Issues in contemporay accounting

Research Assignment by Farah, Siddharth & Rinkle Page 1
BAO5535 Issues In Contemporary Accounting
REPORT: Group Research Assignment
SEMESTER 1- 2015
Due date of Submission: 07/05/2015
Group Members:
Siddharth Pitolwala 4385069
Farah Nuzhat 4510144
Rinkle Gogna 4371169

INTRODUCTION
Measurement:
Measurement is a process involving computing the monetary values of elements in the
financial statements which is to be acknowledged and carried in the balance sheet and income
statement (IASB/AASB Framework, 2010, Para 99-100) for identifying, comparing,
assessing and classifying of accounting data.
However there is no exact depiction assessed from accounting measurement. It is entirely
based on approximation, judgements and probability.
The bases of measurements are historical costs, current cost, fair value, realisable value and
value in use.
Fair Value Measurement:
According to IFRS 13, the fair value measurement refers to making an estimation of the price
of an orderly transaction to sell an asset or to transfer a liability between market participants
on measurement date under current market conditions, whether liabilities, observable market
transaction or market information is available or not. From perspective of buyers and sellers
who are independent and have knowledge about asset and liability, the fair value represents
the estimation about future cash outflows and inflows.
It’s a market based measurement rather than entity based measurement.
In order to measure Fair Value an entity needs to determine the particular asset or liability,
valuation premise for the non-financial assets, the principle or the most advantageous market
and lastly the proper valuation technique suited for the measurement.
The accurate valuation techniques used by an entity in particular circumstances for which
adequate data are available for measuring fair value by maximising the use of observable
inputs and minimising the use of unobservable inputs [IFRS 13:61, IFRS 13:67].
The IFRS 13 acknowledges the three widely used valuation techniques. They are market
approach, cost approach and income approach.

Depending on the circumstances, an entity might require to use single or multiple valuation
techniques [IFRS 13:63].
IFRS established fair value hierarchy in order to increase Comparability and uniformity
which categorizes the inputs into three levels.
Level 1 Inputs are the unadjusted quoted prices in active markets in which frequent and
substantial volume of transactions occur for identical assets and liabilities. Level 2 inputs are
input other than quoted prices included in level 1 that are observable for the asset or liability,
either directly or indirectly. Lastly, level 3 inputs are the unobservable inputs.
Historical Cost:
Historical cost accounting implies that the asset in the balance sheet must be valued based on
their actual price at which they were purchased. It is much more convenient for an entity to
find out the original price paid for an asset. For an example, suppose a land had been
purchased for $90,000 in 1995. If the owner of the land did not change, then according to
historical cost accounting, the value of the land would be recorded in the balance sheet as
$90,000, although the expected market values have been increased tremendously.
For assessing future economic benefits of an entity fair value measurement is appropriate as it
provides pertinent, coherent, comparable and reliable measurement, whereas historical cost is
unable to measure exact value for augmented asset. Fair value is also capable of providing
expected value of risk-adjusted future cash inflow or outflow as it takes into account the
current cost, replacement cost and inflation adjusted cost.
LITERATURE REVIEW
There are various research papers on Positive Accounting Theory and manager’s incentives
for accounting policy choice. Management’s ultimate objective is to achieve maximum
profits. They try to attain this objective by forming various strategies, adopting innovative
techniques, introducing new products and also by adopting an accounting method they can
benefit the most from. As it is management’s discretion to choose either Fair Value or
Historical Cost Method so they choose the one that is more advantageous to them in terms of
decreasing or increasing their income in the books (Gupta (1995)).

