Telstra 2015 Annual Report Download - page 132

Notes to the Financial Statements (continued)
NOTE 18. FINANCIAL RISK MANAGEMENT (continued)
130 Telstra Corporation Limited and controlled entities
18.2 Hedging strategies (continued)
(b) Fair value hedges (continued)
(a) For offshore borrowings, face value equates to the face value
in the underlying currency converted at the spot exchange rate as
at 30 June. Revaluation impacts since inception of the borrowing
due to foreign exchange movements are reflected in the amortised
cost balance.
(b) Fair value revaluation impacts arising from movements in
foreign currency exchange rates and market interest rates (that
relate to the hedged risk) are effectively hedged. We use cross
currency and interest rate swaps as fair value hedges to convert
fixed rate borrowings into Australian dollar floating rate
borrowings.
(c) Cash flow hedges
The objective of our cash flow hedging is to hedge the exposure
arising from variability in future interest and foreign currency cash
flows arising from borrowings that bear interest at variable rates,
or are denominated in foreign currency. Cash flow hedging is also
used to mitigate the foreign currency exposure arising from
anticipated future transactions.
We enter into interest rate and cross currency swaps as hedges of
future cash flows arising from our borrowings. Ineffectiveness is
recognised in the income statement if the change in the fair value
of the hedging instrument exceeds the change in fair value of the
underlying borrowing. The portion of fair value movement
qualifying as effective movement is recognised in the cash flow
hedging reserve in equity.
Forward foreign exchange contracts are used to hedge a portion of
highly probable forecast transactions denominated in foreign
currency. These contracts hedge foreign currency risk arising from
spot rate changes. During the year, there has been no material
impact on profit or loss as a result of discontinuing hedge
accounting for forecast transactions no longer expected to occur.
All our cash flow hedges are in effective economic relationships on
the basis that the critical terms of the hedging instrument and
hedged item are aligned (including face values, cash flows and
currency). During the year, there has been no material
ineffectiveness attributable to our cash flow hedges.
(i) Cash flow profile
Table G shows the maturities of the payments in our cash flow
hedges (i.e. when the cash flows are expected to occur). These
amounts represent the undiscounted cash flows reported in
Australian dollars based on the applicable exchange rate as at 30
June and represent the identified foreign currency exposures at
reporting date.
(a) These amounts will affect our income statement in the same
period in which the cash flows are expected to occur.
(b) For purchases of property, plant and equipment, the gains and
losses on the associated hedging instrument are included in the
measurement of the initial cost of the assets. The hedged assets
affect profit or loss as the assets are depreciated over their useful
lives.
(c) The impact on our income statement from foreign currency
movements associated with these hedged borrowings will affect
profit or loss over the life of the borrowing, however the impact on
profit or loss is expected to be nil as the borrowings are effectively
hedged.
(d) Hedges of net investments in foreign operations
Foreign exchange exposure arises from our investments in foreign
operations. This risk arises from the translation of the net assets
of these entities from their functional currency into Australian
dollars. We may designate forward foreign currency contracts,
cross currency swaps and/or foreign currency borrowings as
hedges of this risk. By applying hedge accounting, foreign
exchange gains or losses on the hedging instruments are
transferred to the foreign currency translation reserve in equity to
offset gains or losses on translation of the net investment. No
material ineffectiveness arises from our net investment hedges as
we designate on a spot to spot basis only the nominal amount of
hedging instruments required to match the desired hedge
percentage of the investment, in accordance with our risk
management policy.
As at 30 June 2015, we had no hedges of net investments in foreign
controlled entities in place.
(e) Derivatives not in a designated hedge relationship
We hold some derivative financial instruments that are not
formally designated in hedging relationships as natural offset
achieves substantially the same accounting results. This primarily
includes forward foreign currency contracts that are used to
economically hedge fair value movements attributable to
exchange rate fluctuations associated with trade creditors and
other liability and asset balances denominated in foreign
currency.
On adoption of AASB 9 (2013), we were able to reinstate a portion
of fair value hedges which were previously ineligible for hedge
accounting; refer note 2.1(a) for further details. All other financial
liabilities that do not meet the strict criteria for hedge accounting
are in effective economic relationships based on contractual face
value amounts and cash flows over the life of the transaction.
Refer to note 7 for the impact on finance costs relating to
transactions not in designated hedge relationships.
Table G Telstra Group
Nominal cash
outflows
As at 30 June
2015 2014
$m $m
Highly probable forecast transactions
Non-capital items (a)
Within 1 year (801) (306)
Capital items (b)
Within 1 year (135) -
After 1 year (2) -
Borrowings (c)
Within 1 year (539) (1,156)
Within 1 to 5 years (4,168) (2,485)
After 5 years (4,559) (4,055)
(10,204) (8,002)