Telstra Corporation Limited – Annual report – 30 June 2019
Section 1. Basis of preparation (extract)
1.4 Key accounting estimates and judgements
Preparing the financial report requires management to make estimates and judgements. The accounting policies and significant management judgments and estimates used and any changes thereto are set out in the relevant notes. They can be located within the following notes:
Disaggregation of revenue from contracts with customers based on the nature and the timing of transfer of goods and services and by major products and geographical market is presented in note 2.1.2 in Table A and in Table B, respectively.
Revenue from other sources includes income from:
• operating leases of mobile handsets offered to our retail customers. For further information about these lease arrangements, refer to note 7.4.2.
• embedded sales type finance leases where Telstra is a dealer – lessor of customer premise equipment
• customer contributions to extend, relocate or amend our network assets, where the counterparty does not purchase any ongoing services under the same (or linked) contract(s).
Government grants include income under the Telstra Universal Service Obligation Performance Agreement (TUSOPA), Mobile Blackspot Government Program and other individually immaterial contracts accounted for as government grants. There are no unfulfilled conditions or other contingencies attached to these grants.
2.2.1 Our contracts with customers
We generate revenue from customer contracts, which vary in their form (standard or bespoke), legal term (casual, short-term and long-term) and customer segment (consumer, small-medium business, government and large enterprise), with the main contracts being:
• homogeneous retail consumer contracts (mass market prepaid and postpaid mobile, fixed and media plans)
• retail small to medium business contracts (mass market and off-the-shelf technology solutions)
• retail enterprise and government contracts (carriage, standardised and bespoke technology solutions and their management)
• network capacity contracts (mainly Indefeasible Right of Use)
• wholesale contracts for telecommunication services
• nbn Definitive Agreements (nbn DAs) and related arrangements
• network design, build and maintenance contracts (mainly with nbn co).
The nature and type of contracts with customers are further described below.
We sell a wide range of goods and services, which are provided either directly by us or by third parties. Generally, we act as principal in our contracts with customers, i.e. we control any promised goods and services before they are transferred to the customer and we have primary obligation for their delivery.
(a) Telstra Consumer and Small Business (TC&SB) contracts
TC&SB is a provider of telecommunication products, services and solutions across mobiles, fixed and mobile broadband, media and digital content to consumer and small business customers in Australia, i.e. our mass market customers. We offer prepaid and postpaid services. These contracts are homogeneous in nature and sold directly by us or via our dealer channel.
Our mass market contracts often offer a bundle of goods and services, including products such as hardware, voice, text and data services, media content and others.
Our postpaid plans are either fixed term contracts, where early termination charges apply if the customer cancels the contract; or casual month-to-month contracts, where the customer may cancel the contract at any time without any significant termination penalty. Fixed term contracts are typically short term and rarely exceed two to five years, with the majority of mobile and fixed contracts being 24 months and some small business contracts with a longer term.
In general, we recognise revenue from sale of goods on their delivery and from sale of services based on passage of time (for contracts with fixed monthly fees) or when the services have been consumed (for usage or excess based contracts).
Our long-term mobile contracts often offer a bundle of hardware and services, where the customer pays a monthly fee and receives a discount. These arrangements include two separate legal contracts with a customer which are combined for accounting purposes.
For mobile bundles sold directly by us, the discount is allocated between handset and services based on their relative standalone selling prices. However, if the bundle is sold via our dealer channel, the whole discount is allocated only to services because Telstra is not acting as a principal for delivery of the handset.
Under some of our long-term mobile and fixed contracts with hardware we offer customers deferred payment terms for handsets or other devices.
Some of our mass market contracts also include material rights and the transaction price allocated to them at contract inception is recognised as revenue either when the customer exercises the option and benefits from the free or discounted products or when the rights are forfeited.
We also offer mobile plans where the customer can lease a handset and purchase a bundle of services. Generally, we allocate the transaction price, and any relevant discounts, to all the products in the bundle based on a mixture of observable and estimated standalone selling prices of these products. However, any lease components are separated under the lease accounting standard based on the fair values of lease and aggregate non-lease components.
Under our fixed contracts, we usually charge a connection fee for new connections to our network. Connection is a fulfilment activity, therefore this fee is added to the transaction price and allocated to distinct goods and services promised under the contract.
Generally, mass market contracts are not modified due to their homogeneous nature. Customers often have rights included in the original contract to move up and/or down within the plan family. However, these rights are not often used.
(b) Telstra Enterprise (TE) contracts
TE transacts with medium to large enterprise and government customers for the provision of telecommunication services, advanced technology solutions, network capacity and management, unified communications, cloud and integrated and monitoring services in Australia and globally. Large and complex TE contracts are usually bespoke in nature as they deliver tailored solutions and services. Outside of the large customers, the contracts are largely standard.
TE contracts are generally large in annual turnover and range from one year in contract length to more than 15 years for large infrastructure projects, with the average term being three years. International network capacity agreements, referred to as Indefeasible Right of Use (IRU) agreements, have an average contract term between 10 and 33 years.
