Introduction to Telstra and TPG

The two chosen entities for this purpose are Telstra Corporations and TPG Telecom Limited. A brief introduction about the two entities shall provide a frame of reference to the readers of the document while evaluating the details about these two companies.

Telstra Corporation Limited (Telstra): Telstra Corporation builds telecommunication networks and operates these networks to provide top quality telecommunication services to the citizens of the country. Apart from Australia the country also has its operations extended to different parts of the world. The company, founded in 1975, has it’s headquarter in Melbourne, Australia.

TPG Telecom Limited (TPG): A giant in Telecommunication industry in Australia, TPG specializes in internet and mobile telecommunication services. In internet service providing market TPG has the second largest market share. The company also has the distinction of running and operating largest mobile virtual network in the country. Initially the company was founded as Total Peripherals Group in 1986. Registered head office of the company is situated at New South Wales, Australia.

Taking into consideration the profiles of the two entities selected for the exercise in this document, let us now get into a detailed discussion about various elements of financial statements of these two companies.

TPG Limited: 

Owners’ equity section of TPG shows the following items:

Share capital: It is the face value received from issue of shares of the company. This amount represent the proportionate right of shareholders in the total ownership of the company (Dhaliwal et. al. 2014).

Reserves: The combined balance of foreign currency translation reserve, share based payments reserve, fair value reserve and cash flow hedge reserve is shown in the amount of reserve. Thus, these are all specific reserves and cannot be used for any other purpose different from te specific reasons for creation of each reserve (Juárez, 2015).

Retained earnings: The amount of retained earnings is the accumulated balance of profit and loss account that have left after declaring dividend from profits attributable to equity shareholders over the years.

Non-controlling interests: It is the amount that represent the equity of minority interests of the company.

Changes in the amount of equity shown in the table below:

TPG Limited
Amounts are in $ million	31st July, 2017	31st July, 2016	Change	% Change
Share capital	1,449.40	1,051.90	397.50	37.79
Reserves	(18.10)	41.20	(59.30)	(143.93)
Retained earnings	963.30	681.00	282.30	41.45
Equity shareholders’ fund	2,394.60	1,774.10	620.50	34.98
Non-controlling interests	4.70	5.10	(0.40)	(7.84)
Equity in total	2,399.30	1,779.20	620.10	34.85

The increase in share capital is due to issue of additional shares to the public by TPG Telecom Limited. The change in reserves amount to negative balance at the end of July 31, 2017 is due to the huge loss that the company incurred in the year. The retained earnings balance has reduced in the year because payment of dividend (Lebedeva et. al. 2016).

Owners’ Equity of TPG

Telstra Corporation Limited:

In case of owners’ equity of Telstra there is absolutely no difference between the items of equity as reported by TPG. Thus, Telstra also showed the balances of share capital, reserves, retained earnings and non-controlling interests. As already a brief discussion about their nature and characters have been made thus, it is not necessary to explain what these elements represent in financial statements (Karadag, 2015). However, the changes in the amounts over the previous year can be analysed below.

Telstra Corporation Limited
Amounts are in $ million	31st Junly, 2017	31st July, 2016	Change	% Change
Share capital	4,421.00	5,167.00	(746.00)	(14.44)
Reserves	105.00	62.00	43.00	69.35
Retained earnings	10,225.00	10,642.00	(417.00)	(3.92)
Equity shareholders’ fund	14,751.00	15,871.00	(1,120.00)	(7.06)
Non-controlling interests	19.00	36.00	(17.00)	(47.22)
Equity in total	14,770.00	15,907.00	(1,137.00)	(7.15)

The decrease in amount of share capital is mainly due to the buyback of $754 million share capital of the company. During the year 2016-17. Transfer of huge loss from total compressive income statement of $165 million is the primary reason for negative balance in reserves of the company. The retained earnings have not changed significant because the amount of dividend paid by the company along with share buy-back payments in total were almost identical to the amount of profit transferred to the retained earnings during the year 2016-17 (Henderson et. al. 2015).

A table containing the balances of equity and debt of the two companies in current as well as previous year would be helpful to understand the debt and equity positions of the two entities and how the position has changed within a year (Robinson et. al. 2015).