Previous studies have looked into the dominance of cost method over the fair value method in
fixed asset valuation on reliability dimension (Christensen and Nikolaev, 2009; Diehl, 2009).
However some not very old studies argued fair value method’s superiority for valuing
tangible assets (Hermann et al., (2006)).
Different accounting techniques can yield different conclusions and hence address the
precision of the report. By revaluating an asset, companies can urge shareholders and
creditors their potential to oversee financial difficulties and enhance future financial
performance (Aboody et al., 1999; Jaggi and Tsui, 2001).
Nelson M. Waweru, PonsianProtNtui and Musa Mangena investigate the choice of
accounting policies in Tanzania.This is the first study to consider the factors that influence
the accounting methods’ choice in Africa and Tanzania. Tanzania has adopted the IFRS’
standards with effect from 1 July 2004. IFRS gives free decision between fair value and
historical cost method and some companies are still permitted to use the Tanzanian standards
(TFASs). The authors concluded that there is no relation between leverage and accounting
policy choice and that there is a positive relationship between income strategy and company
size. This shows larger companies choose income increasing accounting methods.
Inoue and Thomas (1996) found that the size of a firm and leverage are major motives for
accounting methods’ choice. This study is conducted in Japan. So we can conclude that there
are behavioural differences between managers of developed and developing nations.
Another study by Tawfik (2006) concluded that accounting method choices in Saudi Arabia
are not affected by firm’s size, leverage or ownership concentration. IFRS standards are not
permitted in Saudi Arabia.
In our study we developed hypothesis from the positive accounting theory and found that
managers adopt a particular accounting method in response to increase their bonuses or
compensation.
Method of Valuation
Different countries follow different valuation practices and unlike Australia some of the
countries only follow a single valuation practice and they do not have a choice to select fair
value or historical cost. To identify the differences we have selected three different
companies from the different stock exchanges around the world. We have taken

Telecommunication industry for identifying and analysing valuation practice for these
companies. The companies selected are as follows:
 Vodafone Group PLC - London Stock Exchange
 Telstra Corporations Ltd – Australian Stock Exchange
 American Telephone and Telegraph Company (AT&T) – New York Stock Exchange
Advancement in Technology has led to an increase in the growth of Telecommunication
sector all over the world. Also with the invention of smart phones Telecommunication
companies are providing phones along with providing the network connection. As the
telecommunication sector contributes to a large amount in the Gross Domestic Product of any
nation it is important that the valuation practices followed by these companies are followed in
accordance to the International Financial Reporting System and International Accounting
Standards Board.
VODAFONE GROUP PLC
Vodafone is a British multinational telecommunication company headquartered in London. It
is the second largest telecom company all over the world. The main products of Vodafone are
fixed line and mobile telephones, internet services, and digital television. As of 2014,
Vodafone earned £43.6 billion as revenue which is an increase of 0.8% compare to last
year.Vodafone financial statements are made in accordance with the International Financial
Reporting system (IFRS) and European Union Generally Accepted Accounting principles
(GAAP). All the statements are prepared on a going concern basis. IFRS require directors of
Vodafone to make judgements where the choice of accounting policy is given to the
company.
Property Plant and Equipment
PPE stands at around €22.9 billion as of 31st
March 2014 for the consolidated financial
statements. The increase of €6.4 billion compare to the last financial year resulted from group
acquisitions. In addition to acquisitions, there was an additional purchase of PPE of €4.9

billion which was offset against the €4 billion depreciation of the current year and €1.5
billion of foreign exchange adverse movements. Refer to the below table for the comparison
of data of current year with the previous year.
The estimation of useful life of Property plant and equipment of Vodafone is reviewed
annually. So if the useful life of the asset increases in the current year then it helps to reduce
the depreciation charge in the current year.
The report mentions that apart from financial and equity instruments everything is mentioned
on historical cost basis and not on fair value. It also mentions that the adoption of IFRS 13
Fair Value measurement on the group financial statements have no material impact.
The Property, Plant and Equipment of Vodafone consist of two main parts which is Land and
Building and Equipment, furniture and fittings. Land and building are valued at cost less
subsequent accumulated depreciation and accumulated impairment loss. Equipment, furniture
and fittings are also valued at cost less accumulated depreciation and impairment loss. The
assets which are still in progress that is in construction will not have depreciation until the
construction is completed so they will be valued at cost less impairment loss.
The freehold land is not provided with the depreciation while the assets which are leased are
depreciated in the same way as other owned assets. The valuation when selling an asset is
determined by any sale proceeds less the carrying amount of the asset. This asset is
recognized in the income statement.

INTANGIBLES
Intangibles Assets of Vodafone consists of Goodwill; Finite lived intangible assets, licence
and spectrum fees and computer software. The initial measure of goodwill is at cost and
subsequently it is measured at cost less accumulated impairment loss. The goodwill of new
acquisition is calculated by the cost of acquisition less the net fair value of identifiable assets,
liabilities and contingent liabilities on the date of acquisition. All the goodwill measurements
were on the basis of UK GAAP before the introduction of IFRS on 1st
April 2004.Finite lived
intangibles are valued at acquisition or development cost less accumulated amortisation
which is reviewed annually. Licence and spectrum fees are valued on the basis of unexpired
license period, licence renewal and special technologies.
Computer software is valued on the cost incurred to bring the specific software into use.
Other intangible assets such as brands and customer bases are measured on fair value on the
date of acquisition and amortisation is charged over the useful life of asset from the date they
are available for use.