Our TE legal contracts often are in a form of multi-year framework agreements under which customers can order our goods and services, including some of the mass market plans. Framework agreements often include performance conditions and grant different types of discounts or incentive funds. Legal framework agreements are rarely considered as contracts for accounting purposes. Instead, revenue recognition rules are applied to goods and services ordered under each valid purchase order or a statement of work raised under the terms of the framework agreement. This may result in an accounting contract term not matching the legal term of a framework agreement and in turn affect the amount and timing of revenue recognised under each accounting contract. In some of our TE contracts, we also act as a dealer and a lessor for computer mainframes, processing equipment and other related equipment used by our customers as part of the solutions management and outsourcing services. Leases embedded in our contracts are separately accounted for, usually as sales type finance leases with finance lease receivables recognised in the statement of financial position.
Our bespoke TE contracts are varied or re-negotiated from time to time. Subject to the nature of these changes, accounting rules for contract modification apply, depending largely on the determination of distinct goods and services being delivered before and after the contract modifications and the price changes arising from the modifications.
Some of the TE contracts include two phases: a build phase followed by the management of the technology solutions. Due to the complex nature of those arrangements, we analyse the facts and circumstances of each contract in order to determine distinct performance obligations. If the build phase (or its components) qualifies as distinct, we recognise the build phase revenue over the term of the build or at its completion depending on when the customer obtains control over the technology solution. For each contract modification, we assess the scope of the modification or its impact on the contract price in order to determine whether the amendment must be treated as a distinct contract, as if the existing contract were terminated and a new contract signed, or whether the amendment must be considered as a change to the existing contract.
Under some of our enterprise arrangements, we receive customer contributions to extend or amend our network assets to ultimately enable delivery of telecommunication services. Where the counterparty makes a contribution for network construction activities and purchases ongoing services under the same (or linked) contract(s), the upfront contribution is added to the total transaction price of the customer contract and is allocated to the distinct goods and services to be delivered under that contract.
We recognise revenue from management services or fixed fee telecommunication services based on passage of time and from usage based carriage contracts when the services have been consumed.
Some of our framework agreements offer enterprise loyalty programs and technology funds under which customer can obtain additional free products. These are accounted for as material rights and the transaction price allocated to them at contract inception is recognised as revenue either when the customer exercises the option and benefits from the free products or when the rights are forfeited.
Our TE accounting contracts include multiple goods and services. Generally, we allocate the transaction price, and any relevant discounts, to all the products in the accounting contract based on the negotiated prices, which are largely aligned to the estimated standalone selling prices of distinct goods and services promised under the contracts. However, some discounts granted under the framework agreements may be allocated to selected performance obligations if specific performance conditions apply. Transaction price allocated to any lease components is based on the fair values as required by the lease accounting standard.
Our large commercial arrangements often incorporate service level agreements, e.g. agreed delivery time or service reinstatement time. If we fail to comply with one of these commitments, we pay compensation to the customer. The expected amount of such penalties reduce the revenue for the period in which the service level commitment has not been met, and it is recognised as soon as it is probable that the commitment has not been or will not be met. Some of the arrangements also include benchmarking or CPI clauses, which are accounted for as variable consideration, usually from the time the price changes take effect.
Our international TE arrangements include long-term network capacity arrangements (some being take-or-pay arrangements) as well as provision of satellite and colocation services (i.e. access to the rack spaces, utilities and managed services such as security and backups), for which revenue is usually recognised based on passage of time.
IRU arrangements usually include upfront payments for services which will be delivered over multiple years.
In IRUs where Telstra receives financing from the customer, revenue recognised over the contract term exceeds the cash payments received in advance of performance by the amount of interest expense recognised in net finance costs.
(c) Telstra Wholesale contracts
Telstra Wholesale (part of our Telstra InfraCo segment) is a provider of a wide range of telecommunication products and services to other telecommunication operators, carriage services providers and internet service providers, who in turn sell their services to a retail end user.
Revenue arises from fixed network services contracts, including usage based contracts and fixed bundles, with a term of up to two years. Other contracts provide data and IP and mobile products such as interconnect, domestic roaming, bulk SMS and postpaid mobile services.
Insignificant annual revenue arises under long-term network capacity contracts (i.e. IRUs), however some of those contracts have a fixed term of up to 15 years.
Telstra Wholesale legal contracts are generally signed as multi-year framework agreements, which set out pricing for the agreed services, the legal contract term and any renewal options, incentives, discounts and one-off fees. However, usually until our wholesale customer’s customer, i.e. the end user, orders services, the obligation to deliver goods or services does not exist. Therefore, the accounting contract generally arises at the level of a service order of an end user.
Some of our framework agreements specify a minimum spend commitment (i.e. a take-or-pay arrangement), in which case the accounting contract may exist also at the framework agreement level.
Under some of our wholesale arrangements, we receive customer contributions to extend or amend our network assets to ultimately enable delivery of telecommunication services. Where the counterparty makes a contribution for network construction activities and purchases ongoing services under the same (or linked) contract(s), the upfront contribution is added to the total transaction price of the customer contract and allocated to the distinct goods and services to be delivered under that contract.
Telstra Wholesale service revenue is generally recognised over time during the period over which the services are rendered, mostly based on passage of time as the service provider (i.e. our customer) receives unlimited calls and data.