Comparative analysis of debt to equity position of the two companies
	Telstra	TPG
	31st July, 2017	31st July, 2016	31st July, 2017	31st July, 2016
Total equity	14,560.00	15,907.00	2,399.30	1,779.20
Debt (Long term debt)	14,808.00	14,647.00	872.40	1,350.40
Debt to equity ratio (debt / equity)	1.02	0.92	0.36	0.76

The debt and equity position of Telstra has deteriorated within a year and it is clear from the debt to equity ratio of the company. In 2016 the debt to equity ratio of the company was 0.92 which has deteriorated to 1.02 in 2017. Hence, it is clear that the proportion of debt funds to the overall capital invested in the business is higher compared to equity fund in 2017 (Macve, 2015).

On the other hand the debt and equity position of TPG has improved significantly in 2017 as the debt to equity ratio of the company stood at 0.36 compared to 0.76 of 2016.

Telstra and TPG have reported the amount of cash collected from customers, cash paid to suppliers. In addition TPG has reported the amount of cash generated from operations whereas Telstra has reported cash receipts from Government grants and net placement of deposits. Apart from that both companies have also deducted the amount of income tax paid in cash to ascertain the net cash generated from operating activities (Patelli and Pedrini, 2015).  

Owners’ Equity of Telstra

Telstra and TPG has shown the amount of cash used to acquire property, plant and equipment, intangible assets, payment for acquisition of business, payment for joint ventures and other investment properties purchased. Cash inflows under investing activities for TPG include proceeds from disposal of investment properties (Zhang and Andrew, 2014).

Repayments of borrowings is common in both the company. Telstra has also used cash to buy back its shares whereas TPG has collected cash from issue shares net of issuing costs. Repayment of principal amount of financial lease is part of financing activities and have been reported in the cash flow statements of both the companies under financing activities (Dinnie, 2015.

Comparative analysis of cash flows from three broad categories:

TPG Limited
Amounts are in $ million	31st July, 2017	31st July, 2016	Change	% Change
Cash flow from operating activities	722.70	620.40	102.30	16.49
cash flow from investing activities	(457.10)	(1,488.60)	1,031.50	(69.29)
Cash flow from financing activities	(258.60)	884.00	(1,142.60)	(129.25)
Net change in cash	7.00	15.80	(8.80)	(55.70)

From the above table it is clear that the net cash flow generated from operating activities of TPG Limited has increased in 2017 with $722.70. In 2016 the company generated a net cash of $620.40 million. Cash used in investing activities in 2017 $457.10 million is again significantly less compared to the $1488.60 million in 2016. In 2017 the company used $258.60 million in financing activities this is mainly to due to the repayments of borrowings (Cheng et. al. 2014).    

Telstra Corporation Limited
Amounts are in $ million	31st July, 2017	31st July, 2016	Change	% Change
Cash flow from operating activities	7,775.00	8,133.00	(358.00)	(4.40)
cash flow from investing activities	(4,279.00)	(2,207.00)	(2,072.00)	93.88
Cash flow from financing activities	(6,104.00)	(3,777.00)	(2,327.00)	61.61
Net change in cash	(2,608.00)	2,149.00	(4,757.00)	(221.36)

Telstra has generated a net cash of $7,775 million in 2017 compared to $8,133 million in 2016. Thus, there has been significant reduction in cash generation from operating activities of the company. The company has also spend significantly higher amount in investing activities by acquiring property, plant and equipment at $4,279 million. In 2016 the company merely use a net cash of $2,207 million on investing activities. The company has used $6,104 million in net cash on financing activities that include buy back of shares, repayments of borrowings in 2017. In contrast the company only used net cash of $3,777 million in financing activities in 2016 (Schaltegger and Burritt, 2017). Thus, there has been significant changes in cash flows of the company in 2017.   

Let’s have a table containing the net cash generated or used in three board categories of the two companies over the last three years including 2017. Based on the table a brief discussion shall be made to compare the cash flow activities of the two companies in recent years (Simnett and Huggins, 2015).

