Telstra 2012 Annual Report Download - page 119

Telstra Corporation Limited and controlled entities
89
Notes to the Financial Statements (continued)
2.20 Post employment benefits (continued)
(b) Defined benefit plans (continued)
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 other comprehensive
income 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.
As at 30 June 2012 we have used a State and Commonwealth
blended (2011: Commonwealth) 10-year Australian government
bond rate to determine the discount rate. This change resulted in a
$219 million decrease in actuarial loss on defined benefit plans
recognised in the other comprehensive income and the defined
benefit liability.
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. Restricted
shares are subject to performance hurdles. Incentive shares are
subject to a specified period of service. Options and 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 or loss 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 12 months
from the reporting 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. Refer to note 17 for details on the basis
used for estimated 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.
Where we have a legally recognised right to set off the derivative
asset and the derivative liability, and we intend to settle on a net
basis or simultaneously, we record this position on a net basis in our
statement of financial position. Where we enter into master netting
arrangements relating to a number of financial instruments, have a
legal right of set off, and intend to do so, we also include this position
on a net basis in our statement of financial position.
Our derivative instruments that are held to hedge exposures can be
classified into three different types, depending on the reason we are
holding them - fair value hedges, cash flow hedges and hedges of
net investment in foreign operations.
Hedge accounting can only be utilised where effectiveness tests are
met on both a prospective and retrospective basis. For all of our
hedging instruments, any gains or losses on remeasuring to fair
value any portion of the instrument not considered to be effective,
are recognised directly in the income statement in the period in
which they occur. The extent to which gains or losses on the
hedged item and the hedge instrument do not offset represents
ineffectiveness which may result in significant volatility in the
income statement.
We formally designate and document at the inception of a
transaction the relationship between hedging instruments and
hedged items, as well as our risk management objective and
strategy for undertaking various hedge transactions, together with
the methods that will be used to assess the effectiveness of the
hedge relationship. We also document our assessment, both at
hedge inception and on an ongoing basis, of whether the hedging
instruments that are used in hedging transactions have been, and
will continue to be, highly effective in offsetting changes in fair
values or cash flows of hedged items.
2. Summary of significant accounting policies, estimates, assumptions and judgements
(continued)