Refer to the 2019 Telstra annual report and Explain whether the adoption of AASB 16 Leases is likely to have a material effect on the reports of the company, or whether it has had a material effect if already adopted, with reference to your companys leasing commitments. Include discussions relating to accounting for leases from both lessor and lessee perspectives. Provide references to your companys report, as well as two relevant journal articles, and discuss the implementation of AASB 16, the major reporting changes and the likely effect of these changes.
Notes to the financial statements (continued) Notes to the financial statements (continued Telstra Financial Report 2019 Section 7. Other information (continued) Section 7. Other information (continued) 7.3 Parent entity disclosures This note provides details of Telstra Entity financial performance and financial position as a standalone entity. The results include transactions with its controlled entities Tables A and B provide a summary of the financial information for the Telstra Entity. Table A Telstra Entity As at 30 June 2019T 2018 Restated Sm $m Statement of financial position Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities Share capital Cash flow hedging reserve Foreign currency basis spread reserve General reserve Retained profits Total equity 6.959 38,194 45,153 13.378 17,625 31,003 7,053 38.215 45,268 12.750 18.406 31,156 (211) 7.1 Other accounting policies (continued) (b) Other 7.1.3 New accounting standards to be applied in future reporting In March 2018, the International Accounting Standards Board (the periods (continued) LASB) issued a revised Conceptual Framework for Financial (a) New leasing standard (continued) Reporting Framework) to be used immediately by the IASB but effective for Telstra from 1 July 2020. We do not expect the practical When estimating the right-of-use asset and the lease liability as at 1 consequences of the new Framework to be significant in the short July 2019 for our transitioning operating leases where Telstra Group term. However, our assessment of the impact arising from the is a lessee, we have used the following practical expedients for all amendments is ongoing similar leases on a consistent basis (as opposed to on a lease-by- We do not expect any other recently issued accounting standard or lease basis as allowed by the standard): amendment to have a material impact on our financial results upon We have applied a single discount rate to portfolios of leases with adoption. characteristics which we have assessed to be reasonably similar . We have elected to rely on our assessment of whether leases are 7.2 Auditor's remuneration onerous under AASB 137 'Provisions, Contingent Liabilities and Contingent Assets' as at 30 June 2019 instead of conducting an impairment review . for leases of our personal computers and multifunctional devices. Our external auditor of the Group is Ernst & Young (EY). In for which the underlying assets are of low value, we have not made addition to the audit and review of our financial reports, EY any adjustments on transition and as a result the lease payments provides other services throughout the year. This note shows under these contracts will generally continue to be recognised on the total fees to external auditors split between audit, audit- a straight-line basis over the lease term as other operating related and non-audit services expenses . We have no initial direct costs included in the measurement of the right-of-use assets at initial application of the standard Telstra Group Year ended 30 June We have elected to utilise hindsight in determining the lease term 2019 2018 for contracts that contain options for extension or termination of the lease $m $m Based on our transition approach and the practical expedients used, the initial application of AASB 16 as at 1 July 2019 is expected to EY fees for the audit and review of the 9.073 result in recording in the statement of financial position right-of-use financial reports 9.011 assets and lease liabilities ranging from $3.6 billion to $3.8 billion for Assurance services our operating leases where Telstra Group is a lessee. This estimate Audit-related 2.120 1.455 includes more than $0.5 billion related to lease payments arising from new legal contracts executed before 30 June 2019 but effective Other assurance 1.465 0.481 after that date, which have been treated as lease modifications for Total assurance services provided by EY 3.585 1.936 accounting purposes (refer to Table Bin note 7.4.2 to the financial Non-audit services statements for maturity profile of our operating lease commitments). Tax services 0.070 0.065 The right-of-use assets will also be adjusted to reflect any prepaid and/or accrued lease payments. No adjustments have been Advisory services 0.067 0.050 identified for our finance leases where Telstra Group is a lessee. Total non-audit services provided by EY 0.137 0.115 Where Telstra Group is an intermediate lessor we have reassessed our operating leases and identified those that on 1 July 2019 will be Audit-related fees charged by EY are for services that are reasonably recognised as finance leases. No significant adjustments have been related to the performance of the audit or review of our financial estimated reports and for other assurance engagements. These services include regulatory financial assurance services, services over debt No adjustments have been identified for our operating or finance raising prospectuses, additional control assessments, various leases where Telstra is a lessor other than those related to accounting advice and additional audit services related to