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Telstra
Annual Report
2016

Table of contents

  • Page 1
    Telstra Annual Report 2016

  • Page 2
    ...our Annual Report titled Our business, Highlights FY16, Chairman and CEO message, Strategy and performance and Full year results and operations review comprise our operating and financial review (OFR) and form part of the Directors' report. An overview of selected aspects of our corporate governance...

  • Page 3
    ... core • Build new growth businesses • Our material business risks • Outlook Full year results and operations review Sustainability • Our approach • Customer experience • Connecting communities • Our people • Environmental stewardship • Responsible business Board of directors Senior...

  • Page 4
    ... of connectivity, media and content to consumers and businesses in Australia, cloud and other technology services to business, enterprise and government customers, as well as connectivity services to carriers globally. We are leveraging our core strengths in networks and connectivity to capture new...

  • Page 5
    OUR STRATEGY Our strategy is focused on driving growth and creating long term shareholder value. It has three key pillars. Improve Customer Advocacy Drive Value and Growth from the Core Build New Growth Businesses OUR PRIORITIES IN FY16 In FY16, we've been working to deliver against five key ...

  • Page 6
    ... TVs® IN THE MARKET 1.1m 58% HOME BROADBAND AND MOBILE CUSTOMERS ACTIVATED TO USE TELSTRA AIR® GES2 income growth of 11.5% UPGRADED 2,375 OF OUR NETWORK SITES TO OF ALL CONSUMER SERVICES ARE COMPLETED ONLINE 4GX ™ 289,000 new nbn™ connections with overall market share of 50% 533 people...

  • Page 7
    Telstra Health® won Government contract to deliver the National Cancer Screening Register ALMOST 17m SMS SENT TO CUSTOMERS Network Applications and Services business grew by HIGHLIGHTING RESPONSIBLE PHONE USE $ 1.8b Provided 14.3 % PROFIT ON THE SALE OF AUTOHOME SHARES $ our social and ...

  • Page 8
    ... class technology company that empowers people to connect. To achieve this we continue to focus on the three key strategic pillars of improving customer advocacy; driving value and growth from our core business; and, building new growth businesses. We believe this is the right strategy to manage...

  • Page 9
    ... significant customer benefits and reinforce our market differentiation over the longer-term, as well as deliver business benefits such as capital efficiency, reduced operating costs and increased revenue. As a result of the investment, capex to sales ratio4 in each of the next three financial years...

  • Page 10
    ... and we are lifting our aspiration for the year ahead to focus on the things that matter: improving the customer experience, driving value and growth from our core and building pathways toward future, sustainable long-term growth. John P Mullen, Chairman Andrew R Penn, CEO and Managing Director

  • Page 11
    Strategy and performance Our strategy is focused on driving growth and creating long term shareholder value. This section outlines our progress in delivering on the three pillars of our strategy over the past year. Alice, Head of Hong Kong and Taiwan, Global Sales. 09

  • Page 12
    ... Telstra and via external market research. We use this feedback to help our frontline teams improve their conversations with customers and to improve our processes, products and services. Encouragingly, our NPS performances in Telstra Business Managed, Wholesale, GES Australia and GES International...

  • Page 13
    ... up new ways of working, such as video conferencing or setting up an online retail presence. Telstra also doubled the data for new customers who signed up to a business broadband plan from May 2016. We entertained with our Live Football Digital Passes and Telstra Thanks® rewards The AFL Live Pass...

  • Page 14
    ... bring 4G mobile services to regional Australia, we are acutely aware of the challenges facing communities living with limited mobile network access. 12 Customer revenue and growth We continued to grow customer numbers in our core mobiles and fixed broadband business in 2016, leveraging the work we...

  • Page 15
    ... embracing access to high speeds and we are seeing a rise in data use as our customers take advantage of exclusive content through our media and sports partnerships and leading on-demand video technologies like the Telstra TV®. For our business customers we are creating industry solutions, managed...

  • Page 16
    ... change as we provide more managed services to enterprise customers, which tend to be lower margin, and we continue to develop early stage new businesses in areas like health and software. Pacnet In 2015 Telstra acquired Pacnet Limited, a provider of connectivity, managed services and data centre...

  • Page 17
    Strategy and performance | Telstra Annual Report 2016 Telstra Ventures Telstra Ventures, our corporate venture capital arm, continued to invest in high growth technology companies that Telstra can leverage to develop new products and services for our customers. In FY16, Ventures completed 11 new ...