TELSTRA CORPORATION
Telstra Corporation limited is one of the Australia’s leading telecommunication and
information Services Company headquartered in Australia. Their services include mobile
services, home phone services, voice services and fixed broadband services. In 2014, their
total revenue was AUD 26.4 billion with a total income growth of 3.5 %.The revenue they
have earned from fixed services, mobile services, Data and IP, and NAS are 7245 $m, 9668
$m, 2968 $m and 1896 $m consequently. Telstra also invested around $ 1.1 billion for
wireless network in current financial year.
Most of the earnings for Telstra come from Fixed Internet Broadband and Mobile
Connections and it has the largest customers in Australia in both. Telstra is also
internationally spread through Telstra International which invests in Octave investment and
CSL .The following table below represents the statement of financial position for Telstra.

The financial report for Telstra is prepared in accordance with the Australian Accounting
Standard board (AASB), International Financial reporting system (IFRS) and International
Accounting Standard Board (IASB). The report mentions that barring few investments and
some financial instruments Telstra uses historical cost as a method of valuation. The assets
held for sale are measured at fair value less cost to sell the asset. Also the report mentions
that the company formed some judgements for the income, expense, reported amounts of
assets and liabilities and Contingent assets and liabilities.
From 1st
July 2013 Company adopted Fair value measurement on a prospective basis which is
in accordance to the AASB 13. The annual report of Telstra mentions about the new standard
in regards to AASB 13 but it does not replace existing standard requirements.
PROPERTY, PLANT AND EQUIPMENT
PPE of Telstra consists of Buildings, Communication assets and other plant and equipment.
The asset is recorded on Cost and depreciation which is the historical cost method.
Some of the calculations are formed on the basis of judgement for determining the cost of
asset. During the settlement of cash consideration is deferred, the amount payable in the
future are discounted to present value on the date of acquisition and unwinding is recorded as
finance costs. The depreciation is calculated on the basis of straight line method over the
estimated service lives of an asset which is valued every year. Repairs and maintenance
expense is included in the operating expense of the same year.

As a Leased plant and Equipment, Telstra acts as lessor and lessee. As a lessee the
measurement of leased property is valued as lower of the fair value of the asset or the present
value of minimum lease payments under finance lease. As a lessor we value a lease
receivable by the present value of an unguaranteed residual value expected at the end of the
lease term. Rental income from lease property is recognized on straight line basis.
INTANGIBLE ASSETS
Intangible assets of Telstra include Goodwill, Internally generated intangible assets, acquired
intangible assets, deferred expenditure and amortisation. Good will is valued of excess
amount paid than the fair value of net assets on the date of acquisition. Also with the other
internally generated assets it includes the software assets which have a finite life and
amortised on straight line basis. Other acquired intangible assets are valued on the same basis
as goodwill. Deferred expenditure mainly includes costs for basic installation and connection
fees for existing and new services and incremental cost of establishing customer contract
which is amortised as well.
Following table will show the amortisation weighted average period.
Also with the measurement of Intangibles Management judgement plays an important role as
certain intangible assets useful lives is supported by external valuation advice on acquisition.

So it is seen that the intangibles is measured by fair value measurement and not on Historical
cost.
AT&T Inc.
AT&T is an American multinational telecommunication corporation, headquartered at Texas.
They are the largest provider for fixed telephone and second largest for mobile telephone.
Their services comprised of mobile telephones, Broadband connections, fixed line internet
service and broadband subscription television services. Last year, they earned the revenue of
132.447 USD with an operating income of 13.866 billion USD. They have over 121.8 million
customers which earned them the position of 20th
largest mobile telecom operator.
AT&T follows the financial statements in accordance with the United States. Generally
accepted accounting principles and the Financial accounting standard board adopted in
United States.
Property Plant and Equipment
The annual report of AT&T mentions that the method of valuation for PPE is historical cost
method but in some cases where the asset is acquired it is initially recorded at fair value. The
depreciation is on straight line basis. Also some subsidiaries of AT&T follow the composite
group depreciation methodology. In the retirement of depreciable asset the gross book value
is reclassified to accumulated depreciation and no gain or loss is applied on the disposition of
the assets.
The cost of additions and improvements is capitalised while non cash gains in compensation
costs are excluded. Recognition of impairment loss takes place when the carrying amount is
irrecoverable. The increase in the carrying value of asset is depreciated over estimated
economic life.
Following table shows the total assets of AT&T for 2013 and 2014