Some of the Telstra Wholesale contracts include multiple goods and services. We allocate the transaction price, and any relevant discounts, generally to all the products in the accounting contract based on the negotiated prices, which are largely aligned to the estimated standalone selling prices of distinct goods and services promised under the contracts. However, some discounts granted under the framework agreements may be allocated only to selected performance obligations based on the specific performance conditions in the framework agreement.
(d) Agreements with nbn co
We have two types of agreements with nbn co:
• nbn DAs and related arrangements
• commercial contracts for network design, build and maintenance services.
Revenue from contracts with nbn co is mainly reported within the Telstra InfraCo segment. Amounts recognised as other income are recorded in our corporate areas.
Our nbn DAs and related arrangements include a number of separate legal contracts with both nbn co and the Commonwealth Government (being related parties hence treated as the same customer for accounting purposes) which have been negotiated together with a common commercial objective. These separate legal contracts have been combined under the revenue recognition rules.
The combined accounting contract, comprising of nbn DAs and related arrangements, has a minimum fixed term of 30 years for accounting purposes.
The combined nbn DAs and related arrangements include a number of separately priced elements, some of which are accounted for under the revenue recognition standard whereas others under other accounting standards, e.g. government grants. The Subscriber Agreement continues to be separately accounted for as other income given the nbn disconnection fees do not relate to our ordinary activities and there is no price dependency on other nbn DAs.
Services provided under the Infrastructure Services Agreement (ISA) are accounted for under the revenue recognition requirements. We recognise revenue from providing long-term access to ducts and pits and other infrastructure, including dark fibre and exchange rack space over time, initially based on the cumulative nbnTM network rollout percentage and after rollout completion based on passage of time.
The build of nbn related infrastructure is not considered a separate performance obligation, therefore payments received for it under a separate legal agreement have been combined and accounted for together with the ISA long-term access services. These payments have been received upfront and recorded as a contract liability, i.e. an advance payment for services transferred over the ISA average contracted period of 35 years.
ISA also includes payments for sale of our infrastructure assets, with the net gain on sale of those assets recognised in other income. Net gain on sale of the infrastructure assets is recognised at point in time when the control passes to nbn co based on the incremental nbnTM network rollout percentage.
We deliver a number of different services under these arrangements and the transaction price includes a number of fixed and variable components as described on the following page in the ‘Impact of nbn Infrastructure Services Agreement (ISA) on revenue from customer contracts and other income’.
Given significant variability in the overall ISA consideration, the legal contract includes specific clauses as to if, when and how an interest receivable or an interest payable should be calculated.
The other arrangements with nbn co are commercial contracts for network design, build and maintenance services. These arrangements provide a framework agreement with scheduled rates under which nbn co can order required services. Generally, the accounting contracts under these arrangements have no fixed term or minimum order quantities that extend beyond 12 months.
The majority of revenue is recognised over time on a percentage of completion basis. This is because the work being delivered can take several months to complete with control being passed progressively over that period. The percentage of completion is calculated as costs incurred as a percentage of total estimated costs.
Recognition of trade receivables, contract assets and contract liabilities from our contracts with customers and movements in net contract assets and contract liabilities are detailed in notes 3.7.1 and 3.7.2, respectively.
2.2.2 Remaining performance obligations
Nature, types and terms of our contracts with customers are described in note 2.2.1.
Sometimes goods and services purchased under the same customer contract will be transferred to the customer over multiple reporting periods.
For contracts where a customer has made a firm commitment, for example entered into a fixed term contract or a take-or-pay arrangement, and where some performance obligations remain unfulfilled as at 30 June 2019, we disclose the aggregate transaction price allocated to goods and services which will be transferred after 30 June 2019 but arise from contracts existing as at that date. These performance obligations represent goods and services that we are obliged to provide to customers during the remaining fixed term of our contracts, including contracts with an initial term of one year or less.
Certain contracts offer customers the ability to purchase additional goods or services at a discount. Any additional consideration for those products is not included in the transaction price as it will be recognised when the customer exercises the option to purchase those products under a new, and not an existing, accounting contract.
In determining the transaction price allocated to the remaining performance obligations we did not include any future amounts arising from usage based contracts, excess charges from consumption over and above the services included in the current contract, one-off transactions or casual contracts because no obligation arises under those contracts until the customer consumes our services.
Future revenue arising from nbn DAs is estimated based on a number of assumptions and the estimated amount of variable consideration has been constrained to the amount that is highly probable of not resulting in a significant cumulative revenue reversal. The estimated variable consideration and the constraint are reassessed each reporting period. However, given its size, long-term nature and a number of variable components impacting the contract consideration (refer to note 2.2.1 for details) the actual amounts recognised in the future periods may still materially differ from our estimates.
In addition, any amounts arising from our existing customer contracts which will be recognised as ‘revenue from other sources’ or ‘other income’, for example operating lease income or net gain on sale of assets, are excluded from the remaining performance obligations.
We have elected to apply the first time adoption practical expedient and not to disclose the remaining performance obligations for the financial year 2018.
Table B presents aggregate transaction price allocated to the remaining performance obligations promised under the contracts where a customer has made a firm commitment before the balance date but goods and services will be transferred after 30 June 2019. Presented time bands best depict future revenue recognition profiles.
2.2.3 Recognition and measurement
In the financial year 2019, we have adopted new accounting policies for revenue recognition.
