Telstra 2009 Annual Report Download - page 167

Telstra Corporation Limited and controlled entities
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Notes to the Financial Statements (continued)
(a) Risks and mitigation (continued)
(iv) Sensitivity analysis - foreign currency risk (continued)
The impact of some of our borrowings not being in fair value hedge
relationships has resulted in some volatility in profit and loss. Whilst
the revaluation impact attributable to foreign exchange movements
will largely offset between the derivatives and the borrowings there
will be some profit impact due to the fact that the derivatives are
recorded at fair value and hence the foreign exchange movements are
recognised at present value. However, the borrowings which are
accounted for on an amortised cost basis will reflect revaluation
movements for changes in the spot exchange rate which are not
discounted. Therefore, the impact on profit and loss is primarily
attributable to the discounting effect of the foreign exchange gains
and losses on the hedging derivatives.
The net gain or loss in the cash flow hedging reserve reflects the result
of exchange rate movements on the derivatives used in our cash flow
hedges of offshore loans which will be released to the income
statement in the future as the underlying hedged items affect profit.
For the Telstra Group, our foreign currency translation risk associated
with our foreign investments results in some volatility to the foreign
currency translation reserve. The impact on the foreign currency
translation reserve relates to translation of the net assets of our
foreign controlled entities including the impact of hedging. The net
gain or loss in the sensitivity analysis takes into account the related
hedges and represents the impact of the unhedged portion. Our
significant offshore controlled entities include investments in
TelstraClear Limited denominated in New Zealand dollars, Hong Kong
CSL Limited denominated in Hong Kong dollars and our Chinese
businesses SouFun Holdings Limited, Sequel Limited and Telstra
Octave Holdings Limited denominated in Chinese renminbi. Hong
Kong CSL Limited and TelstraClear Limited are hedged in the range of
40% to 50%. A significant contributing factor to the higher sensitivity
in 2009 when compared to 2008 is due to the acquisition of Octave
during the year.
For the Telstra Entity the sensitivity analysis results in a profit or loss
volatility resulting from the hedging instruments used to hedge our
net foreign investments. This amount is transferred to the foreign
currency translation reserve in the Telstra Group and hence there is no
impact on profit for the Telstra Group.
Credit risk
Credit risk is the risk that a contracting entity will not complete its
obligations under a financial instrument and cause us to make a
financial loss. We have exposure to credit risk on all financial assets
included in our statement of financial position, comprising cash and
cash equivalents, trade and other receivables, available-for-sale
financial assets, finance lease receivables and derivative instruments.
To help manage this risk:
• we have a policy for performing credit risk assessments on new and
existing customers and where required, establishing credit limits
and payment terms for entities we deal with;
• we monitor exposure to high risk debtors on a predictive and pro-
active basis;
• we may require collateral where appropriate; and
• we manage exposure to individual entities we either transact with
or enter into derivative contracts with (through a system of credit
limits).
Trade and other receivables consist of a large number of customers,
spread across the consumer, business, enterprise, government and
international sectors. We do not have any significant credit risk
exposure to a single customer or groups of customers. Ageing
analyses and ongoing credit evaluation is performed on the financial
condition of our customers and, where appropriate, an allowance for
doubtful debtors is raised. In addition, receivable balances are
monitored on an ongoing basis with the result that our exposure to
bad debts is not significant. For further details regarding our trade
and other receivables refer to note 10.
Our maximum exposure to credit risk is based on the recorded
amounts of our financial assets, net of any applicable provisions for
loss (refer to note 17, Table C and Table D). Where entities have a right
of set-off and intend to settle on a net basis under master netting
arrangements, this set-off has been recognised in the financial
statements on a net basis. We may also be subject to credit risk for
transactions which are not included in the statement of financial
position, such as when we provide a guarantee for another party.
Details of our contingent liabilities are disclosed in note 23.
The Telstra Group and the Telstra Entity are also exposed to credit risk
arising from our transactions in money market instruments, forward
foreign currency contracts, cross currency and interest rate swaps.
For credit purposes, there is only a credit risk where the contracting
entity is liable to pay us in the event of a closeout (i.e. in the money).
We have policies that limit the amount of credit exposure to any
financial institution. These risk limits are regularly monitored.
Derivative counterparties and cash transactions are limited to
financial institutions that meet minimum credit rating criteria in
accordance with our policy requirements. Our credit risk and financial
instruments are spread amongst a number of financial institutions.
One of the methods that we use to manage the risk relating to these
instruments is to monitor our exposure by country of financial
institution based on a value at risk (VaR) methodology. Value at risk
calculations are a technique that estimates the potential losses that
could occur on risk positions in the future as a result of movements in
market rates over a specified time horizon given a specified level of
confidence which is statistically determined.
Our credit risk exposure on financial instruments (excluding trade and
other receivables) such as money market transactions, foreign
currency contracts, cross currency and interest rate swap
transactions is derived with reference to the current market value,
where it is in-the-money, of the transaction combined with a
potential credit factor which is based on VaR methodology. It is
important to note that the amounts included in Table E below include
the in-the-money market values combined with a potential credit
calculation and will therefore not equate to either the accounting
carrying value, fair value or face value of the transactions as disclosed
in note 17.
18. Financial risk management (continued)