Issues in contemporay accounting

Research Assignment by Farah, Siddharth & Rinkle

BAO5535 Issues In Contemporary Accounting

REPORT: Group Research Assignment

SEMESTER 1- 2015

Due date of Submission: 07/05/2015

Group Members:

Siddharth Pitolwala 4385069

Farah Nuzhat 4510144

Rinkle Gogna 4371169


INTRODUCTION

Measurement:

Measurement is a process involving computing the monetary values of elements in the

financial statements which is to be acknowledged and carried in the balance sheet and income

statement (IASB/AASB Framework, 2010, Para 99-100) for identifying, comparing,

assessing and classifying of accounting data.

However there is no exact depiction assessed from accounting measurement. It is entirely

based on approximation, judgements and probability.

The bases of measurements are historical costs, current cost, fair value, realisable value and

value in use.

Fair Value Measurement:

According to IFRS 13, the fair value measurement refers to making an estimation of the price

of an orderly transaction to sell an asset or to transfer a liability between market participants

on measurement date under current market conditions, whether liabilities, observable market

transaction or market information is available or not. From perspective of buyers and sellers

who are independent and have knowledge about asset and liability, the fair value represents

the estimation about future cash outflows and inflows.

It’s a market based measurement rather than entity based measurement.

In order to measure Fair Value an entity needs to determine the particular asset or liability,

valuation premise for the non-financial assets, the principle or the most advantageous market

and lastly the proper valuation technique suited for the measurement.

The accurate valuation techniques used by an entity in particular circumstances for which

adequate data are available for measuring fair value by maximising the use of observable

inputs and minimising the use of unobservable inputs [IFRS 13:61, IFRS 13:67].

The IFRS 13 acknowledges the three widely used valuation techniques. They are market

approach, cost approach and income approach.


Depending on the circumstances, an entity might require to use single or multiple valuation

techniques [IFRS 13:63].

IFRS established fair value hierarchy in order to increase Comparability and uniformity

which categorizes the inputs into three levels.

Level 1 Inputs are the unadjusted quoted prices in active markets in which frequent and

substantial volume of transactions occur for identical assets and liabilities. Level 2 inputs are

input other than quoted prices included in level 1 that are observable for the asset or liability,

either directly or indirectly. Lastly, level 3 inputs are the unobservable inputs.

Historical Cost:

Historical cost accounting implies that the asset in the balance sheet must be valued based on

their actual price at which they were purchased. It is much more convenient for an entity to

find out the original price paid for an asset. For an example, suppose a land had been

purchased for $90,000 in 1995. If the owner of the land did not change, then according to

historical cost accounting, the value of the land would be recorded in the balance sheet as

$90,000, although the expected market values have been increased tremendously.

For assessing future economic benefits of an entity fair value measurement is appropriate as it

provides pertinent, coherent, comparable and reliable measurement, whereas historical cost is

unable to measure exact value for augmented asset. Fair value is also capable of providing

expected value of risk-adjusted future cash inflow or outflow as it takes into account the

current cost, replacement cost and inflation adjusted cost.

LITERATURE REVIEW

There are various research papers on Positive Accounting Theory and manager’s incentives

for accounting policy choice. Management’s ultimate objective is to achieve maximum

profits. They try to attain this objective by forming various strategies, adopting innovative

techniques, introducing new products and also by adopting an accounting method they can

benefit the most from. As it is management’s discretion to choose either Fair Value or

Historical Cost Method so they choose the one that is more advantageous to them in terms of

decreasing or increasing their income in the books (Gupta (1995)).


Previous studies have looked into the dominance of cost method over the fair value method in

fixed asset valuation on reliability dimension (Christensen and Nikolaev, 2009; Diehl, 2009).

However some not very old studies argued fair value method’s superiority for valuing

tangible assets (Hermann et al., (2006)).

Different accounting techniques can yield different conclusions and hence address the

precision of the report. By revaluating an asset, companies can urge shareholders and

creditors their potential to oversee financial difficulties and enhance future financial

performance (Aboody et al., 1999; Jaggi and Tsui, 2001).

Nelson M. Waweru, PonsianProtNtui and Musa Mangena investigate the choice of

accounting policies in Tanzania.This is the first study to consider the factors that influence

the accounting methods’ choice in Africa and Tanzania. Tanzania has adopted the IFRS’

standards with effect from 1 July 2004. IFRS gives free decision between fair value and

historical cost method and some companies are still permitted to use the Tanzanian standards

(TFASs). The authors concluded that there is no relation between leverage and accounting

policy choice and that there is a positive relationship between income strategy and company

size. This shows larger companies choose income increasing accounting methods.