(a) Revenue from contracts with customers
Revenue from contracts with customers arises from arrangements where the counterparty is a customer that transacts with us to obtain goods or services which are an output of our ordinary activities in exchange for consideration.
We apply the five-step approach to our customer arrangements to identify the contract for accounting purposes, i.e. the accounting contract and to determine the amount and timing of revenue to be recognised. The five steps are applied at inception of the accounting contract in order to provide an overview of the contract as a whole. This in turn allows us to determine the accounting for relevant costs to obtain and/or fulfil a contract. The five steps are described below. For the accounting policy for deferred costs to obtain and/or fulfil a contract refer to note 3.8.1.
(i) Step 1: Identify the contract with customer
In order to identify an accounting contract, the contract must be legally enforceable. Any components of the contract which are accounted for under other accounting standards are then identified and separated out as they cannot be considered for revenue recognition.
The accounting contract may not align with the legal contract and in some cases multiple legal contracts may need to be combined to form one accounting contract. In other instances, a legal contract may only provide a framework agreement (i.e. an offer) and an accounting contract only exists when the customer commits to purchase goods or services. This is because an accounting contract must have commercial substance. Each party’s rights regarding the goods or services and specified payment terms must also exist. In addition, it has to be probable that the customer is able and intends to pay Telstra. The contract term impacts the identification of performance obligations and the transaction price.
(ii) Step 2: Identify the performance obligations in the contract
After the accounting contract and its term have been established, we determine the performance obligations within the contract. Performance obligations include promised distinct goods or services for which control is transferred from Telstra to the customer and material rights but exclude fulfilment activities (other activities that are necessary under the contract but that do not result in a transfer of goods or services).
Performance obligations can be explicitly stated in a contract or can be implied when the customer has a valid expectation that an additional good or service will be delivered.
A material right is accounted for as a separate performance obligation if we give the customer a beneficial option to purchase additional distinct goods or services, i.e. the customer receives an incremental discount of at least 5% of the transaction price compared to other customers.
We account for a series of goods or services which are substantially the same and have the same pattern of transfer to the customer as a single performance obligation.
A good or service is distinct if it is capable of being distinct, i.e. a customer can benefit from it on its own together with other readily available resources, and it is distinct within the context of the contract, i.e. no transformative relationship exists with other promised goods or services.
(iii) Step 3: Determine the transaction price
After all performance obligations have been identified, we determine the transaction price, which represents the total amount of revenue to be recognised under the accounting contract. In doing so, we assume that the contract will not be cancelled, renewed or modified.
The transaction price may include fixed and/or variable, cash and/or non-cash consideration. It may also need to be adjusted for:
• a significant financing component (if the period between when we would transfer the good or service to the customer and when the customer would pay for the good or service is expected to be greater than one year)
• consideration accounted for under other accounting standards (such as lease repayments)
• amounts collected on behalf of third parties (such government taxes).
Fixed cash consideration is not dependent on future events and is based on the minimum amount of cash we expect to receive in exchange for delivering the minimum level of goods or services the customer has legally committed to purchase at contract inception over the accounting contract term.
Variable consideration receivable or payable is an amount that is variable or contingent upon an uncertain future event before the exact amount is known. Examples of variable consideration include discounts, rebates, refunds, credits and price concessions. To estimate an amount of variable consideration, we use either the most likely amount or the expected value method depending on which better predicts the variable amount. After estimating it, we constrain the variable consideration to the amount that is highly probable of not resulting in a significant cumulative revenue reversal.
(iv) Step 4: Allocate the transaction price to the performance obligations in the contract
After the transaction price has been determined, we allocate it to the performance obligations generally based on their relative standalone selling price (SSP). SSP is the price for which we would sell the goods or services underlying the performance obligations on a standalone basis, i.e. not in a bundle. We determine SSPs at contract inception using an observable price for a standalone sale of substantially the same good or service under similar circumstances and to a similar class of customers. If no observable price is available, we estimate the SSP using an appropriate method, e.g. adjusted market assessment approach, expected cost plus a margin approach or a residual approach.
Using relative SSPs for allocating the transaction price to performance obligations generally reflects the proportional amount of consideration we expect to receive in exchange for delivering the underlying distinct goods and/or services under the contract. However, in some instances, in order to correctly reflect the amount of revenue to be recognised, we apply allocation exceptions for variable consideration, discounts or a significant financing component in order to correctly allocate these elements to some but not all performance obligations.
(v) Step 5: Recognise revenue when or as a performance obligation is satisfied
After the transaction price has been allocated to the performance obligations, we determine when revenue should be recognised, i.e. when a performance obligation is satisfied by us which is when control of the distinct good or service is transferred to the customer.
Customers obtain control over a good or service when they benefit from the good or service and decide how to use the good or service.
If any of the following three criteria are met, we recognise revenue over time:
• the customer simultaneously receives and consumes all benefits as we perform (this applies to routine or recurring services)
• our performance creates or enhances an asset controlled by the customer (this is relevant when the asset is built on a customer’s site)
• the asset has no alternative use to us and we have an enforceable right to payment (for example, an asset is being built to order).
If none of the criteria are met, we recognise revenue at a point in time.