Comparative analysis
Year	2017	2016	2015
	Telstra	TPG	Telstra	TPG	Telstra	TPG
Cash flow from operating activities `	7,775.00	722.70	8,133.00	620.40	8,311.00	381.90
cash flow from investing activities	(4,279.00)	(457.10)	(2,207.00)	(1,488.60)	(5,692.00)	(265.60)
Cash flow from financing activities	(6,104.00)	(258.60)	(3,777.00)	884.00	(6,882.00)	(116.90)

The above table clearly shows the significant difference between the size and scale of operations of the two entities selected in this document, i.e. Telstra and TPG. Telstra’s operating scale is much larger than that of TPG. Cash flows generated from operating activities in 2017 for Telstra is $7,775 million compared to merely $722.70 million of TPG. Similarly Telstra used $4,279 million net cash in investing activities in 2017 as opposed to $457.10 million of TPG. Telstra has also used $6,104 million in net cash on financing activities whereas TPG has used $258.60 million (Benson et. al. 2015).

• Items in other comprehensive income statement:

Debt to Equity Position

Generally items that are not included in income statement to determine the amount of net income or loss from business operations such as effects of foreign exchange translation, changes in fair value of hedge instruments and others are included in other comprehensive income statement of an organization (Watts and Zuo, 2016).

Telstra has reported following items in other comprehensive income statement of the company in 2017:

• Actual gains on defined benefit plant.
• Income tax on the above actual gains attributable to equity shareholders of the company.
• Gains from investment in equity designated at fair value due to changes in fair value of these investments.
• Income tax on such gains of fair value investments.
• Differences due to translation in foreign operations.
• Gain or loss attributable to changes in foreign currency basis spread reserve (Horngren and Harrison, 2015).

TPG has reported the following items in other comprehensive income statement of the company in 2017:

• Loss on translation of items denominated in foreign currencies. .
• Impact of hedges of cash flow items.
• Loss on reclassification of assets available for sale during the year 2017.

• Reasons that above items are not reported in ordinary income statements of the two companies are enumerated below:

The above items are not ordinary items resulted from day to day business operations. The above items are all mainly arise due to the financial ad hedging policies of the company. Also these are not actual gains and losses from business. Hence, the above items are reported separately in other comprehensive income statement of an organization (Kraal, Yapa and Joshi, 2015).

The table below shows the items and amounts reported in other comprehensive income statements of two companies (Firth and Gounopoulos, 2017).     

Year	2017	2016
	Telstra	TPG	Telstra	TPG
Actuarial gain / (Loss) on defined benefit plans	133.00	–	(302.00)	–
Foreign exchange translation difference	(77.00)	(4.00)	52.00	(0.10)
Net gain / (Loss) on cash flow hedges	(50.00)	(1.90)	21.00	(2.00)
Net change in fair value of available for sale financial assets	–	(19.60)	–	29.80
Reclassification gain / (loss) for available for sale assets	–	(34.30)	–	(62.40)

TPG Limited had no gain or loss on actuarial valuation as per the other comprehensive income statement of the company. Telstra reported $133 million gain in 2017 in $302 million losses in 2016 from actuarial valuation of defined plans. Losses due to foreign n exchange translation difference in case of Telstra for 2017 is $77 million compared to $4 million of TPG. Telstra also reported net loss on hedging cash flow items of $50 million in 2017 whereas TPG reported loss of $1.90 million from hedging cash flow items in the same period (Haller and van Staden, 2014). There has been no amount of gain and losses on net change in fair value of financial assets held for sale and reclassification of financial assets held for sale for Telstra during 2017 and 2016. However, TPG has reported a loss of $19.60 million and gain of 29.80 million in 2017 and 2016 respectively on financial assets held for sale. The company has also reported a loss of $34.30 million and $62.40 million in 2017 and 2016 respectively on reclassification of financial assets available for sale (Black, 2016).         

In case of Telstra the net effect would have been $7 million higher net profit attributable to equity shareholders in 2017. However, in case of TPG the effect would have significantly higher. The net profit of the company would have decreased by $59.8 million in 2017 (Khan, Bradbury and Courtenay, 2018).

Cash Flows from Operating, Investing, and Financing Activities

Yes, the other comprehensive income should be included to evaluate the performance of managers of an organization as taking decision regarding hedging, fair value investments, holding financial assets for sale and other such decisions are also taken by the managers of an organization (Bratten, Causholli and Khan, 2016).

Income tax expenses reported by TPG and Telstra:

Income tax expense of $179.8 million in 2017 has been disclosed in the income statement of TPG. A year ago in 2016 income tax expense of the company was $129.5 million.