Inoue and Thomas (1996) found that the size of a firm and leverage are major motives for

accounting methods’ choice. This study is conducted in Japan. So we can conclude that there

are behavioural differences between managers of developed and developing nations.

Another study by Tawfik (2006) concluded that accounting method choices in Saudi Arabia

are not affected by firm’s size, leverage or ownership concentration. IFRS standards are not

permitted in Saudi Arabia.

In our study we developed hypothesis from the positive accounting theory and found that

managers adopt a particular accounting method in response to increase their bonuses or

compensation.

Method of Valuation

Different countries follow different valuation practices and unlike Australia some of the

countries only follow a single valuation practice and they do not have a choice to select fair

value or historical cost. To identify the differences we have selected three different

companies from the different stock exchanges around the world. We have taken


Telecommunication industry for identifying and analysing valuation practice for these

companies. The companies selected are as follows:

Vodafone Group PLC - London Stock Exchange

Telstra Corporations Ltd – Australian Stock Exchange

American Telephone and Telegraph Company (AT&T) – New York Stock Exchange

Advancement in Technology has led to an increase in the growth of Telecommunication

sector all over the world. Also with the invention of smart phones Telecommunication

companies are providing phones along with providing the network connection. As the

telecommunication sector contributes to a large amount in the Gross Domestic Product of any

nation it is important that the valuation practices followed by these companies are followed in

accordance to the International Financial Reporting System and International Accounting

Standards Board.

VODAFONE GROUP PLC

Vodafone is a British multinational telecommunication company headquartered in London. It

is the second largest telecom company all over the world. The main products of Vodafone are

fixed line and mobile telephones, internet services, and digital television. As of 2014,

Vodafone earned £43.6 billion as revenue which is an increase of 0.8% compare to last

year.Vodafone financial statements are made in accordance with the International Financial

Reporting system (IFRS) and European Union Generally Accepted Accounting principles

(GAAP). All the statements are prepared on a going concern basis. IFRS require directors of

Vodafone to make judgements where the choice of accounting policy is given to the

company.

Property Plant and Equipment

PPE stands at around €22.9 billion as of 31stMarch 2014 for the consolidated financial

statements. The increase of €6.4 billion compare to the last financial year resulted from group

acquisitions. In addition to acquisitions, there was an additional purchase of PPE of €4.9


billion which was offset against the €4 billion depreciation of the current year and €1.5

billion of foreign exchange adverse movements. Refer to the below table for the comparison

of data of current year with the previous year.

The estimation of useful life of Property plant and equipment of Vodafone is reviewed

annually. So if the useful life of the asset increases in the current year then it helps to reduce

the depreciation charge in the current year.

The report mentions that apart from financial and equity instruments everything is mentioned

on historical cost basis and not on fair value. It also mentions that the adoption of IFRS 13

Fair Value measurement on the group financial statements have no material impact.

The Property, Plant and Equipment of Vodafone consist of two main parts which is Land and

Building and Equipment, furniture and fittings. Land and building are valued at cost less

subsequent accumulated depreciation and accumulated impairment loss. Equipment, furniture

and fittings are also valued at cost less accumulated depreciation and impairment loss. The

assets which are still in progress that is in construction will not have depreciation until the

construction is completed so they will be valued at cost less impairment loss.

The freehold land is not provided with the depreciation while the assets which are leased are

depreciated in the same way as other owned assets. The valuation when selling an asset is

determined by any sale proceeds less the carrying amount of the asset. This asset is

recognized in the income statement.


INTANGIBLES

Intangibles Assets of Vodafone consists of Goodwill; Finite lived intangible assets, licence

and spectrum fees and computer software. The initial measure of goodwill is at cost and

subsequently it is measured at cost less accumulated impairment loss. The goodwill of new

acquisition is calculated by the cost of acquisition less the net fair value of identifiable assets,

liabilities and contingent liabilities on the date of acquisition. All the goodwill measurements

were on the basis of UK GAAP before the introduction of IFRS on 1st April 2004.Finite lived

intangibles are valued at acquisition or development cost less accumulated amortisation

which is reviewed annually. Licence and spectrum fees are valued on the basis of unexpired

license period, licence renewal and special technologies.

Computer software is valued on the cost incurred to bring the specific software into use.

Other intangible assets such as brands and customer bases are measured on fair value on the

date of acquisition and amortisation is charged over the useful life of asset from the date they

are available for use.