We use either input or output methods to measure progress when satisfying the performance obligations over time. Output methods use direct measurements of the value to the customer, i.e. they are based on the goods or services that control has transferred to date relative to the remaining goods or services promised under the contract (for example, milestones reached). It is applied when the value of the goods or services transferred to the customer can be measured directly. Input methods use our efforts or inputs in the satisfaction of the performance obligation relative to the total expected efforts or inputs in satisfying that performance obligation (for example, our labour hours used). It is applied when the value of the underlying goods or services transferred to the customer cannot be measured.
When a performance obligation is satisfied at a point in time, the allocated transaction price is recognised when control is transferred to the customer. In determining whether the control over the good has transferred to the customer, we consider the customer’s obligation to pay, transfer of legal title to the good, physical possession of the good, the customer’s acceptance and risks and rewards of ownership.
(vi) Accounting after contract inception
The five-step approach provides an accounting contract overview at its inception. However, some judgements and estimates may change over the accounting contract term. Where relevant, we account for the following events after contract inception:
• exercised or forfeited customer options (both material rights and marketing offers, i.e. non beneficial options)
• changes in estimates of variable consideration
• changes in how the customer exercises its contractual rights
• special arrangements, e.g. bill and hold or consignment arrangements.
(vii) Contract modifications
From time to time, our contracts are renegotiated after contract inception and their scope and/or price change. We account for contract modifications either as:
• a separate contract which will not require any reallocation to performance obligations in the original contract
• a retrospective cumulative change to revenue (creating either a catch up or deferral of past revenues for all performance obligations in the original contract)
• a prospective change to revenue with a reallocation of revenues amongst remaining performance obligations in the original contract, or
• both a cumulative change and prospective change to revenue in the original contract.
(b) Revenue from other sources
Revenue from other sources includes income arising from arrangements other than those accounted for using the five-step approach. This is because in some cases income generated in the course of our ordinary activities does not relate to our performance under contracts with customers or it is explicitly accounted for under other accounting standards.
Contract terminations generally trigger different rights and obligations under the legal contract. These rights and obligations are not related to our performance and were not considered at inception of the accounting contract when applying the five-step approach. Therefore, where relevant, any income over and above the recovery of the consideration due for the delivered goods or services is not classified as revenue from customer contracts. Instead, we classify it as revenue from other sources.
We earn revenue from operating subleases of mobile handsets offered to our retail customers (Telstra as a lessor), which we lease from a third party in a back-to-back arrangement (Telstra as a lessee). We also earn revenue from property operating leases. Operating lease income is recognised on a straight- line basis over the lease term.
We earn revenue from embedded sales type finance leases where Telstra is a dealer-lessor of customer premise equipment. We recognise revenue from sale of these goods at point in time when the control transfers to the customer.
We receive contributions to extend, relocate or amend our network assets. Where the counterparty makes a contribution for network construction activities that is not considered a government grant, and does not purchase any ongoing services under the same (or linked) contract(s), we recognise revenue over the period of the network construction activities.
Other items we classify as revenue from other sources include late payment fees, which are recognised when charged and their collectability is reasonably assured.
(c) Government grants
Government grants are recognised where there is reasonable assurance that the grant will be received and Telstra will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement as other income over the period necessary to match them with the costs that they are intended to compensate.
3.3 Trade and other receivables and contract assets (extracts)
3.3.1 Current and non-current trade and other receivables and contract assets (extracts)
The majority of our receivables are in the form of contracted agreements with our customers. In general, the terms and conditions of these contracts require settlement between 14 to 30 days from the date of invoice. Credit risk associated with trade and other receivables and contract assets has been provided for.
Our trade receivables include receivables with deferred payment terms, which allow eligible customers the opportunity to repay the amounts due for certain hardware and professional installation services monthly over 12, 24 or 36 months.
Contract assets relate to our rights to consideration for goods or services provided to the customers but for which we do not have an unconditional right to payment at the reporting date.
Refer to note 3.7 for further details regarding trade receivables from contracts with customers and contract assets.
(a) Finance lease receivables
We enter into finance lease arrangements predominantly for communication assets dedicated to solutions management that we provide to our customers largely in a back-to-back finance lease arrangement. Refer to note 7.4 for information about our finance lease commitments arising from these finance arrangements (Telstra as a lessee). The weighted average remaining term of the finance lease in our customer contracts is 5 years (2018: 6 years).
Table B presents detailed information about our finance lease receivables.
The interest rate implicit in the leases is fixed at the contract date for the entire lease term. The average effective interest rate was 5.0 per cent (2018: 5.3 per cent) per annum.
(b) Impairment of trade and other receivables and contract assets
Trade and other receivables and contract assets are exposed to customers’ credit risk and are subject to impairment assessment.
If a credit loss is expected, an allowance for doubtful debt is raised to reduce the carrying amount of trade and other receivables and contract assets based on a review of outstanding amounts at a reporting date.
A credit loss is a shortfall between the cash flows that are due in accordance with the contract and the cash flows that we expect to receive, discounted at the original effective interest rate. The estimated expected credit loss is calculated using one of the following approaches:
• a portfolio approach based on historical credit loss experience (mostly applied to balances arising from our consumer and small business customer contracts)
• an individual account by account assessment based on past credit history, knowledge of debtor’s financial situation or other known credit risk (applied to balances arising from contracts with large corporate and government customers as well as to accounts where some detrimental change in payment behaviour has been noticed or certain thresholds have been exceeded by Telstra Enterprise and Telstra InfraCo customers)
• a hybrid of the portfolio approach and individual assessment (applied mostly to balances arising from Telstra Enterprise customer contracts).