  • Page 18
    ... class experiences, products and services for our customers; and further enhance our brand and reputation in global markets in our effort to become a world class technology company that empowers people to connect. This risk is exacerbated as we expand our operations overseas and enter new markets...

  • Page 19
    Strategy and performance | Telstra Annual Report 2016 Business resilience Material Business Risk and key drivers The risk of planned, or unplanned, disruption to the services we provide to our customers. There are multiple threats to Telstra's ability to ensure resilience and continuity of key ...

  • Page 20
    ... exposes us to a potential loss in market share and income, increased costs and poor customer experience. A successful transition is necessary to maintain our share in the fixed market and build future products that will drive growth from our core business. Consideration must also be given to the...

  • Page 21
    ... our productivity program, leveraging our core strengths and driving value through our investments. Our customers and our networks are our biggest assets, which is why we need to invest to set new standards and deliver excellent experiences for our customers, and to support our increased aspirations...

  • Page 22
    ... year results and operations review FY16 Summary financial results Continuing operations Total revenue Total income (excluding finance income) Operating expenses Share of net profit from joint ventures and associated entities EBITDA Depreciation and amortisation EBIT Net finance costs Income tax...

  • Page 23
    ... and operations review | Telstra Annual Report 2016 Telstra Customer Insight Centre, Level 2, 400 George Street Sydney. Reported results Following the completion of the sale of a 47.4 per cent stake in online business Autohome on 23 June 2016, the numbers and commentary in the segment, product and...

  • Page 24
    ... business units which offer our main products and services in the market. Further information on each reportable segment can be found in Note 2.1 of the Annual Report. Segment information from continuing operations FY16 Total external income Telstra Retail Global Enterprise and Services Telstra...

  • Page 25
    Full year results and operations review | Telstra Annual Report 2016 Product performance Product sales revenue breakdown FY16 Key product revenue Fixed Mobile Data and IP NAS Media FY15 $m 7,188 10,654 3,417 2,418 931 Change % (2.2) (2.0) 10.9 14.3 4.6 $m 7,029 10,441 3,789 2,763 974 27% 40% ...

  • Page 26
    ... points through ongoing operational leverage, scalable standardised offerings, and a lower cost global delivery model. Media Media product portfolio revenue increased by 4.6 per cent to $974 million. Telstra Media delivers content experiences, to differentiate and add value to our core access...

  • Page 27
    ...This is a result of an increase in our core sales costs of 5.1 per cent and new business costs of 66.7 per cent. Core sales costs are direct costs associated with revenue and customer growth. The increase in new business costs supported growth in the Telstra Health and Telstra Software Group as well...

  • Page 28
    ... Net cash provided by operating activities Total capital expenditure (including investments) Sale of business and shares in controlled entities (net of cash disposed) Other investing cash flows Net cash used in investing activities Free cashflow Net cash used in financing activities Net increase...

  • Page 29
    ... issued shares in Autohome. This liquidity will be used to fund our capital management program in FY17. 30 June 2016 Summary Statement of Financial Position Current assets Non current assets Total assets Current liabilities Non current liabilities Total liabilities Net assets Total equity Return...

  • Page 30
    Sustainability Our goal is to embed social and environmental considerations into our business in ways that create value for the company and our stakeholders. 28

  • Page 31
    ...our products and services more accessible, enhancing digital literacy and cyber safety and supporting technological innovation for social good. Environmental leadership We continue to build a more strategic approach to managing the environmental risks and opportunities across our value chain. We use...

  • Page 32
    ... Through our Access for Everyone (A4E) program, we help people on low incomes or facing financial hardship to stay connected. Since its inception in 2002, we've provided benefits to the value of more than $2 billion and have worked with more than 2,000 community organisations across Australia to...

  • Page 33
    Sustainability | Telstra Annual Report 2016 Connecting communities Digital connectivity is increasing in importance, with access to the internet now supporting everything from social interactions to employment and social services. With this in mind we're using our technology, expertise, scale and ...

  • Page 34
    ...and passion to help transform Telstra into a world class technology company. Employee health and safety We are making good progress in our efforts to continuously improve the Health, Safety and Environment (HSE) culture. This year we reviewed our enterprise-wide HSE Management System and introduced...

  • Page 35
    ... found in our 2016 Corporate Governance Statement which is available on our website at telstra.com/governance. Developing our employees As our business changes, it's important that our culture, values and behaviours are consistent and that we have the necessary knowledge and skills to manage change...