TELSTRA CORPORATION

Telstra Corporation limited is one of the Australia’s leading telecommunication and

information Services Company headquartered in Australia. Their services include mobile

services, home phone services, voice services and fixed broadband services. In 2014, their

total revenue was AUD 26.4 billion with a total income growth of 3.5 %.The revenue they

have earned from fixed services, mobile services, Data and IP, and NAS are 7245 $m, 9668

$m, 2968 $m and 1896 $m consequently. Telstra also invested around $ 1.1 billion for

wireless network in current financial year.

Most of the earnings for Telstra come from Fixed Internet Broadband and Mobile

Connections and it has the largest customers in Australia in both. Telstra is also

internationally spread through Telstra International which invests in Octave investment and

CSL .The following table below represents the statement of financial position for Telstra.


The financial report for Telstra is prepared in accordance with the Australian Accounting

Standard board (AASB), International Financial reporting system (IFRS) and International

Accounting Standard Board (IASB). The report mentions that barring few investments and

some financial instruments Telstra uses historical cost as a method of valuation. The assets

held for sale are measured at fair value less cost to sell the asset. Also the report mentions

that the company formed some judgements for the income, expense, reported amounts of

assets and liabilities and Contingent assets and liabilities.

From 1st July 2013 Company adopted Fair value measurement on a prospective basis which is

in accordance to the AASB 13. The annual report of Telstra mentions about the new standard

in regards to AASB 13 but it does not replace existing standard requirements.

PROPERTY, PLANT AND EQUIPMENT

PPE of Telstra consists of Buildings, Communication assets and other plant and equipment.

The asset is recorded on Cost and depreciation which is the historical cost method.

Some of the calculations are formed on the basis of judgement for determining the cost of

asset. During the settlement of cash consideration is deferred, the amount payable in the

future are discounted to present value on the date of acquisition and unwinding is recorded as

finance costs. The depreciation is calculated on the basis of straight line method over the

estimated service lives of an asset which is valued every year. Repairs and maintenance

expense is included in the operating expense of the same year.


As a Leased plant and Equipment, Telstra acts as lessor and lessee. As a lessee the

measurement of leased property is valued as lower of the fair value of the asset or the present

value of minimum lease payments under finance lease. As a lessor we value a lease

receivable by the present value of an unguaranteed residual value expected at the end of the

lease term. Rental income from lease property is recognized on straight line basis.

INTANGIBLE ASSETS

Intangible assets of Telstra include Goodwill, Internally generated intangible assets, acquired

intangible assets, deferred expenditure and amortisation. Good will is valued of excess

amount paid than the fair value of net assets on the date of acquisition. Also with the other

internally generated assets it includes the software assets which have a finite life and

amortised on straight line basis. Other acquired intangible assets are valued on the same basis

as goodwill. Deferred expenditure mainly includes costs for basic installation and connection

fees for existing and new services and incremental cost of establishing customer contract

which is amortised as well.

Following table will show the amortisation weighted average period.

Also with the measurement of Intangibles Management judgement plays an important role as

certain intangible assets useful lives is supported by external valuation advice on acquisition.


So it is seen that the intangibles is measured by fair value measurement and not on Historical

cost.

AT&T Inc.

AT&T is an American multinational telecommunication corporation, headquartered at Texas.

They are the largest provider for fixed telephone and second largest for mobile telephone.

Their services comprised of mobile telephones, Broadband connections, fixed line internet

service and broadband subscription television services. Last year, they earned the revenue of

132.447 USD with an operating income of 13.866 billion USD. They have over 121.8 million

customers which earned them the position of 20th

largest mobile telecom operator.

AT&T follows the financial statements in accordance with the United States. Generally

accepted accounting principles and the Financial accounting standard board adopted in

United States.

Property Plant and Equipment

The annual report of AT&T mentions that the method of valuation for PPE is historical cost

method but in some cases where the asset is acquired it is initially recorded at fair value. The

depreciation is on straight line basis. Also some subsidiaries of AT&T follow the composite

group depreciation methodology. In the retirement of depreciable asset the gross book value

is reclassified to accumulated depreciation and no gain or loss is applied on the disposition of

the assets.

The cost of additions and improvements is capitalised while non cash gains in compensation

costs are excluded. Recognition of impairment loss takes place when the carrying amount is

irrecoverable. The increase in the carrying value of asset is depreciated over estimated

economic life.

