Telstra 2010 Annual Report Download - page 109

Telstra Corporation Limited and controlled entities
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Notes to the Financial Statements (continued)
2.20 Post-employment benefits (continued)
(b) Defined benefit plans (continued)
The actuaries use the projected unit credit method to determine
the present value of the defined benefit obligations of each plan.
This method determines each year of service as giving rise to an
additional unit of benefit entitlement. Each unit is measured
separately to calculate the final obligation. The present value is
determined by discounting the estimated future cash outflows
using rates based on government guaranteed securities with
similar due dates to these expected cash flows.
We recognise all our defined benefit costs in the income statement
with the exception of actuarial gains and losses that are recognised
directly in other comprehensive income via retained profits.
Components of defined benefit costs include current and past
service cost, interest cost and expected return on assets. Past
service cost is recognised immediately to the extent that the
benefits are already vested, and otherwise is amortised on a
straight-line basis over the average period until the benefits
become vested.
Actuarial gains and losses are based on an actuarial valuation of
each defined benefit plan at reporting date. Actuarial gains and
losses represent the differences between previous actuarial
assumptions of future outcomes and the actual outcome, in
addition to the effect of changes in actuarial assumptions.
We apply judgement in estimating the following key assumptions
used in the calculation of our defined benefit liabilities and assets
at reporting date:
• discount rates;
• salary inflation rate; and
• expected return on plan assets.
The estimates applied in the actuarial calculation have a significant
impact on the reported amount of our defined benefit plan liabilities
and assets. If the estimates prove to be incorrect, the carrying
value may be materially impacted in the next reporting period.
Additional volatility may also potentially be recorded in retained
profits to reflect differences between actuarial assumptions of
future outcomes applied at the current reporting date and the
actual outcome in the next annual reporting period.
Refer to note 24 for details on the key estimates used in the
calculation of our defined benefit liabilities and assets.
2.21 Employee share plans
We own 100% of the equity of Telstra ESOP Trustee Pty Ltd, the
corporate trustee for the Telstra Employee Share Ownership Plan
Trust (TESOP97) and Telstra Employee Share Ownership Plan Trust
II (TESOP99). We consolidate the results, position and cash flows
of TESOP97 and TESOP99.
The Telstra Growthshare Trust (Growthshare) was established to
allocate equity based instruments as required. Current equity
based instruments include options, performance rights, restricted
shares, incentive shares, directshares and ownshares. Options and
restricted shares are subject to performance hurdles. Incentive
shares are subject to a specified period of service. Performance
rights can be subject to performance hurdles or a specified period
of service.
We own 100% of the equity of Telstra Growthshare Pty Ltd, the
corporate trustee for Growthshare. We also include the results,
position and cash flows of Growthshare.
We recognise an expense for all share based remuneration
determined with reference to the fair value at grant date of the
equity instruments issued. The fair value of our equity instruments
is calculated using a valuation technique that is consistent with the
Black-Scholes methodology and utilises Monte Carlo simulations.
The fair value is charged against profit over the relevant vesting
periods, adjusted to reflect actual and expected levels of vesting.
2.22 Derivative financial instruments
We use derivative financial instruments such as forward exchange
contracts, cross currency swaps and interest rate swaps to hedge
risks associated with foreign currency and interest rate
fluctuations.
The use of hedging instruments is governed by the guidelines set
by our Board of Directors.
Derivative financial instruments are included as non current assets
or liabilities except for those with maturities less than twelve
months from the balance date, which are classified as current
assets or liabilities.
Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently
remeasured to fair value. The method of recognising the resulting
remeasurement gain or loss depends on whether the derivative is
designated as a hedging instrument, and if so, the nature of the
item being hedged. Where we hold derivative financial
instruments that are not designated as hedges, they are
categorised as 'held for trading' financial instruments. All of our
derivative financial instruments are stated at fair value.
Derivative assets are derecognised when the rights to receive cash
flows from the derivative assets have expired or have been
transferred and we have transferred substantially all the risks and
rewards of ownership.
The carrying value of our cross currency and interest rate swaps
refers to the fair value of our receivable or payable under the swap
contract. We do not offset the receivable or payable with the
underlying financial asset or financial liability being hedged, as the
transactions are usually with different counterparties and are not
generally settled on a net basis.
2. Summary of accounting policies (continued)