  • Page 36
    ... with managing our own impacts, we have a responsibility to improve efficiency across our value chain. Our extensive network coverage and depth of technical expertise means we have an opportunity to support government, businesses, customers and the community in addressing long-term sustainability...

  • Page 37
    ...our mobile safety SMS campaign, sending out almost 17 million messages referring customers to telstra.com/mobiletips, our information site for safe and responsible phone use. We have a dedicated EME help desk and team that proactively reviews new site proposals, develops community consultation plans...

  • Page 38
    Board of directors Board of Directors (left to right): Chin Hu Lim, Steven Vamos, Andrew Penn, Margaret Seale, Peter Hearl, Craig Dunn, Nora Scheinkestel, Russell Higgins AO, John Mullen, Trae Vassallo. 36

  • Page 39
    37

  • Page 40
    ... Director since 1 May 2015. Mr Penn joined Telstra in 2012 as Chief Financial Officer. In this role, he was responsible for strategy, mergers and acquisitions, treasury, internal audit, risk management, tax, corporate planning, reporting and analysis, external reporting and investor relations...

  • Page 41
    ... Chief Executive Officer of ninemsn. Mr Vamos also worked for Apple Computer in the 1990s after spending 14 years in senior management roles at IBM Australia. Directorships of listed companies (past three years): Director, Fletcher Building Limited (from 2015), David Jones Limited (2012-2014). 39

  • Page 42
    ... made a change to our corporate structure and new appointments to our senior management team. In March we introduced a new business unit, Technology Innovation and Strategy which reflects our greater focus on innovation and our ambition to become a world class technology company. We made a number of...

  • Page 43
    Senior management team | Telstra Annual Report 2016 Andrew Penn Chief Executive Officer Mr Penn became Chief Executive Officer in May 2015. Prior to his appointment as Chief Executive, Andrew led the Finance and Strategy and International teams as Chief Financial Officer and Group Executive ...

  • Page 44
    ... making and accountability frameworks • robust systems of risk management and assurance Telstra Board Audit & Risk Committee Remuneration Committee Nomination Committee Chief Executive Officer Our People • Telstra Values, Code of Conduct and policy framework which define the standards of...

  • Page 45
    ... and venture capital sectors. • Craig Dunn joined the Board as a non-executive Director in April 2016. Mr Dunn is a highly regarded business leader with more than 20 years of experience in financial services, pan-Asian business activities and strategic advice for government and major companies. Mr...

  • Page 46
    ...term Managing our risks Understanding and managing our risks is part of how we work. It helps us meet our strategy and business objectives and our legal and regulatory obligations, and to make informed business decisions and act ethically in the best interests of Telstra Group and our shareholders...

  • Page 47
    ... Report at telstra.com/sustainability/report. Also core to our framework are the activities we undertake to monitor and review its design and implementation. We conduct reviews and self-assessments of our framework across the enterprise and report the results to our Management Risk Committee...

  • Page 48
    ... our statutory reporting obligations under the Corporations Act and the ASX Listing Rules. • Securities Trading - setting out the rules and restrictions relating to buying, selling and otherwise dealing in Telstra securities by our Directors, CEO, senior management, specified other employees and...

  • Page 49
    Section Title | Telstra Annual Report 2016 Directors' Report 47

  • Page 50
    ... and chaired the Technology Committee from 2009 and 2012 Capital management On 2 May 2016, Telstra announced a capital management program of at least $1.5 billion to commence in the first half of the financial year 2017. On 11 August, the Board resolved to undertake an off-market share buy-back of...

  • Page 51
    .... 2 Andrew Penn also holds 1,425,669 Performance Rights. 3 The number of shares disclosed is the number held as at the date of cessation as a Director. Board and Committee meeting attendance Details of the number of meetings held by the Board and its Committees during financial year 2016, and...

  • Page 52
    ... Coleman was appointed Company Secretary of Telstra Corporation Limited effective 1 January 2012. Mr Coleman is a senior legal and governance professional with over 20 years experience advising at senior management and board levels. Mr Coleman reports to the Board and his responsibilities include...

  • Page 53
    ... Report2016 2016 Section Title | Telstra The Directors are satisfied, based on advice provided by the Audit & Risk Committee that the provision of non-audit services during financial year 2016 is consistent with the general standard of independence for auditors imposed by the Corporations Act...

  • Page 54
    ... for Key Management Personnel (KMP) of the Telstra Group for the year ended 30 June 2016 (FY16). Key changes in FY16 The overall structure of our Remuneration Report remains consistent with the way in which it has been presented for the last few years. However, leading up to the 2015 Telstra Annual...