Following table shows the total assets of AT&T for 2013 and 2014

http://en.wikipedia.org/wiki/Broadband_Internet_access

http://en.wikipedia.org/wiki/Pay_television


INTANGIBLE ASSETS

Intangible assets in books of AT&T are mainly divided into goodwill, federal

communications commission licences, indefinite and definite intangible assets. Goodwill is

valued at excess of amount paid over fair value of net assets acquired. FCC licence gives the

right to utilize certain radio frequency spectrum to provide wireless communication service

which is issued for a fixed period of time. All the intangible assets are not amortised but

tested annually for impairment.

The testing compares the book value with the fair value of an asset. Goodwill is calculated on

the basis of discounted cash flow or the market multiple approach. Brand names are

compared by comparing the book value with the fair value calculated by discounted cash

flow approach on a royalty rate derived from the revenues related to brand name. Finite

intangible assets are amortized over the useful life.

CONCLUSION

To sum up, all the three companies use Historical Cost Method for fixed assets and fair value

for intangible assets. They sell property or acquire one at fair value. US companies don’t use

IFRS but US GAAP. UK follows IFRS and Australia follows IFRS and IASB. Goodwill is

considered as an additional value on top of the market value and for all the three companies

depreciation is measured at straight line method.


The report mentions that apart from financial and equity instruments everything is mentioned

on historical cost basis and not on fair value.


REFERENCES:

Aboody, D., Barth, M.E., and Kaznik, R. (1999), “Revaluations of Fixed Asset and

Future Performance: Evidence from UK”, Journal of Accounting and Economics

Annual report of Telstra Corporation 2014

AT&T Annual report 2014

Business with Confidence, Measurement in Financial Reporting, available at:

<icaew.com/bettermarkets>

Christensen, H.B., and Nikolaev, V. (2009), “Who uses fair value accounting for non-

financial assets after IFRS adoption?”, Working paper, available

at: http://ssrn.com/abstract=1269515.

Deloitte. IAS 16 — Property, Plant and Equipment. [ONLINE] Available

at:http://www.iasplus.com/en/standards/ias/ias16. [Accessed 01 May 15].

Deloitte. IFRS 13 — Fair Value Measurement. [ONLINE] Available

at:http://www.iasplus.com/en/standards/ifrs/ifrs13. [Accessed 28 April 15].

Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?, Hans B.

Christensen and Valeri V. Nikolaev, 2012

Gupta, S. (1995), “Determinants of the choice between partial and comprehensive

income tax allocation: the case of the domestic international sales corporation”.

Herrmann, D., Saudagaran, S.M., and Thomas, W.B. (2006), “The Quality of Fair

Value Measures of Property, Plant and Equipment”,

http://ssrn.com/abstract=1269515

http://www.iasplus.com/en/standards/ias/ias16

http://www.iasplus.com/en/standards/ifrs/ifrs13


IFRS. 2012. Educational material on fair value measurement Measuring the fair

value of unquoted equity instruments within the scope of IFRS 9 Financial

Instruments. [ONLINE] Available at:http://www.ifrs.org/use-around-the-

world/education/fvm/documents/educationfairvaluemeasurement.pdf. [Accessed 01

May 15].

IFRS. 2012. IAS 38 Intangible Assets. [ONLINE] Available

at: http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-

English.pdf. [Accessed 26 April 15].

IFRS. 2013. IFRS 13 Fair Value Measurement . [ONLINE] Available

at: http://www.ifrs.org/IFRSs/IFRS-technical-

summaries/Documents/English%20Web%20Summaries%202013/IFRS%2013.pdf.

[Accessed 26 April 15].

Kotter, J. (1999), “Asset revaluation and debt contracting”.

Nelson M. WaweruPonsianProtNtui Musa Mangena, (2011),"Determinants of

different accounting methods choice in Tanzania", Journal of Accounting in Emerging

Economies.

Tawfik, M.S. (2006), “An empirical investigation of the validity of the positive theory

in developing countries: the case of the kingdom of Saudi Arabia”, available at: http://

mstawfik.tripod.com/pt.pdf

Vodafone 2014,Vodafone annual report 2014, Vodafone Group Plc , [Accessed 26

April 15],

<http://www.vodafone.com/content/annualreport/annual_report14/downloads/full_an

nual_report_2014.pdf >

http://www.ifrs.org/use-around-the-world/education/fvm/documents/educationfairvaluemeasurement.pdf

http://www.ifrs.org/use-around-the-world/education/fvm/documents/educationfairvaluemeasurement.pdf

http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-English.pdf

http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-English.pdf

http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/English%20Web%20Summaries%202013/IFRS%2013.pdf

http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/English%20Web%20Summaries%202013/IFRS%2013.pdf

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