Depreciation Its Impact On Profitability â€Myassignmenthelp.Com

Question: Disuses About The Depreciation Its Impact On Profitability? Answer: Introducation Telstra Ltd - The Company uses straight-line basis method of depreciation taking into consideration the estimated useful life of the fixed assets. The fixed assets that are depreciated using this method include property, plant, equipment, buildings and leasehold property but exclude freehold land (Telstra, 2016). The companys policy is that the company starts charging depreciation only when the assets are put to use in the company. The estimated useful life and the residual value of the assets are estimated by the management using judgment basis and the review is done every year for the same. Further, the assessment is also done in comparison with other companies in the industry. The effect of this method of depreciation on profitability remains the same every year as the same Accountt of depreciation is reduced and then the net profit arrives (Brealey et. al, 2011). Hence, it can be described as a consistent method that helps in arriving at the profit with ease. But as the depreciation is a non-cash expense, profits reduce but not the cash flows. TPG Telecom Ltd.- This company also uses the straight line method of depreciation and uses the estimated useful lives of the assets to calculate depreciation amount. The estimated useful life is estimated by the management according to the trend in the industry and as per own judgments (TPG Telecom Ltd, 2016). The review is done in this company also on an annual basis for the estimated useful lives. But, the estimated useful lives estimated by this company are totally different from that estimated by Telstra Ltd. The effect on profitability is the same every year as the amount of depreciation expense is the same for every year (Davies Crawford, 2012). Inventory Methods and impact on Profitability. Telstra Ltd.- In this company, the valuation of Inventory is done at lower of the net realizable value or the cost price of the inventory (Telstra, 2016). The company finds out the net realizable value of the inventory by subtracting the total cost of inventory (including purchase, distribution cost, etc from the estimated selling price which may be determined by industry trends (Porter Norton, 2014). The company also uses weighted average price method to find the actual cost of inventories. TPG Telecom Ltd.- The inventory valuation method used by TPG Telecom Ltd. is the same as that used by Telstra Ltd. This company also values inventory at cost or net realizable value whichever is lower. The inventory valuation needs to adhere to the policies of the company as the profit figure is highly affected by the policies adopted for the inventory valuation (TPG Telecom Ltd, 2016). The impact of inventory valuation method on profitability is that if the inventory is overvalued, it will result in an increase in profits and if the inventory is undervalued, it will result in a reduction of profits. Identification Analysis of Intangibles of the company. Telstra Ltd.- The company has the following intangible assets as per the financial statements of the company : Goodwill- The valuation of goodwill is done at cost and the cost is the excess of purchase consideration paid over the total value of net assets purchased (Telstra, 2016). Other intangible assets acquired by the company are valued at fair value by the company which is- Software Assets Licenses Deferred Expenditure Other Intangibles TPG Telecom Ltd.- The company has the following intangible assets as per the financial statements : Non- Amortizing Intangible Asset- Goodwill it is valued at cost less any impairment losses Brands- Relief from Royalty Method is used by the company for valuing and recognizing the value of brands Amortizing Intangible Assets- Acquired customer bases- when a company is acquired, the customer relationships and the contracts with those customers come along with the acquisition. Such relationship is valued using the expected future economic benefits of such customers (Brigham Daves, 2012). This indicates that the acquisition carries the specific benefits too. Indefeasible rights of use of capacity- these are recognized at fair value of the acquisition. Other Intangibles- these are usually valued at cost less any impairment losses and accumulated amortization. Comparative summary of policies (covering points 1 to 3) adopted by both companies TPG Telecom Ltd.