Under the portfolio approach, receivables and contract assets are grouped based on shared credit risk characteristics, such as:
• account status (services still active or not)
• customers’ payment history
• the days past due.
Contract assets relate to the transferred goods and services where a valid invoice is yet to be issued to the customer and have substantially the same risk characteristics as the trade receivables for the same types of contracts. Therefore, the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets.
Under a hybrid approach, accounts with an increased risk defined by balance, age or insolvency are assessed individually and any resulting impairment amount is recognised in lieu of the provision calculated using the portfolio approach for that particular account.
In Telstra Wholesale (part of Telstra InfraCo segment), the combination of the industry default rate corresponding to Standard & Poor’s BB credit risk rating and the individual approach is used to arrive at the provision amount.
Our provision rates for trade receivables and contract assets where a portfolio approach is applied range from 0.2 per cent for balances not past due to 91.0 per cent for balances where the payment is overdue by more than 90 days and the customer’s services have been deactivated.
The ageing analysis and loss allowance in relation to our trade receivables from contacts with customers, finance lease receivables and contract assets where the impairment allowance is calculated using a simplified approach (i.e. based on the probability of default over the lifetime of the financial asset and loss given default) are detailed in Table C.
Ageing analysis in Table C is based on the original due date of trade receivables, including where repayment terms for certain long outstanding trade receivables have been renegotiated. We have not presented the comparatives as allowed under the transition requirements to the new impairment measurement principles that we adopted as at 1 July 2018.
Contract assets are not yet due for collection, thus the entire balance has been included in the ‘not past due’ category.
Other receivables and accrued revenue totalling $971 million (2018: $855 million) are subject to impairment assessment under the general approach and include 72 per cent (2018: 70 per cent) of balances with an external credit rating of AA or above.
We hold security for a number of trade receivables, including past due or impaired receivables, in the form of guarantees, letters of credit and deposits. During the financial year 2019, no securities were called upon. These trade receivables, along with our trade receivables that are neither past due nor impaired, comprise customers who have a good debt history and are considered recoverable. Further, we limit our exposure to credit risk from trade receivables by establishing a maximum payment period and, in certain instances, cease providing further services after 90 days from the past due date.
Movements in the allowance for doubtful debts in respect of our trade and other receivables and contracts assets are detailed in Table D.
The total allowance in Table D includes the allowance for all types of trade and other receivables and contract assets, regardless of the method used in assessing the allowance. Impairment allowance related to accrued revenue and other receivables (not presented in Table C) amounted to $9 million.
3.3.2 Recognition and measurement
Trade and other receivables and contract assets are financial assets.
Trade and other receivables are initially recorded at fair value and subsequently measured at amortised cost using the effective interest method, with the exception of certain trade receivables from contracts with customers, which are subsequently measured at fair value. Refer to note 4.4.5 for further details on trade receivables from contracts with customers measured at fair value.
Contract assets arise from our contracts with customers and are initially recorded at the transaction price allocated as compensation for goods or services provided to customers for which the right to collect payment is subject to providing other goods or services under the same contract (or group of contracts) and/or we are yet to issue a valid invoice. Contract assets are subsequently measured to reflect relevant transaction price adjustments (where required) and are transferred to trade receivables when the right to payment becomes unconditional, i.e. when the other goods or services under the same contract (or group of contracts) have been transferred and/or a valid invoice has been issued.
(a) Lease receivables (Telstra as a lessor)
Refer to note 3.1.2 (c) for details about whether an arrangement contains a lease and the distinction between finance leases and operating leases.
Where we lease assets via a finance lease, a lease receivable is recognised at the beginning of the lease term and measured at the present value of the minimum lease payments receivable plus the present value of any unguaranteed residual value expected to accrue at the end of the lease term.
Finance lease receipts are allocated between finance income and a reduction of the lease receivable over the term of the lease in order to reflect a constant periodic rate of return on the net investment outstanding in respect of the lease.
Income from operating leases is recognised on a straight-line basis over the term of the relevant lease.
(b) Impairment of financial assets
We estimate the expected credit losses for our financial assets (including contract assets) measured at amortised cost on either of the following basis:
• a general approach, i.e. 12-month expected credit loss which results from all possible default events within the 12 months after the reporting date (applicable to accrued revenue and other receivables), or
• a simplified approach, i.e. lifetime expected credit loss which results from all possible default events over the expected life of a financial instrument (applicable to trade receivables from contracts with customer, contract assets and lease receivables).
If the credit risk of a financial asset at the reporting date has increased significantly since its initial recognition, loss allowance is calculated based on lifetime expected credit losses, rather than 12 months.
Any customer account with debt more than 90 days past due is considered to be in default.
Trade receivables and contract assets are written off against the allowance for doubtful debts or directly against their carrying amounts and expensed in the income statement when all collection efforts have been exhausted and the financial asset is considered uncollectable. Factors indicating there is no reasonable expectation of recovery include insolvency and significant time period since the last invoice was issued.
