Telstra 2008 Annual Report Download - page 114

Telstra Corporation Limited and controlled entities
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Notes to the Financial Statements (continued)
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.
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 which can be allocated 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 profit
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.
2.8 Investments
(a) Controlled entities
Investments in controlled entities are recorded at cost less
impairment of the investment value.
Where we hedge the value of our investment in an overseas controlled
entity, the hedge is accounted for in accordance with note 2.22.
(b) Jointly controlled and associated entities
(i) Jointly controlled entities
A jointly controlled entity is a contractual arrangement (in the form of
an entity) whereby two or more parties take on an economic activity
which is governed by joint control. Joint control involves the
contractually agreed sharing of control over an entity where two or
more parties must consent to all major decisions. Our interests in
jointly controlled entities, including partnerships, are accounted for
using the equity method of accounting in the Telstra Group financial
statements and the cost method in the Telstra Entity financial
statements.
Under the equity method of accounting, we adjust the initial recorded
amount of the investment for our share of:
• profits or losses after tax for the year since the date of investment;
• reserve movements since the date of investment;
• unrealised profits or losses;
• dividends or distributions received; and
• deferred profit brought to account.
Where the equity accounted amount of our investment in an entity
falls below zero, we suspend the equity method of accounting and
record the investment at zero. When this occurs, the equity method of
accounting does not recommence until our share of profits and
reserves exceeds the cumulative prior years share of losses and
reserve reductions.
Where we have long term assets that in substance form part of our
investment in equity accounted interests and the equity accounted
amount of investment falls below zero, we reduce the value of these
long term assets in proportion with our cumulative losses.
2. Summary of accounting policies (continued)