Telstra 2015 Annual Report Download - page 83

Telstra Corporation Limited and controlled entities 81
Notes to the Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ESTIMATES, ASSUMPTIONS AND
JUDGEMENTS (continued)
_Telstra Financial Report 2015
2.3 Foreign currency translation (continued)
(b) Financial reports of foreign operations that have a functional
currency that is not Australian dollars (continued)
• income statements are translated into Australian dollars at
average exchange rates, unless there are significant
identifiable transactions, which are translated at the exchange
rate that existed on the date of the transaction
• current translation gains and losses are recorded in other
comprehensive income.
Refer to note 2.22(c) for details regarding our accounting policy for
derivative financial instrument items that are used to hedge our
net investment in entities whose functional currency is not
Australian dollars.
2.4 Cash and cash equivalents
Cash and cash equivalents include cash at bank and on hand,
bank deposits and negotiable certificates of deposit that are held
for the purposes of meeting short term cash commitments rather
than investment purposes.
Bank deposits and negotiable certificates of deposit are classified
as financial assets held at amortised cost.
2.5 Trade and other receivables
Trade and other receivables are 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, an
insolvency risk or an 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 for less than one year in constructing
and maintaining the telecommunications network. We also
purchase strategic inventories for use in maintenance of network
assets beyond one year. 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.
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
cost of disposal. 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, include 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
can be allocated to specific contracts on a reasonable basis
• 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(c) for further details.
Profits are recognised when:
• the stage of contract completion can be reliably determined
• costs to date can be clearly identified
• 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) Joint arrangements
A joint arrangement is a contractual arrangement whereby two or
more parties have joint control. Joint control involves the
contractually agreed sharing of control over an arrangement
where decisions about the relevant activities require the
unanimous consent of the parties sharing control. The
classification of a joint arrangement as a joint operation or joint
venture depends on the rights and obligations of the parties to the
arrangement.
(i) Joint ventures
A joint venture is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net assets
of the arrangement. In the Telstra Group financial statements our
interests in joint ventures are accounted for using the equity
method of accounting.
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
• deferred profit brought to account.