Our inventory includes goods available for sale, materials, consumables and spare parts to be used within one year in constructing and maintaining our telecommunications network. We also purchase strategic inventories for use in maintenance of network assets beyond one year.
Right to recover products arises from sale with a right of return under certain contracts with customers as described in note 3.5.1.
3.4.1 Recognition and measurement
Inventories are valued 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 less estimated costs of completion and the estimated costs incurred in marketing, selling and distribution. It approximates fair value less costs to sell.
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.
3.5 Trade and other payables
Trade payables and other payables are non-interest bearing liabilities. Our payment terms vary, however payments are generally made within 30 days to 90 days from the invoice date.
From time to time, Telstra’s suppliers utilise supply chain finance, i.e. they transfer their rights of the amounts due from Telstra to third parties. However, Telstra’s obligation is to pay for goods and services purchased from our suppliers on the original due date without any change in payment terms. As at 30 June 2019, the amount payable under this arrangement was $593 million (2018: $42 million) and we have reclassified it from ‘Trade payables’ to ‘Other payables’.
3.5.1 Recognition and measurement
Trade and other payables, including accruals, are recorded when we are required to make future payments as a result of purchases of assets or services. Trade and other payables are financial liabilities initially recognised at fair value and carried at amortised cost using the effective interest method.
Some of our contracts with customers include a right of return, where the customer can return certain devices for specified reasons. Where this is the case, at contract inception we restrict the revenue recognised to the amounts of consideration we expect to be entitled to, i.e. we exclude the estimated refund amount. At the same time, we also recognise a refund liability (representing our obligation to provide a refund for the returned products), a right to recover products (presented as an inventory item and representing the estimate of the carrying value of the products to be recovered from customers) and a corresponding adjustment to the cost of sales. At each reporting period, we remeasure the refund liability (with a corresponding adjustment to revenue) and update the measurement of the right to recover products where required.
3.6 Contract liabilities and other revenue received in advance
Contract liabilities arise from our contracts with customers and represent amounts paid (or due) to us by customers before receiving the goods and/or services promised under the contract.
We also recognise revenue received in advance for consideration received upfront under contracts giving rise to revenue from other sources or other income, for example from nbn disconnection fees or from sale of assets.
Table A presents customer payments received in advance under different types of our commercial arrangements.
3.7 Trade receivables from customer contracts, contract assets and contract liabilities
3.7.1 Recognition of trade receivables, contract assets and contract liabilities
Trade receivables, contract assets and contract liabilities arise from our contracts with customers described in note 2.2.1.
The relationship between our performance and the customer’s payment will determine if trade receivables, contract assets or contract liabilities are recognised.
The timing of revenue recognition may differ from customer invoicing. Trade receivables from contracts with customers (refer note 3.3.1) represent an unconditional right to receive consideration (primarily cash), which normally arises when the goods and services promised to the customer have been transferred and/or a valid invoice has been issued.
By contrast, contract assets mainly refer to amounts allocated as consideration for goods or services provided to customers for which the right to collect payment is subject to providing other goods or services under the same contract (or group of contracts) and/or we are yet to issue a valid invoice.
Contract liabilities represent amounts paid (or due) to us by customers before receiving the goods and/or services promised in the contract.
Contract assets and contract liabilities also arise due to timing differences between invoicing and recognition of certain discounts, credits or other incentives, including those arising from our framework agreements. These items adjust revenue recognised in a given period but they can be invoiced upfront, over the contract term or when certain performance conditions have been met.
Customer contract assets and liabilities are presented, respectively, in current and non-current assets and current and non-current liabilities based on the amounts expected to be collected or recognised as revenue within or after 12 months from the reporting period end.
In general, we invoice customers in advance for services provided under our prepaid or fixed (usually monthly) fee contracts and in arrears for usage based contracts (e.g. carriage services under enterprise contracts) or excess charges in mass market contracts. In those cases we would recognise a contract liability and a contract asset respectively.
Under our mobile mass market long-term plans which offer a bundle of hardware and services, the customer enters into two separate legal contracts. Where these are combined for revenue recognition, we recognise a trade receivable for the device payment contract under which we have an unconditional right to payment despite the deferred payment terms resulting in invoicing over the extended term.
Under some of our fixed mass market long-term contracts, we also offer a bundle of hardware (delivered upfront) and services (delivered over the contract term). In this case, the excess of the amount allocated to the hardware over the amount invoiced at the time is recognised as a contract asset and transferred to trade receivables as the service is invoiced, i.e. under this legal contract our right to consideration is conditional on transfer of future services.
Under some of our fixed mass market plans, wholesale and enterprise arrangements, we charge upfront connection or other fees for contract fulfilment activities, which represent transaction price adjustments and at the time give rise to a contract liability given they have been collected before the goods and services have been transferred.
We also recognise a contract liability for our domestic and international network capacity arrangements, under which we receive upfront payments in advance of services which will be provided over an average contract term between 10 and 33 years.
3.7.2 Movements in net contract assets and contract liabilities
Our billing arrangements for goods and services as well as different types of discounts, credits or other incentives can vary depending on the type and nature of the contracts with customers. As a result, at times under the same accounting contract, we may recognise both a contract asset and a contract liability. At each reporting period, any balances arising from the same accounting contract are presented net in the statement of financial position as either a net contract asset or a net contract liability.
