Telus 2011 Annual Report Download - page 77

TELUS 2011 ANNUAL REPORT . 73
MANAGEMENT’S DISCUSSION & ANALYSIS: 7
Currency risk
The Company’s functional currency is the Canadian dollar, but it
regularly transacts in U.S. dollars due to certain routine revenues and
operating costs being denominated in U.S. dollars, as well as sourcing
some inventory purchases and capital asset acquisitions internationally.
The U.S. dollar is the only foreign currency to which the Company has
a significant exposure.
The Company’s foreign exchange risk management includes the use
of foreign currency forward contracts and currency options to fix the
exchange rates on short-term U.S. dollar denominated transactions and
commitments. Hedge accounting is applied to these short-term foreign
currency forward contracts and currency options only on a limited basis.
Interest rate risk
Changes in market interest rates will cause fluctuations in the fair value
or future cash flows of temporary investments, short-term investments,
short-term obligations, long-term debt and/or cross currency interest
rate swap derivatives.
When the Company has temporary investments, they have short
maturities and fixed rates, thus their fair value will fluctuate with changes
in market interest rates; absent monetization prior to maturity, the
related future cash flows do not change due to changes in market
interest rates.
If the balance of short-term investments includes debt instruments
and/or dividend-paying equity instruments, the Company could be
exposed to interest rate risks.
As short-term obligations arising from bilateral bank facilities, which
typically have variable interest rates, are rarely outstanding for periods
that exceed one calendar week, interest rate risk associated with this
item is not material.
Short-term borrowings arising from the sales of trade receivables
to an arm’s-length securitization trust are fixed-rate debt. Due to the
short maturities of these borrowings, interest rate risk associated with
this item is not material.
In respect of the Company’s currently outstanding long-term debt,
other than for commercial paper and amounts drawn on its credit
facilities, it is all fixed-rate debt. The fair value of fixed-rate debt fluctuates
with changes in market interest rates; absent early redemption and/or
foreign exchange rate fluctuations, the related future cash flows do not
change. Due to the short maturities of commercial paper, its fair values
are not materially affected by changes in market interest rates but
its cash flows representing interest payments may be if the commercial
paper is rolled over.
Amounts drawn on the Company’s short-term and long-term credit
facilities will be affected by changes in market interest rates in a manner
similar to commercial paper.
Similar to fixed-rate debt, the fair value of the Company’s cross
currency interest rate swap derivatives fluctuated with changes in market
interest rates as the interest rate swapped to was fixed; absent early
redemption, the related future cash flows would not have changed due
to changes in market interest rates.
Other price risk
Provisions – The Company is exposed to other price risk arising from
a written put option provided for a non-controlling interest, as discussed
further in Note 16(e) of the Audited consolidated financial statements.
Short-term investments – If the balance of short-term investments
line item on the statement of financial position includes equity instru-
ments, the Company would be exposed to equity price risks.
Long-term investments – The Company is exposed to equity price
risks arising from investments classified as available-for-sale. Such
investments are held for strategic rather than trading purposes.
Share-based compensation derivatives – The Company is exposed
to other price risk arising from cash-settled share-based compensation
(appreciating Common Share and Non-Voting Share prices increase
both the expense and the potential cash outflow). Cash-settled equity
swap agreements have been entered into that establish a cap on
the Company’s cost associated with its net-cash settled share options
and fix the Company’s cost associated with its restricted stock units.
Market risk
Net income and other comprehensive income for the years ended
December 31, 2011 and 2010, could have varied if the Canadian dollar:
U.S. dollar exchange rates, market interest rates and the Company’s
Common Share and Non-Voting Share prices varied by reasonably pos-
sible amounts from their actual statement of financial position date values.
The sensitivity analysis of the Company’s exposure to currency
risk, interest rate risk, and other price risk arising from share-based
compensation is shown in Note 4(g) of the Audited consolidated financial
statements.
Fair values – general
The carrying values of cash and temporary investments, accounts
receivable, short-term obligations, short-term borrowings, accounts
payable and certain provisions (including restructuring accounts payable)
approximate their fair values due to the immediate or short-term maturity
of these financial instruments. The carrying values of the Company’s
investments accounted for using the cost method do not exceed their
fair values.
The carrying value of short-term investments, if any, equals their fair
value as they are classified as held for trading. The fair value is determined
directly by reference to quoted market prices in active markets.
The fair values of the Company’s long-term debt are based on quoted
market prices in active markets.
The fair values of the Company’s derivative financial instruments
used to manage exposure to interest rate and currency risks are esti-
mated based on quoted market prices in active markets for the same
or similar financial instruments or on the current rates offered to the
Company for financial instruments of the same maturity as well as the
use of discounted future cash flows using current rates for similar
financial instruments subject to similar risks and maturities (such fair
values being largely based upon Canadian dollar: U.S. dollar forward
exchange rates and interest rate yield curves as at the statement of
financial position dates).
The fair values of the Company’s derivative financial instruments used
to manage exposure to increases in compensation costs arising from
certain forms of share-based compensation are based upon fair value
estimates of the related cash-settled equity forward agreements provided
by the counterparty to the transactions (such fair value estimates being
largely based upon the Company’s Common Share and Non-Voting Share
prices as at the statement of financial position dates).
Recognition of derivative gains and losses
Gains and losses on derivative instruments and their location within the
Consolidated statements of income and other comprehensive income are
detailed in Note 4(i) of the Audited consolidated financial statements.