  • Page 55
    ...| Telstra Annual Report 2016 Contents The key outcomes under our incentive plans this year were: 1.0 1.1 1.2 Remuneration snapshot Key Management Personnel Actual pay and benefits which crystallised in FY16 Looking forward to FY17 and changes proposed SHORT TERM INCENTIVES (STI) Senior Executives...

  • Page 56
    ... 13/10/15) Senior Executives Chief Executive Officer & Managing Director (CEO) Andrew Penn Chief Financial Officer (CFO) Warwick Bray Chief Operations Officer (COO) Kate McKenzie Group Executive Global Enterprise & Services (GES) Brendon Riley Group Executive Telstra Retail Gordon Ballantyne (until...

  • Page 57
    ... review The Remuneration Committee reviews Senior Executive remuneration annually to ensure there is a balance between fixed and at risk pay, and that it reflects both short and long term performance objectives aligned to Telstra's strategy. The Board reviews the CEO's remuneration based on market...

  • Page 58
    ... to reflect our business strategy and increase shareholder value. Telstra uses a volume weighted average share price (VWAP) to determine the number of Restricted Shares to be allocated under the STI plan (refer to section 2.3(b) STI deferral), and the number of Performance Rights to be allocated...

  • Page 59
    ...AT RISK) LONG TERM INCENTIVE (AT RISK) Cash • Base salary plus superannuation • Set based on market and internal relativities, performance, qualifications and experience • 75% of STI outcome paid in September after the financial year end • STI outcome based on Telstra's financial, customer...

  • Page 60
    ... the FY16 LTI plan, no entitlement to receive dividends and no voting rights in relation to those shares. Non-Permitted Reason: If a Senior Executive leaves Telstra for any reason, other than a Permitted Reason, any time during the Performance or Restriction Period, the equity instruments lapse or...

  • Page 61
    ... Report | Telstra Annual Report 2016 Performance hurdles explained: Relative Total Shareholder Return (RTSR) RTSR measures the performance of an ordinary Telstra share (including the value of any cash dividends and other shareholder benefits paid during the period) relative to the other companies...

  • Page 62
    ...Senior Executives. 3.1 Financial performance Details of Telstra's performance, share price and dividends over the past five years are summarised in the table below: FY16 Performance measures Earnings Total Income2 EBITDA2 Net Profit3 Shareholder value Share price ($)4 Total dividends paid per share...

  • Page 63
    Remuneration Report | Telstra Annual Report 2016 The Board believes the methods of calculating the financial and NPS outcomes are appropriate, and a rigorous assessment of Telstra's performance for FY16. Senior Executive STI outcomes (excluding the Group Executive Telstra Wholesale) Total revenue ...

  • Page 64
    ... 16.3% 16.0% -2.3% 2.1% -0.2% 15.9% 30/06/2013 30/06/2014 30/06/2015 30/06/2016 LTI PLAN: FY11 LTI PLAN: FY12 LTI PLAN: FY13 LTI PLAN: FY14 3.4 Senior Executive contract details The key terms and conditions of the ongoing service contracts for current Senior Executives are summarised in the table...

  • Page 65
    ... from 12 April 2016, Craig Dunn was appointed as a member of the Audit & Risk Committee. 4.2 Remuneration policy and strategy Telstra's non-executive Directors are remunerated with set fees and do not receive any performance based pay. This enables non-executive Directors to maintain independence...

  • Page 66
    ... equity settled share-based payments columns are based on accounting values and do not reflect actual payments received by Senior Executives in FY16. Short term employee benefits Post-employment benefits Year Name and title Andrew Penn Chief Executive Officer Warwick Bray Chief Financial Officer...

  • Page 67
    Remuneration Report | Telstra Annual Report 2016 Termination benefits Other long term benefits Accrued leave benefits ($) Equity settled share-based payments Accounting value (at risk) ($)6,7,8 Short term incentive shares9 458,445 465,562 211,303 30,272 37,592 - 281,796 350,229 324,413 359,672 14...

  • Page 68
    ... time as Senior Executives. 3. In accordance with the retirement provisions of Telstra's policy for the FY16 STI plan, no STI deferral will be made for Mr Lee. His FY16 STI payment will be paid as 100% cash. As Kate McKenzie announced her retirement subsequent to the reporting date of 30 June 2016...