The net presentation mainly impacts our small business and enterprise framework arrangements offering loyalty programs and technology funds, and nbn DAs, where multiple legal contracts have been combined as one accounting contract.
Table A presents opening and closing balances of our current and non-current contract assets and contract liabilities and their total net movement for the period.
Generally, contract assets increase when we recognise revenue for goods and services transferred to the customer in advance of their invoicing and decrease when we invoice customers for goods and services provided previously (i.e. when contract assets are transferred to trade receivables).
On the other hand, contract liabilities increase when we receive consideration in advance of transferring the goods and services to the customer, and decrease when we recognise revenue for the goods and services previously prepaid by the customer.
Other changes in our contract assets and contract liabilities represent movements resulting from changes in the transaction prices due to timing of invoicing and recognition of discounts, credits and other incentives.
As at 30 June 2019, the net contract liabilities amounted to $1,112 million (2018: $1,069 million). The following selected movements contributed to the overall increase of $43 million (2018: $105 million decrease) in the net contract liabilities:
• $1,521 million (2018: $1,364 million) revenue recognised in the reporting period that was included in the contract liabilities balance at the beginning of the period
• $42 million (2018: $44 million) cumulative catch-up adjustments to revenue recognised in the prior reporting periods.
Refer to note 3.3.1 for details regarding impairment assessment and related movements in contract assets.
3.8 Deferred contract costs
Certain costs related to our contracts with customers and not accounted for under any other accounting standards are deferred in the statement of financial position and amortised on a basis consistent with the transfer of goods and services to which these costs relate.
Deferred contract costs comprise of deferred costs to obtain or fulfil an accounting customer contract. Table A provides movements in net book value of the deferred contract costs.
3.8.1 Recognition and measurement
We capitalise costs to obtain an accounting contract when the costs are incremental, i.e. would not have been incurred if the contract had not been obtained and are recoverable either directly via reimbursement by the customer or indirectly through the contract margin.
We elect to recognise the incremental costs of obtaining contracts as an expense when incurred if the amortisation period of the assets that we would have otherwise recognised would have been one year or less.
Costs to fulfil a contract are costs incurred in satisfying the performance obligations under a customer contract. These costs relate directly to an identified performance obligation or indirectly to other activities that are necessary under the contract but that do not result in a transfer of goods or services, i.e. they are fulfilment activities.
Costs to fulfil a contract include set-up costs and costs of a service provider, which represent the costs incurred in relation to services which will be transferred to our customers in the future reporting periods.
We capitalise costs to fulfil a contract if all of the following apply:
• the costs are not required to be accounted for under another accounting standard
• the costs relate directly to a contract or a specifically identified anticipated contract (for example, costs relating to services to be provided under renewal of an existing contract)
• the costs generate or enhance resources that we control and will be used to satisfy future performance obligations under the contract
• we expect to recover the costs.
We amortise deferred contract costs over the term that reflects the expected period of benefit of the expense. This period may extend beyond the initial contract term to the estimated customer life or average customer life of the class of customers. We use the amortisation pattern consistent with the method used to measure progress and recognise revenue for the related goods or services.
We assess whether deferred contract costs are impaired whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
2.1 Segments and disaggregated revenue (extract)
2.1.2 Segment results and disaggregated revenue
Table A details our segment results and a reconciliation of EBITDA contribution to the Telstra Group’s EBITDA, EBIT and profit before income tax expense. It also presents disaggregated revenue based on the nature and the timing of transfer of goods and services.
We recognise revenue from contracts with customers when the control of goods or services has been transferred to the customer. Revenue from sale of services is recognised over time, whereas revenue from sale of goods is recognised at a point in time. Other revenue from contracts with customers includes licensing revenue (recognised either at a point in time or over time) and agency revenue (recognised over time). Refer to note 2.2.1 for further details about our contracts with customers.
The effects of the following inter-segment transactions have not been excluded from segment EBITDA contribution:
• revenue from external customers in the TE segment includes $254 million (2018: $214 million) of inter-segment revenue treated as external expenses in the TC&SB and Telstra InfraCo segments, which is eliminated in the ‘All Other’ category
• external expenses in the TE segment include $11 million (2018: $13 million) of inter-segment expenses treated as external revenue in the Telstra InfraCo and eliminated in the ‘All Other’ category.
During the year, total impairment loss of $499 million related to property, plant and equipment and software assets was recognised in the ‘All Other’ category. Refer to notes 3.1 and 3.2 for further details.
In the financial year 2018, a total impairment loss of $317 million related to goodwill and other non-current assets was recognised in the ‘All Other’ category.
Table B presents disaggregation of our segment revenue by major products and geographical markets.
Other products and services relate to nbn co accessing our infrastructure and miscellaneous revenue. It also includes revenue from Telstra Health and Telstra Software business units.
All Other category by product and by geographical market includes eliminations of the inter-segment transactions described in the segment results following Table A in note 2.1.2. Amounts disclosed in geographical markets were partly offset by revenue from operating segments which do not meet the disclosure requirements of a reportable segment. Other negative product revenue amounts relate to certain corporate level adjustments.