Telstra Case Summary

Part A (a)
The present value of all future cash flows is a factor in the calculation of Value-in-Use (AASB 136 (30)). The Telstra Ltd management makes assumptions that future operating performance (or cash flow) of the asset can be appropriately predicted based on historical performances and expected future performances (Telstra, p94). This complies with AASB 136 (33), (34) and (35).

Future net cash flows have to be discount back to present value (AASB 136 (56)). The assumption that Telstra has makes is that the discount rate will be based on the weighted average cost of capital (AASB A17) with specific risk premiums. As required by AASB (A18), Telstra has excluded specific risk premiums from all other calculations to avoid double up.

Typical of a Listed Company, Telstra is made up of Cash Generating Units (CGU) which have different discount rates. Telstra makes the assumption that the asset in the Telecommunications Network, that is ubiquitous throughout Australia, does not generate cash independently of each other. Therefore the telecommunications unit forms one large CGU known as Telstra Entity.

Part A (b)

Investors depend on information for the best allocation of their scarce resources. Following the recent global financial crisis, there should be significant
There is evidence that estimation uncertainty comes from the subjective judgement of management. This is made more complex for managers when restricted liquidity and marketplace volatility makes the estimation of fair value difficult. For Value-in-Use calculations; it is the equity volatility, future revenues and the discount rate that contribute to estimation uncertainty. The complexity of so many variables can be overwhelming for unprepared companies. Needless to say, there is ample opportunity to choose creative accounting to favour company management and, due to laziness, to avoid the cost of full reporting