Executive summary

The business report has been prepared to address the CFO of Telstra CO. It highlights the approach
adopted by Telstra Co for measuring intangible assets and an explanation of why they do so. It further
critically evaluates the drawbacks of the approaches, followed by some recommendations to overcome
those loses that has been suffered due to applying the standard and a conclusion of the overall report.
Table of Contents
Introduction.................................................................................................................................................2
Intangible Assets.........................................................................................................................................2
Telstra Recognition & Measurement Approach..........................................................................................2
Goodwill..................................................................................................................................................2
Internally Generated Intangible Assets...................................................................................................2
Acquired Assets.......................................................................................................................................2
Evaluation of the Accounting Treatment.....................................................................................................3
Recommendations.......................................................................................................................................3
Conclusion...................................................................................................................................................3
References...................................................................................................................................................4
Introduction
Observing the current market/industry, the development in tangible assets have moved towards a
decline due to the fact that a lot has happened in developing new hardware till 2000’s after that except
for minor innovations the field of intangible assets have emerged. The problem arose when standard
setters were not in the favor of recognizing properly the intangible assets rather their focus is still on
tangible assets. Ignoring its value, by not allowing a proper valuation approach, understate the worth of
many company’s’ financial statements such as Telstra Co.

Intangible Assets

Telstra Recognition & Measurement Approach

The standard demonstrates 2 approaches for measuring the intangible assets i.e. the Cost model, where
initial cost of the asset is kept as a base and any amortization and impairment is deducted to reach the
carrying value of the intangible asset and the revaluation model, where the intangible asset’s fair value
is assessed every year after deducting any amortization and impairment and is compared with its
carrying value to know if both the values are in parallel.

Telstra Co uses both the models for three categories of assets.

Goodwill
Firstly, cost of goodwill acquired through acquisition is determined for initial recognition, by deducting
the fair value of net assets form the consideration paid for acquisition. (Telstra 2019). As for goodwill an
active market does not exist where buying and selling of the specified asset takes place with sufficient
frequency and volume. This limits the availability of pricing information on an ongoing basis, which
makes it quite obvious to use the cost model for initial and subsequent measurement rather than
revaluation model.

Internally Generated Intangible Assets

Secondly, internally generated intangible assets are also recognized and measured at cost. Its cost not
only include material and services from outside the organization deployed over it but asset related
payroll cost inclusive of contractors and borrowing cost. (Telstra 2019). As the asset’s cost include a
number of items that are mainly organization centered rather than market centered, it’s best to use the
cost model for its recognition and measurement.

Acquired Assets
And last but not the least, acquired intangible assets that uses both the approaches. For assets acquired
through business combination management’s judgment on a variety of factors is implemented that
includes but is not limited to present cash flows extrapolating, future cash flows timing and amount
determined and discounted and many more factors. Whereas assets acquired through specific
acquisition has to bear cost model. (Telstra 2019).
Evaluation of the Accounting Treatment

Telstra Co is not allowed to use the revaluation model in many cases due to the unavailability of active
market. This degrades the value of many items of the financial statements for instance, the software
when initially hits the market, if flourishes, could bring a great favorable change to the financial
statement. But due to the restriction it is still recorded at cost.

Telstra Co spends a substantial amount of money on internally generated intangible assets such as the
goodwill in the market, customer lists and loyalty, employees training, retention and recruitment. They
all play a vital role in incrementing the future cash flows of the organization, as without these survival of
the organization seems to be in danger. Still these all expenditures are expensed out, (CRCSI, ASIBA and
ANZLlC, 2009) as the AASB 138 requires the spendings to meet the criteria of identifiability that the
aforementioned lack. This hits the profit and assets value down to a greater degree.

Besides this research cost that is basically a first step towards development of any asset is ignored too
and is expensed out as incurs. It is quite clear that in order to develop a successful intangible asset a
comprehensive research is necessary. Moreover, if at any stage the development cost does not qualifies
for the criteria of capitalization this too should be expensed out, even though, it met the criteria
previously.

All these collectively has a significant negative effect on depicting the real picture of the organization,
especially for a potential new investor, who misses the reality of the financial statements. The
uncountable amount of money spent along with tiresome energy spend has not been shown in the
financial statements.

Recommendations
As the basic purpose of accounting standards are to present the financial statements fairly and should
more comparable by harmonizing the accounting treatments, there is a need to remove the dual
standard of recognizing the intangible assets. Intangible assets that are to be capitalized when
purchased externally should have the same treatment when developed internally. Because if external
purchases of intangible assets could be measured through some techniques it is also possible to
measure internally generated assets too, for instance by an independent valuator in the market.

Due to the volatile nature of the intangible assets, it is necessary that in order to present a fair picture of
the asset it should be measured at fair value rather than cost. As the asset due to continuous
development and competition in market does not remains in a single state of value. So in order to
accommodate this change a revaluation model should be preferred over cost model to predict a neat
and clean picture of the assets.

Conclusion
A thorough examination of the standard is required. This will focus on accommodating the highlighted
issue of standard’s criteria for capitalizing the intangible asset. Harmonization of accounting valuation
treatments will not only bring the ignored items to the face of financial statements making it more clear
for its users to understand and rely upon, it will also stop many accountants from manipulating the
accounting records by utilizing the loops. And finally the conservative approach of cost models should be
focused less as compared to the fair value model, again for a clear and neat picture of the financial
statements.

References

Telstra Co (2019). Telstra Annual Report 2019. Retrieved from

https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/2019-Annual-Report.PDF

CRCSI, ASIBA and ANZLlC. (2009). INITIAL ACCOUNTING FOR INTERNALLY GENERATED INTANGIBLE
ASSETS. Retrieved from
https://www.aasb.gov.au/admin/file/content106/c2/The_Cooperative_Research_Centre_for_Spatial_In
formation_14_May_2009.pdf