Telstra 2010 Annual Report Download - page 151

Telstra Corporation Limited and controlled entities
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Notes to the Financial Statements (continued)
(a) Risks and mitigation (continued)
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).
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 and note 30.
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 analysis 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.
In relation to our transactions in money market instruments,
forward foreign currency contracts, cross currency and interest rate
swaps 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 credit risk exposure
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.
The amounts included in Table D below include the in-the-money
market values combined with a potential credit calculation and will
therefore not equate to the accounting carrying value, fair value or
face value of the transactions as disclosed in note 17.
In determining the potential credit limit factors to be used in these
calculations, the following should be noted:
• reference is made to the historical volatility factors relevant to
the particular currencies/interest rates applicable to the
instruments;
• in determining the volatility factors, reference has been made to
the holding period or in this case the maturity of the instrument.
In some cases the transaction can have a maturity of up to 10
years and the potential volatility needs to reflect the possible
movements over this time period given historical observations;
and
• we have used 99% confidence levels to determine the applicable
potential credit limit factors.
The VaR based methodology employed has the following
limitations:
• the use of historical data as a proxy for estimating future events
may not cover all potential events, in particular this is relevant
when trying to estimate potential volatility over a long holding
period such as 10 years; and
• the use of a 99% confidence level, by definition, may not take
into account movements that may occur outside of this
confidence threshold.
18. Financial risk management (continued)
Table D Telstra Group
Credit risk concentrations (VaR based)
As at 30 June 2010 As at 30 June 2009
%$m % $m
Australia . . . . . 18.7 1,495 21.2 1,664
United States . . . 16.2 1,295 22.2 1,743
Japan . . . . . . . 4.9 393 3.5 271
Europe . . . . . . 21.9 1,757 21.0 1,642
United Kingdom . . 21.7 1,737 23.9 1,878
Canada . . . . . . 0.7 57 0.8 63
Switzerland . . . . 3.1 252 3.0 236
China/Hong Kong . 10.4 831 4.1 321
Singapore . . . . . 2.2 177 0.1 9
New Zealand . . . 0.2 20 0.2 16
100.0 8,014 100.0 7,843