Telstra 2013 Annual Report Download - page 79

NOTES TO THE
FINANCIAL STATEMENTS
(CONTINUED)
FINANCIAL STATEMENTS
Telstra Corporation Limited and controlled entities Telstra Annual Report 2013 77
2.3 Foreign currency translation (continued)
(b) Financial reports of foreign operations that have a functional
currency that is not Australian dollars (continued)
Refer to note 2.22(c) for details regarding our accounting policy for
derivative financial instruments and foreign currency monetary
items that are used to hedge our net investment in entities which
have a functional currency that is not in Australian dollars.
2.4 Cash and cash equivalents
Cash and cash equivalents include cash at bank and on hand, bank
deposits, negotiable certificates of deposit and bills of exchange
that are held for the purposes of meeting short term cash
commitments rather than investment purposes.
Bank deposits are recorded at amounts to be received. Negotiable
certificates of deposit and bills of exchange are classified as
“available-for-sale” financial assets and are held at fair value. The
carrying amount of these assets approximates their fair value due to
the short term to maturity.
2.5 Trade and other receivables
Trade and other receivables are considered financial assets. They
are initially recorded at the fair value of the amounts to be received
and are subsequently measured at amortised cost using the
effective interest method. These financial assets are derecognised
when the rights to receive cash flows from the financial assets have
expired or have been transferred and we have transferred
substantially all the risks and rewards of ownership.
An allowance for doubtful debts is raised to reduce the carrying
amount of trade receivables, based on a review of outstanding
amounts at reporting date. The allowance for doubtful debts is
based on historical trends and management's assessment of
general economic conditions. An allowance for doubtful debts is
raised when management considers there is a credit risk,
insolvency risk or incapacity to pay a legally recoverable debt. Bad
debts specifically provided for in previous years are eliminated
against the allowance for doubtful debts. In all other cases, bad
debts are eliminated directly against the carrying amount and
written off as an expense in the income statement.
2.6 Inventories
Our finished goods include goods available for sale, and material
and spare parts to be used in constructing and maintaining the
telecommunications network. We value inventories at the lower of
cost and net realisable value.
For the majority of inventory items, we assign cost using the
weighted average cost basis. For materials used in the production
of directories the “first in first out” basis is used for assigning cost.
Net realisable value of items expected to be sold is the estimated
selling price in the ordinary course of business, less estimated costs
of completion and the estimated costs incurred in marketing, selling
and distribution. It approximates fair value less costs to sell. We
calculate net realisable value of inventories by making certain price
assumptions to project selling prices into the future and
assumptions about technologies at reporting date.
Net realisable value of items expected to be consumed, for example
used in the construction of another asset, is the net value expected
to be earned through future use.
2.7 Construction contracts
(a) Valuation
We record construction contracts in progress at cost (including any
profits recognised) less progress billings and any provision for
foreseeable losses. Cost includes:
• both variable and fixed costs directly related to specific contracts;
• amounts that are attributable to contract activity in general and
which can be allocated to specific contracts on a reasonable
basis; and
• costs expected to be incurred under penalty clauses, warranty
provisions and other variances.
Where a significant loss is estimated to be made on completion, a
provision for foreseeable losses is brought to account and recorded
against the gross amount of construction work in progress.
(b) Recognition of revenue and profit
Revenue and profit is recognised on an individual project basis
using the percentage of completion method. The percentage of
completion is calculated based on estimated costs of completion.
Refer to note 2.17(d) for further details.
Profits are recognised when:
• the stage of contract completion can be reliably determined;
• costs to date can be clearly identified; and
• total contract revenues to be received and costs to complete can
be reliably estimated.
(c) Disclosure
The construction work in progress balance is recorded in current
inventories after deducting progress billings. Where progress
billings exceed the balance of construction work in progress, the net
amount is shown as a current liability within trade and other
payables.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ESTIMATES, ASSUMPTIONS AND JUDGEMENTS
(CONTINUED)