Telstra 2010 Annual Report Download - page 39

24
Telstra Corporation Limited and controlled entities
Full year results and operations review - June 2010
The reduction in net interest on borrowings of $140
million (borrowing costs less finance income) during
fiscal 2010 principally arises from:
• a reduction in the average yield on debt (from
7.1% to 6.4%) which was principally due to
reductions in short-term market base interest
rates during the year flowing through to the
floating rate component of our debt portfolio; and
• a reduction in the average volume of net debt over
the year.
The reductions from lower interest rates have been
somewhat offset by rises in our borrowing margins on
new debt raised during the year.
It is important to note that in general it is our intention
to hold our borrowings and associated derivative
instruments to maturity. Accordingly, unrealised
revaluation gains and losses will be recognised in our
finance costs over the life of the financial instrument
and will progressively unwind to nil at maturity.
The movement in the loss/(gain) on fair value hedges -
effective of $87 million (moving from a gain in 2009 to
a loss in 2010) reflects an improvement in financial
markets which has resulted in a partial reversal of
previously recognised gains. The net revaluation loss of
$26 million in the current year is explained by the
contraction in our borrowing margins (which reduces
our interest rates) combined with an increase in
Australian base market rates (which increases our
interest rates). In addition, there is the impact of the
net present value calculation as borrowings move one
year closer to maturity.
A combination of the following factors has resulted in a
net unrealised gain of $36 million (moving by $186
million from a gain of $222 million in fiscal 2009)
associated with financial instruments that are either not
in a designated hedge relationship or were previously
designated in a hedge relationship and no longer qualify
for hedge accounting:
• the valuation impacts described above for fair
value hedges;
• the different measurement bases of the
borrowings (measured at amortised cost) and the
associated derivatives (measured at fair value);
and
• a net loss of $21 million for the amortisation
impact of unwinding previously recognised gains
on those borrowings that were de-designated from
hedge relationships.
Notwithstanding that these borrowings and the related
derivative instruments do not satisfy the requirements
for hedge accounting, they are in effective economic
relationships based on contractual face value amounts
and cashflows over the life of the transaction.
Overall, the fair value adjustments to finance costs
amount to a net gain of $5 million in fiscal 2010,
compared to a net gain of $284 million in fiscal 2009.
Income tax expense and franking account
• Our effective tax rate of 28.9% is slightly lower than the Australian company tax rate due to a number of tax
effect adjustments arising during fiscal 2010
Income tax expense increased by 1.0% to $1,598
million while reported profit before income tax reduced
by 2.1% to $5,538 million. Although profit was lower,
the following factors contributed to the increase in
income tax expense:
• the origination of a deferred tax liability generated
from the change in accounting policy of our Trading
Post® masthead which increased income tax
expense by $101 million ($81 million after the
effects of the profit and loss amortisation);
• an increase in the impairment of goodwill of $181
million predominately relating to CSL New World
resulting in an increase of $54 million to income
tax expense; and
• a reduction in the investment allowance deduction
of $40 million with a related income tax expense of
$12 million; partly offset by
• an increase in the tax refund of $145 million
attributable to amended assessments to the 2007
and 2008 fiscal years relating to research and
development.
The effective tax rate was 28.9% for fiscal 2010 which
was slightly higher than the rate of 28.0% in fiscal
2009, and is 1.1 percentage points lower than the
Australian company tax rate of 30.0%. This represents
a difference of $63 million to the notional income tax
expense.
During fiscal 2010, we have paid a total of $1,509
million of tax instalments for the Telstra tax
consolidated group relating to the last quarter of fiscal
Year ended 30 June
2010 2009 Change Change
$m $m $m %
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,598 1,582 16 1.0%
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.9% 28.0% 0.9