- The main accounting policies of this company are: Basis of consolidation- In case of business combinations, the purchase consideration is valued at fair value of the assets and any sum paid in excess of the fair value of the net assets acquired is treated as a purchase of goodwill which is then shown as an intangible asset of the company (Choi Meek, 2011). In the case of subsidiaries, the financial statements of subsidiaries are included in consolidated financial statements and the accounting policies for the subsidiaries are changed to align them with the policies of the total group from time to time (TPG Telecom Ltd, 2016). While preparing the consolidated financial statements, the intra group transactions and balances are ignored. Foreign Currency Transactions- The transactions that are in foreign currency are converted into the exchange rate at the time of preparation of financial statements at the rate prevalent on that date. The assets and liabilities are also converted at the current exchange rate and any foreign exchange differences that arise on conversion are shown in the income statement. Other non monetary assets and liabilities are converted from foreign currency to Australian Dollars using the then ruling rate of exchange. Foreign Operations The incomes and the expenses of the foreign operations are converted to Australian dollars at the rate which was there at the time of those particular transactions. The assets and liabilities involved in the foreign operations are converted to Australian Dollars at the exchange rate prevalent on the reporting date (Subramanyam Wild, 2014). Any foreign currency conversion difference is then recognized in the income statement and shown in equity. The comparative points with regard to the above-mentioned points in the case of Telstra Ltd. are as under: Foreign Currency Transactions- The transactions in foreign currency are usually converted at the spot exchange rate of the transaction date. The receivables and payables are converted at the exchange rate that is ruling on the reporting date (Telstra, 2016). The same treatment is witnessed in the case of TPG Telecom Ltd where the foreign currency gets converted. Foreign Operations Here also there are many similarities when we talk about the foreign operations. The assets and liabilities including goodwill are converted to Australian dollars at the exchange rate on the reporting date. The Equity items are converted at the rate which was prevalent on the initial investment dates (Horngren, 2013). The main point of comparison here is that the incomes and expenses shown in Income Statement are converted into Australian Dollars at the average rate mostly and other wise on the transaction date rate (Telstra, 2016). Basis of Consolidation In case of Telstra Ltd. also, similar policies are adopted for consolidating the accounts of all subsidiaries with the parent company. As per Telstra (2016), the purchase consideration is valued at fair value of the assets and any sum paid in excess of the fair value of the net assets acquired is treated as purchase of goodwill which is then shown as intangible asset of the company. The subsidiaries are the controlled entities where the parent company has the right to the activities of the controlled entities. Hence, the parent company has the utmost control over the activities of the subsidiary (Graham Smart, 2012). In the case of subsidiaries, the financial statements of subsidiaries are included in consolidated financial statements and the accounting policies for the subsidiaries are usually consistent but are changed to align them with the policies of the total group from time to time (Albrecht et. al, 2011). The functioning of intra group transactions is also similar here and the intra group transactions and balances are ignored while consolidation of accounts. Recommendation The companies operate in the field of technology and going by the overall evaluation it can be seen that there appear certain differences between the two, however; the line of action is the same considering the operations. As per the evaluation and comparison did above, on the three policies that both the companies have similar kind of accounting policies and this is due to the reason that both of them operate in the same line of activity and try to match the policies of the industry as a whole. Both the companies follow the policies as per their business and the manner of operation. This is in tune with the industry standards. However, the management from time to time can update the policies to have a better grasp of the environment and the practices. Hence, the regulatory framework is keenly eyed by both the companies and the same has been vividly described in the annual report. References Albrecht, W, Stice, E. Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. Brealey, R, Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin. Brigham, E. Daves, P 2012, Intermediate Financial Management , USA: Cengage Choi, R.D. Meek, G.K 2011, International accounting, Pearson . Davies, T. Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Graham, J. Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Porter, G Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learning Subramanyam, K Wild, J 2014, Financial Statement Analysis, McGraw Hill Telstra 2016, Telstra 2016 Annual Report and accounts, viewed 24 August 2017 https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-Annual-Report.pdf TPG Telecom Ltd 2016, TPG Telecom Ltd Annual report and accounts, viewed 24 August 2017 https://www.tpg.com.au/about/pdfs/FY16%20Annual%20Report.pdf