Telstra has deducted $1,773 million from profit before tax as income tax expense to calculate the amount of profit after tax of the company in 2017. In the corresponding previous year the amount of income tax expense recorded by the company was $1,768 million (Easton and Zhang, 2017).

Effective tax rates of two companies:

The effective tax rates of two companies are calculated in the table below:

All amounts in the table below are in $’million.

Year	2017	2016
	Telstra	TPG	Telstra	TPG
Income tax expenses	1,773.00	179.80	1,768.00	129.50
Earnings before tax	5,647.00	595.50	5,600.00	514.10
Effective tax rate (%)	31.40	30.19	31.57	25.19

As can be seen that effective tax rate in 2017 is higher for Telstra Corporation Limited with 31.40% as compared to 30.19% of TPG (Bradbury, 2016).

Deferred tax assets and deferred tax liabilities of two companies:

No deferred tax assets or deferred tax liabilities have been recorded by TPG as per the financial statements of 2017 and 2016 (Griffith, Miller and O’Connell, 2014).     

In 2017 and 2016 Telstra has recorded an amount of $44 million as deferred tax assets and $1,539 million as deferred tax liabilities (Kim, 2016).

The reason that an organization records deferred tax assets and deferred tax liabilities is mainly with the expectation that in future there would be substantial amount of profit and loss that the organization will earn or incur to reverse the differences in taxable profit and accounting profit that arise due to timing differences in income tax provisions as per the Income Tax Assessment Act, 1997 (Finocchiaro et. al. 2018).

Reasons for increase and decrease in deferred tax assets and deferred tax liabilities in the financial statements:

Telstra Corporations Limited:

Year	2017
Amount $’ million	2017	2016
deferred tax assets	44.00	54.00
Deferred tax liabilities	1,539.00	1,493.00

As can be seen that deferred tax assets of the company has decreased whereas deferred tax liabilities have increased in 2017. The main reason for increase in deferred tax liabilities is due to timing differences in financial instruments. Apart from that defined benefit assets has also contributed to the changes in net deferred tax liability of the company (Yasseen, Jansen and Small, 2016).

Cash tax amount of both the companies: cash tax amount of two companies have been calculated in the table below.

Cash tax amount (2017)
	Telstra	TPG
Income tax expenses	1,773.00	179.80
Add: Increase in deferred tax liabilities
Telstra (1539 – 1493)	46
	1,819.00	179.80
Add: Decrease in deferred tax assets
Telstra (54 -44)	10
	1,829.00	179.80
Add: Increase in Current tax receivables (11 -8)	3
Less: Decrease in current tax assets (3.8 -0)	3.8
	1,832.00	176.00
Add: Decrease in current taxa payable  (176 -161)	15
Less: Increase in current tax liabilities (54.4 -0)	54.4
Cash tax	1,847.00	121.60

 Cash tax rates:

The cash tax rates of two companies are provided below:

	Telstra	TPG
Cash tax	1,847.00	121.60
Amount earnings before tax	5,647.00	595.50
Cash tax rate	32.71%	20.42%

The cash tax rates of two companies are different from the book tax rates of two companies due to the number of reasons. Firstly, the book tax rates are calculated by using the income tax expense as reported in the income statement of an organization and the amount of profit before tax of the organization (Tran and Zhu, 2017). However, in order to calculate cash tax rates number of adjustments was made to the tax expenses. Hence, there is significant difference between cash tax and book tax and also between the respective tax rates. Apart from that the changes in current tax liabilities and assets are also adjusted against the income tax expense to calculate the cash tax amount. Hence, there is significant difference between cash tax rate and book tax rate.

Conclusion: 

All necessary information required for ascertaining the financial performance and position of an entity is provided in financial statements. However, it is important to have the requisite knowledge and skills necessary to read and understand the financial statements and various elements of financial statements. In this document the detailed discussion on various items of equity of TPG and Telstra has certainly provided a clear picture as to the different elements of owners’ equity. Apart from that items that are reported in comprehensive income statements are also discussed to understand the reasons for recording such items in other comprehensive income statement of an entity. The complexity of corporate tax recording of an entity has also been understood from the document.