  • Page 69
    ... 2016. 2. Restriction period end date refers to the end of the Restriction Period for Performance Rights. 3. Vest has the meaning here as defined in the Australian Accounting Standards. A Performance Right vests when it has been performance tested and the resultant Restricted Share has been released...

  • Page 70
    ... the financial statements. The fair value of the Restricted Shares granted during FY16 at the grant date of 14 August 2015 was $6.13 and was based on the market value of Telstra shares. Relates to Restricted Shares coming out of restriction or Performance Rights vesting as defined above. Performance...

  • Page 71
    ... performance tested at the end of FY16 and resulted in 47.0% of the plan lapsing. For Dr Wildberger only, this relates to performance rights lapsing due to service condition not being met. For Mr Lee, Mr Ballantyne and Dr Wildberger, the balance reported at 30 June 2016 reflects the number of equity...

  • Page 72
    ... membership on Board Committees. 2. For FY16, Telstra has included the cost value of Telstra products and services (such as Foxtel) provided to directors without charge to allow them to famaliarise themselves with Telstra's products and services and with recent technological developments. These sums...

  • Page 73
    ...related to our employee share plans, shares acquired or disposed by our KMP and their related parties during FY16 were on an arm's length basis at market price. 2. For those non-executive Directors and Senior Executives who qualified as a KMP during the financial year, the balance as at 30 June 2015...

  • Page 74
    ... of nbnâ„¢ related changes in profit or cash. Any nbnâ„¢ related commercial works are excluded from this definition. Net Promoter Score. A non financial measure in Telstra's STI plan. Refer to 3.2(b) for further information. A right to a Restricted Share at the end of a performance period, subject...

  • Page 75
    ... responsibility for planning, directing and controlling the activities of the company and Group, directly or indirectly. A Senior Executive's contract of employment. Structural Separation Undertaking Short Term Incentive Senior Executives are provided with a percentage of their actual STI payment in...

  • Page 76
    ... is in respect of Telstra Corporation Limited and the entities it controlled during the financial year. John P Mullen Chairman 11 August 2016 Ernst & Young Andrew R Penn Chief Executive Officer and Managing Director 11 August 2016 SJ Ferguson Partner Sydney 11 August 2016 A member firm of Ernst...

  • Page 77
    Section Title | Telstra Annual Report 2016 Financial Report 75

  • Page 78
    ... 4.1 Dividends 4.2 Equity 4.3 Capital management 4.4 Financial instruments and risk management Section 5: Our people 5.1 Employee benefits 5.2 Employee share plans 5.3 Post-employment benefits 5.4 Key management personnel compensation Section 6: Our investments 6.1 Changes in the group structure...

  • Page 79
    ... ended 30 June 2016 Telstra Group Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Year ended 30 June 2016 2015 $m $m Note Continuing operations Income Revenue (excluding finance income) Other income Expenses Labour Goods and services purchased Other expenses Share of net...

  • Page 80
    ... year ended 30 June 2016 Telstra Group Year ended 30 June 2016 2015 $m $m Note 5,780 69 5,849 Items that will not be reclassified to the income statement Retained profits - actuarial (loss)/gain on defined benefit plans attributable to equity holders of Telstra Entity - income tax on actuarial gain...

  • Page 81
    ... Defined benefit liability Revenue received in advance Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Equity available to Telstra Entity shareholders Non-controlling interests Total equity The notes following the financial statements...

  • Page 82
    ... lease principal amounts Share buy-back Purchase of shares for employee share plans Proceeds from sale of controlled entity shares Finance costs paid Dividends paid to equity holders of Telstra Entity Other Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents...

  • Page 83
    ...year ended 30 June 2016 Telstra Group Share capital Reserves Retained profits Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Total $m Balance at 1 July 2014 Profit for the year Other comprehensive income Total comprehensive income for the year Dividends Share buy-back (net...

  • Page 84
    ... Capitalisation of development costs Determining fair value of identifiable intangible assets Useful lives of intangible assets Estimating allowance for doubtful debts Estimating net realisable value Long service leave provision Defined benefit plan Accounting for business combinations Significant...

  • Page 85
    ... billing and service requests • sales and contract management for large business and government customers in Australia and globally • management of Telstra's networks outside Australia • product management for advanced technology solutions and services, including Data and Internet Protocol (IP...

  • Page 86
    ...network service delivery costs for TR, GES and TW customers • the TOps segment recognises certain expenses in relation to the installation and maintenance of Hybrid Fibre Coaxial (HFC) cable network, while the running costs of the HFC cable network is managed by Media & Marketing operating segment...

