Telus 2010 Annual Report Download - page 74

70 . TELUS 2010 annual report
7.8 Financial instruments, commitments and contingent liabilities
Financial instruments (Note 5 of the Consolidated financial statements)
The Company’s financial instruments and the nature of risks that they may be subject to are set out in the following table:
Risks
Market risks
Financial instrument Credit Liquidity Currency Interest rate Other price
Measured at cost or amortized cost
Cash and temporary investments X X X
Accounts receivable X X
Accounts payable X X
Restructuring accounts payable X
Short-term obligations X X
Long-term debt X X X
Measured at fair value
Short-term investments X X
Long-term investments X
Foreign exchange derivatives(1) X X X
Share-based compensation derivatives(1) X X X
Cross currency interest rate swap derivatives(1) X X X X
(1) Use of derivative financial instruments is subject to a policy which requires that no derivative transaction be entered into for the purpose of establishing a speculative or
leveraged position (the corollary being that all derivative transactions are to be entered into for risk management purposes only) and sets criteria for the creditworthiness
of the transaction counterparties.
Credit risk
Credit risk associated with cash and temporary investments is minimized
substantially by ensuring that these financial assets are placed with
governments, major financial institutions that have been accorded strong
investment grade ratings by a primary rating agency, and/or other credit-
worthy counterparties. An ongoing review is performed to evaluate
changes in the status of counterparties.
Credit risk associated with accounts receivable is minimized by the
Company’s large and diverse customer base, which covers substantially
all consumer and business sectors in Canada. The Company follows
a program of credit evaluations of customers and limits the amount of
credit extended when deemed necessary. The Company maintains
allowances for potential credit losses, and any such losses to date have
been within management’s expectations. As at December 31, 2010,
the weighted average life of past-due customer accounts receivable
is 59 days (2009 – 72 days).
The Company must make significant estimates in respect of the
allowance for doubtful accounts. Current economic conditions, historical
information, why the accounts are past due and line of business from
which the customer accounts receivable arose are all considered when
determining whether past-due accounts should be allowed for; the
same factors are considered when determining whether to write off
amounts charged to the allowance account against the customer
account receivable. The provision for doubtful accounts is calculated
on a specific-identification basis for customer accounts receivable
over a specific balance threshold and on a statistically derived allowance
basis for the remainder. No customer accounts receivable are written
off directly to the provision for doubtful accounts.
Aside from the normal customer accounts receivable credit risk
associated with its retained interest, the Company has no continuing
exposure to credit risk associated with its trade receivables, which
are sold to an arm’s-length securitization trust.
Counterparties to the Company’s cross currency interest rate swap
agreements, share-based compensation cash-settled equity forward
agreements and foreign exchange derivatives are major financial institu-
tions that have all been accorded investment grade ratings by a primary
rating agency. The dollar amount of credit exposure under contracts with
any one financial institution is limited and counterparties’ credit ratings
are monitored. The Company does not give or receive collateral on swap
agreements and hedging items due to its credit rating and those of its
counterparties. While the Company is exposed to credit losses due to
the non-performance of its counterparties, the Company considers the
risk of this remote. The Company’s derivative liabilities do not have credit-
risk-related contingent features.
Liquidity risk
As a component of capital structure financial policies, discussed under
Section 4.3 Liquidity and capital resources, the Company manages
liquidity risk by maintaining a daily cash pooling process, which enables
the Company to manage its liquidity surplus and liquidity requirements
according to the actual needs of the Company and its subsidiaries,
by maintaining bilateral bank facilities and syndicated credit facilities,
by maintaining a commercial paper program, by the sales of trade
receivables to an arm’s-length securitization trust, by continuously
monitoring forecast and actual cash flows and by managing maturity
profiles of financial assets and financial liabilities.