References: 

Benson, K., Clarkson, P.M., Smith, T. and Tutticci, I., 2015. A review of accounting research in the Asia Pacific region. Australian Journal of Management, 40(1), pp.36-88. [Online] Available from: https://journals.sagepub.com/doi/abs/10.1177/0312896214565121 [Accessed 24 September 2018]

Black, D.E., 2016. Other comprehensive income: a review and directions for future research. Accounting & Finance, 56(1), pp.9-45. [Online] Available from: https://onlinelibrary.wiley.com/doi/abs/10.1111/acfi.12186 [Accessed 24 September 2018]

Bradbury, M.E., 2016. Discussion of ‘Other comprehensive income: a review and directions for future research’. Accounting & Finance, 56(1), pp.47-58.

Bratten, B., Causholli, M. and Khan, U., 2016. Usefulness of fair values for predicting banks’ future earnings: evidence from other comprehensive income and its components. Review of Accounting Studies, 21(1), pp.280-315.

Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.

Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G., 2014. Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), pp.328-355.

Dinnie, K., 2015. Nation branding: Concepts, issues, practice. Routledge.

Easton, P. and Zhang, X.J., 2017. Mixing fair-value and historical-cost accounting: predictable other-comprehensive-income and mispricing of bank stocks. Review of Accounting Studies, 22(4), pp.1732-1760.

Finocchiaro, D., Lombardo, G., Mendicino, C. and Weil, P., 2018. Optimal inflation with corporate taxation and financial constraints. Journal of Monetary Economics, 95, pp.18-31.

Firth, M. and Gounopoulos, D., 2017. IFRS adoption and management earnings forecasts of Australian IPOs.

Griffith, R., Miller, H. and O’Connell, M., 2014. Ownership of intellectual property and corporate taxation. Journal of Public Economics, 112, pp.12-23.

Haller, A. and van Staden, C., 2014. The value added statement–an appropriate instrument for Integrated Reporting. Accounting, Auditing & Accountability Journal, 27(7), pp.1190-1216.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Horngren, C. and Harrison, W., 2015. ACCOUNTING: BSB110. Pearson Higher Education AU.

Juárez, F., 2015. The accounting equation inequality: A set theory approach. [Online] Available from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2664335 [Accessed 24 September 2018]

Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40. [Online] Available from: https://emaj.pitt.edu/ojs/index.php/emaj/article/view/67 [Accessed 24 September 2018]

Khan, S., Bradbury, M.E. and Courtenay, S., 2018. Value Relevance of Comprehensive Income. Australian Accounting Review, 28(2), pp.279-287.

Kim, J.H., 2016. Presentation formats of other comprehensive income after accounting standards update 2011-05. Research in Accounting Regulation, 28(2), pp.118-122.

Kraal, D., Yapa, P.W.S. and Joshi, M., 2015. The Adoption of International Accounting Standard (IAS) 12 Income Taxes: Convergence or Divergence with Local Accounting Standards in Selected ASEAN Countries?.

Lebedeva, T.E., Akhmetshin, E.M., Dzagoyeva, M.R., Kobersy, I.S. and Ikoev, S.K., 2016. Corporate governance issues and control in conditions of unstable capital risk. International Journal of Economics and Financial Issues, 6(1S), pp.25-32.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Patelli, L. and Pedrini, M., 2015. Is tone at the top associated with financial reporting aggressiveness?. Journal of Business Ethics, 126(1), pp.3-19.

Robinson, T.R., Henry, E., Pirie, W.L., Broihahn, M.A. and Cope, A.T., 2015. International Financial Statement Analysis, (CFA Institute Investment Series). John Wiley & Sons.

Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.

Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.

Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax income gap.

Watts, R.L. and Zuo, L., 2016. Understanding practice and institutions: A historical perspective. Accounting Horizons, 30(3), pp.409-423.

Yasseen, Y., Jansen, J. and Small, R., 2016. Accounting for deferred taxation: accounting technical. Professional Accountant, 2016(27), pp.14-16. [Online] Available from: https://www.ingentaconnect.com/content/sabinet/account/2016/00002016/00000027/art00005 [Accessed 24 September 2018]

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26. [Online] Available from: https://www.sciencedirect.com/science/article/pii/S1045235412001335 [Accessed 24 September 2018]