INTANGIBLE ASSETS
Intangible assets in books of AT&T are mainly divided into goodwill, federal
communications commission licences, indefinite and definite intangible assets. Goodwill is
valued at excess of amount paid over fair value of net assets acquired. FCC licence gives the
right to utilize certain radio frequency spectrum to provide wireless communication service
which is issued for a fixed period of time. All the intangible assets are not amortised but
tested annually for impairment.
The testing compares the book value with the fair value of an asset. Goodwill is calculated on
the basis of discounted cash flow or the market multiple approach. Brand names are
compared by comparing the book value with the fair value calculated by discounted cash
flow approach on a royalty rate derived from the revenues related to brand name. Finite
intangible assets are amortized over the useful life.
CONCLUSION
To sum up, all the three companies use Historical Cost Method for fixed assets and fair value
for intangible assets. They sell property or acquire one at fair value. US companies don’t use
IFRS but US GAAP. UK follows IFRS and Australia follows IFRS and IASB. Goodwill is
considered as an additional value on top of the market value and for all the three companies
depreciation is measured at straight line method.

The report mentions that apart from financial and equity instruments everything is mentioned
on historical cost basis and not on fair value.

REFERENCES:
 Aboody, D., Barth, M.E., and Kaznik, R. (1999), “Revaluations of Fixed Asset and
Future Performance: Evidence from UK”, Journal of Accounting and Economics
 Annual report of Telstra Corporation 2014
 AT&T Annual report 2014
 Business with Confidence, Measurement in Financial Reporting, available at:
<icaew.com/bettermarkets>
 Christensen, H.B., and Nikolaev, V. (2009), “Who uses fair value accounting for non-
financial assets after IFRS adoption?”, Working paper, available
at: http://ssrn.com/abstract=1269515.
 Deloitte. IAS 16 — Property, Plant and Equipment. [ONLINE] Available
at:http://www.iasplus.com/en/standards/ias/ias16. [Accessed 01 May 15].
 Deloitte. IFRS 13 — Fair Value Measurement. [ONLINE] Available
at:http://www.iasplus.com/en/standards/ifrs/ifrs13. [Accessed 28 April 15].
 Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?, Hans B.
Christensen and Valeri V. Nikolaev, 2012
 Gupta, S. (1995), “Determinants of the choice between partial and comprehensive
income tax allocation: the case of the domestic international sales corporation”.
 Herrmann, D., Saudagaran, S.M., and Thomas, W.B. (2006), “The Quality of Fair
Value Measures of Property, Plant and Equipment”,

 IFRS. 2012. Educational material on fair value measurement Measuring the fair
value of unquoted equity instruments within the scope of IFRS 9 Financial
Instruments. [ONLINE] Available at:http://www.ifrs.org/use-around-the-
world/education/fvm/documents/educationfairvaluemeasurement.pdf. [Accessed 01
May 15].
 IFRS. 2012. IAS 38 Intangible Assets. [ONLINE] Available
at: http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-
English.pdf. [Accessed 26 April 15].
 IFRS. 2013. IFRS 13 Fair Value Measurement . [ONLINE] Available
at: http://www.ifrs.org/IFRSs/IFRS-technical-
summaries/Documents/English%20Web%20Summaries%202013/IFRS%2013.pdf.
[Accessed 26 April 15].
 Kotter, J. (1999), “Asset revaluation and debt contracting”.
 Nelson M. WaweruPonsianProtNtui Musa Mangena, (2011),"Determinants of
different accounting methods choice in Tanzania", Journal of Accounting in Emerging
Economies.
 Tawfik, M.S. (2006), “An empirical investigation of the validity of the positive theory
in developing countries: the case of the kingdom of Saudi Arabia”, available at: http://
mstawfik.tripod.com/pt.pdf
 Vodafone 2014,Vodafone annual report 2014, Vodafone Group Plc , [Accessed 26
April 15],
<http://www.vodafone.com/content/annualreport/annual_report14/downloads/full_an
nual_report_2014.pdf >

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