated depreciation of 40,658million (Annual report, 2013).

The objective of purpose financial reporting and the qualitative characteristics of useful financial information as per the Conceptual Framework for Financial Reporting

Business activities create a demand for accounting that intensifies when ownership and control of a company diverges, as in larger corporations. Financial accounting allows capital suppliers to monitor managers` stewardship of the funds invested in, or loaned to, the company. This stewardship role shapes many accounting concepts and is an important objective of financial accounting. However, the focus of financial accounting is slowly shifting from monitoring and evaluating managerial performance toward providing information for business decisions, especially as related to investing. This information for decision making role of financial accounting now dominates the AASB`s agenda, and affects financial accounting standards as well as financial analysis.

The shift in accounting to a more practical information perspective emphasizes relevant information for business decisions. This information perspective is at the heart of modern accounting and is reflected in the AASB`s statement of financial accounting concepts No1: financial reporting should provide information that is useful to present and potential investors and creditors and other users… since investors` and creditors` cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing and uncertainty to prospective net cash inflows. These three factors magnitude, timing, and uncertainty are the crucial ingredients for determining company value.

This shift in focus increases the emphasis of accounting standards on predictability and decision usefulness rather than on accountability and performance measurement. This is reflected in AASB`S conceptual framework. The idea of providing information to users and allowing them to assess its impact, moves standard setting away from measuring the effects of transaction on financial statements to reporting useful information in notes.

The usefulness financial statements depend on the qualities of accounting information, the qualitative characteristics of useful financial information. ‘Relevance and reliability are qualities making accounting information useful for decisions. Information can directly help a decision maker predict future outcomes’. Such information is relevant because it has predictive value. Accounting information often demands a trade-off between relevance and reliability.

The disclosure requirements for PPE as per AASB 116

The AASB 116 itself explicitly restricts itself to the PPE, valuation and recording. PPE as defined by the standard include tangible assets that ‘are held for more than one period and used in the production’. Looking at Note 2 of the Financial Statements of Telstra Corporation ltd (2013) reveals in detail the summary significant policies, estimates, assumption and Judgments used in the preparation of accounts. Part 2.10 of the Note 2 highlights accounting policies relating to Property, plant and equipment. According this note all assets have recorded according to the requirements of AASB 116 which is cost ‘less accumulated depreciation and accumulated impairment losses’ (2013). AASB 116 standard that demands that all costs associated with asset must be considered when recording the historical value of the asset purchased. This is complied with as the company capitalizes all ‘Costs incurred whilst commissioning new assets’.

In the case of Property, Plant and Equipment are record at cost reduced by the depreciation. The usable service lives for different categories of assets are used i.e. buildings are depreciated over a 40 year service life, whilst other assets such as machinery, equipment, vehicles etc range from 3 to 20 years of usable service lives. Any expenditure that does not improve service life are expensed as they occur otherwise changes to service life are evaluated and adjusted accordingly for the said assets. Their foremost asset is land recorded at cost of $52million and have not been depreciated while have historical cost of $ 1166million with accumulated depreciation and impairment of $ 586 million. This is compliance with AASB 116 section 75 which requires the ‘disclosure of the methods adopted and the estimated useful lives’. The standard requires that the information must provide a fair value of the PPE in order to ensure that there is no misrepresentation involved.

An entity is required to disclose the details regarding its PPE. By this way the investors will be informed about the different risk factors involved in the operations. It is also required that “probable that future economic benefits associated with the item will flow to the entity “. In the case of acquisition of one asset that has no economic future should be treated with, in the past it was not reflected in the financial statement, in the same way for all entities. Now it is required that the total amount paid for acquisition must be accounted and the same must be reflected in the financial statement.

The AASB 116 does not permit capitalization of expenses unless such costs fall within a specific rule under the standards. It requires recognition of cost as incurred and disallows the recognition of internally generated intangible assets.

The disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information

Looking at the financial statements one will noted that AASB 116 has been complied with by looking all asset at cost less depreciation and impairment cost. This is the application of the historical cost principle which implies that when valuing property, plant, and equipment a company initially records an asset at its cost value. This is clearly applied by Telstra Corporation ltd has recorded all costs associated with assets including expenses that were necessary to bring the asset to a usable or serviceable condition and location as mention in financial statements. All costs of acquisition and preparation of the assets are ‘capitalized’ to obtain cost of asset.