our intermediate lessor described above. controlled entities. The transition estimates have been calculated based on our current Other assurance fees charged by EY are for other assurance interpretation of the new accounting requirements. However, there engagements, including IT security control assessments. is still an ongoing global debate in regard to certain aspects of the application of the new standard and our finaladiustments may differ We have processes in place to maintain the independence of the from the current estimates should a different consensus be agreed external auditor, including the nature of expenditure on non-audit globally. services. EY also has specific internal processes in place to ensure auditor independence We continue to assess the impact of the new leasing standard on our future financial results, in particular how the new lease identification requirements will change accounting for new contracts entered into after 1 July 2019. We also continue to identify changes to our accounting policies, internal and external reporting requirements, IT systems, business processes and controls which will be fully operationalised during the financial year 2020. (209) (21) 201 9,732 201 9.700 14,112 14,150 7.3.2 Contingent liabilities and guarantees (a) Common law claims Certain common law claims by employees and third parties are yet to be resolved. As at 30 June 2019, management believes that the resolution of these contingencies will not have a significant effect on the Telstra Entity's financial results. The maximum amount of these contingent liabilities cannot be reliably estimated. (b) Indemnities, performance guarantees and financial support We have provided the following indemnities, performance guarantees and financial support through the Telstra Entity. indemnities to financial institutions to support bank guarantees to the value of $229 million (2018: $189 million) in respect of the performance of contracts . indemnities to financial institutions and other third parties in respect of performance and other obligations of our controlled entities, with the maximum amount of our contingent liabilities of $135 million 2018: $133 million) . letters of comfort to indicate support for certain controlled entities to the amount necessary to enable those entities to meet their obligations as and when they fall due, subject to certain conditions including that the entity remains our controlled entity) during the financial year 1998, we resolved to provide IBM Global Services Australia Limited (BMGSA) with guarantees issued on a several basis up to $210 million as a shareholder of IBMGSA During the financial year 2000, we issued a guarantee of $68 million on behalf of IBMGSA. During the financial year 2004, we sold our shareholding in this entity. The $68 million guarantee provided to support service contracts entered into by IBMGSA and third parties, was made with IBMGSA bankers or directly to IBMGSA customers. As at 30 June 2019, this guarantee remains unchanged and $142 million (2018: $142 million) of the $210 million guarantee facility remains unused. Upon sale of our shareholding in IBMGSA and under the deed of indemnity between shareholders, our liability under these performance guarantees has been indemnified for all guarantees that were in place at the time of sale. Therefore, the overall net exposure to any loss associated with a claim has effectively been offset. (c) Other In addition to the above matters, entities in the Telstra Group may be recipients of, or defendants in certain claims, regulatory or legal proceedings and/or complaints made, commenced or threatened. At 30 June 2019, management believes that the resolution of these contingencies will not have a material effect on the financial position of the Telstra Group, or are not at a stage which supports a reasonable evaluation of the likely outcome of the matter. 7.3.3 Recognition and measurement The accounting policies for the Telstra Entity are consistent with those of the Telstra Group, except for those noted below: under our tax funding arrangements, amounts receivable for payable) recognised by the Telstra Entity for the current tax payable (or receivable) assumed from our Australian wholly- owned entities are booked as current assets or liabilities investments in controlled entities, included within non-current assets, 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 4.3. Refer to note 6.1 for details on our investments in controlled entities. Our interests in associated entities and joint ventures, including partnerships, are accounted for using the cost method of accounting and are included within non-current assets Table B Telstra Entity Year ended 30 June 2019 2018 Restated Sm Statement of comprehensive income Profit for the year Total comprehensive income 2,358 2.337 3,584 3.547 Total non-current assets include $603 million (2018: 9862 million) impact of impairment losses recognised during the year. Within that amount, impairment losses relating to the value of our investments in, and the amounts owed by our controlled entities amounted to $104 million (2018: $545 million) and have been eliminated on consolidation of the Telstra Group. Refer to note 2.3 for impairment losses for property, plant and equipment and software. 7.3.1 Property, plant and equipment commitments Table C provides details of our expenditure commitments for the acquisition of property, plant or equipment, which have been contracted for at balance date but not recognised in the financial statements Table C Telstra Entity As at 30 June 2019 2018 $m $m 471 635 Total property, plant and equipment expenditure commitments