The application of this principle in using AASB 116 is shown in Note 13 where the cost is recorded as $60,984million. This presentation shows full disclosure concept of the value of the assets of the company using the historical cost principle. The full (or adequate) disclosure principle which requires that information in financial statements must be sufficiently complete to avoid misleading users of reports. This suggests revealing all information that may be useful or support in decision making. Historical cost states that the acquisition cost is the proper amount at which transactions involving assets should be recorded in the accounting system.

Accounting for interest costs during construction of plant assets is one area of special concern. Interest costs arise when funds are unavailable for use in operations while an asset is both being constructed and not yet productively utilized. Companies capitalize these costs and allocate them to future operations. Despite this seemingly clear directive there is a variety of practices regarding cost capitalization when a company constructs a plant asset. While most direct costs are included, allocation of variable overhead and, especially, fixed overhead costs is problematic. In particular, when idle capacity is used to construct operating assets, inclusion of fixed overhead is debatable. However, if production is forgone to construct assets, these are grounds for capitalizing a proportionate share of this overhead.

Another concern about the application historical cost in the valuation of Telstra Corporation ltd property, plant, and equipment is whether it reflects the dollar amount. Accumulation of asset costs acquired over different periods is an aggregation of measuring units with differing purchasing power. Since depreciation, the allocation of capitalized costs over the asset`s benefit period, uses these accumulated costs, this distortion affects income.

All property, plant, and equipment assets are presumably part of continuing operations. If any of these assets are temporarily idle, companies must disclose this in their notes. Such disclosure might explain excess costs or lower than expected profit margins, both of which can impact our analysis. Should assets be idle for long periods of time without definite prospects of use, companies must exclude them from the property, plant, and equipment account pending their reactivation, sale or disposition. These idle assets represent investment with little or no return, but often still require upkeep and maintenance.

About the impact of these differing possibilities are not always adequate. Adequate disclosures include information on depreciation charges under the alternative allocations. If a company discloses deferred taxes arising from accelerated depreciation for tax, our analysis can approximate the added depreciation due to acceleration by dividing the deferred tax amount by the current tax rate.

In addition to preparing financial statements that is compliance with AASB 116 adherence to the principle of historical cost paramount. According to AASB 116 which is recognition standard that demands that all costs must assess and recorded at the historical value of the asset purchased. Therefore in this regard, the costs involved in the acquisition of the assets including their expenses have been fully disclosed.

The disclosures on PPE alignment with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement

Telstra has valued property, plant and equipment emphasizing objectivity of historical cost. They are compliance with AASB 116 and we do not have clear recognition of user needs in valuing these assets. Instead, preparers often argue that balance sheets do not purport to reflect market values. Unfortunately, historical costs are not especially relevant in assessing replacement values or in determining future need for operating assets. Also, they are not comparable across different companies` reports and are not particularly useful in measuring opportunity costs of disposal or in assessing alternative uses of funds.

Historical costs of plant assets reflect a company’s capacity to provide services. It is sometimes argued that the value of assets derives from their ability to earn a return and, consequently, the value rests with their impact on the income statement. While true in many ways, this argument is not the only means to evaluating an asset’s value. Asset value also is tied to its productive capacity and the skill of management. Indeed, one of management’s primary tasks is to effectively and efficiently manage these operating assets.

In conclusion, we looked at AASB Standard 116 Revenue where only three types of revenue are recognized – from sale of goods, from rendering of services and from usage of entity assets in lieu of interest, royalties or dividends.

There is some distinction between the Framework and Standard 116 as the framework does no distinguish between revenues and gains whilst Standard 118 does. Telstra Corporation ltd adheres to Standard 116 for the most part and discloses cost of various assets including expenses of making the operate .


Australian Accounting Standards Board, 2009. Framework for the Preparation and Presentation of Financial Statements. [Online] Available at: < >

Australian Accounting Standards Board, 2009. AASB Standard 116 Property, Plant and Equipment. [Online] Available at: < >

Telstra, 2013. Annual Report. [Online] Available at: <>