  • Page 87
    ... Net finance costs Profit before income tax expense from continuing operations Profit before income tax expense from discontinued operations Telstra Group profit before income tax expense Continuing operations Revenue from external customers Other income Total income from continuing operations Share...

  • Page 88
    ...from our products and services. Table C Telstra Group Note Total income from continuing operations (excluding finance income) Fixed Mobile Data & IP Network applications and services Media Other sales revenue ¹ Other revenue ² Other income 2.2 2.2 2.2 Year ended 30 June 2016 $m 2015 $m 7,029 10...

  • Page 89
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 2. Our performance (continued) 2.2 Income Telstra Group Note Continuing operations Sales revenue Rendering of services Sale of goods Construction contracts Other revenue (...

  • Page 90
    ..., discounts, sales incentives, duties and taxes. We generate revenue and other income primarily from the following business activities: Category Sale of services Recognition and measurement Telecommunication services Revenue from: • calls is earned on completion of the call • internet and data...

  • Page 91
    ... to customers at the commencement of a contract or is an amount that can be used to buy future products and services. A portion of the total revenue under the arrangement is allocated to the non-cash incentive in accordance with the policy for multiple deliverables arrangements. The sales revenue...

  • Page 92
    ... in the current year had no material impact on the amounts recognised in the income statement. Should evidence exist in future reporting periods that changes these best estimates, other income and sales revenue will be adjusted in future reporting periods. 90 90| Telstra Corporation Limited and...

  • Page 93
    ...Telstra Group Note Continuing operations Included in our labour expenses are the following Employee redundancy Share-based payments Defined contribution plan expense Defined benefit plan expense Cost of goods sold Other expenses Impairment losses Rental expense on operating leases Service contracts...

  • Page 94
    ... financial statements (continued) Section 2. Our performance (continued) 2.4 Income taxes This note sets out our tax accounting policies and provides an analysis of our income tax expense and deferred tax balances, including a reconciliation of tax expense to accounting profit. Current income tax...

  • Page 95
    ... exchange movements. Table B Telstra Group Deferred tax items recognised in the income statement Property, plant and equipment Intangible assets Provision for employee entitlements Trade and other payables Defined benefit (asset)/liability Borrowings and derivative financial instruments Revenue...

  • Page 96
    ... Information about equity instruments issued under the Growthshare and TESOP99 share plans can be found in note 5.2. In the prior year, the weighted average number of ordinary shares used in the calculation of basic EPS included the effect of the offmarket share buy-back completed on 6 October 2014...

  • Page 97
    ... | Telstra Annual Report Section 2. Our performance (continued) 2.6 Notes to the statement of cash flows 2.6.1 Reconciliation of profit to net cash provided by operating activities 2.6.2 Cash and cash equivalents Table B Telstra Group Year ended 30 June 2016 $m 269 3,281 3,550 2015 $m 581...

  • Page 98
    ... our working capital supporting the operating liquidity of our business. 3.1 Property, plant and equipment SECTION 3. OUR CORE ASSETS AND WORKING CAPITAL Table A shows movements in net book value of our tangible assets during the financial year. Table A Telstra Group Land and site improvements...

  • Page 99
    ... the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 3. Our core assets and working capital (continued) 3.1 Property, plant and equipment (continued) The following paragraphs provide further information about our fixed asset classes...

  • Page 100
    ... result of our assessment is included in the net effect of our useful lives assessment. Should evidence exist in future reporting periods that changes these best estimates, depreciation expense will be adjusted as a change in estimate in future reporting periods. 98 98| Telstra Corporation Limited...

  • Page 101
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 3. Our core assets and working capital (continued) 3.2 Goodwill and other intangible assets This note provides details of our goodwill and other intangible assets and their...

  • Page 102
    ...financial statements (continued) Section 3. Our core assets and working capital (continued) 3.2 Goodwill and other intangible assets (continued) The following paragraphs detail further information about our intangible assets classes: • as at 30 June 2016, we had software assets under development...

  • Page 103
    ... statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 3. Our core assets and working capital (continued) 3.2 Goodwill and other intangible assets (continued) 3.2.1 Impairment assessment (continued) (b) Value in use We have used the following key...

  • Page 104
    ...Internally generated intangible assets include mainly IT development costs incurred in design, build and testing of new or improved IT products and systems. Research costs are expensed when incurred. Capitalised development costs include: • external direct costs of materials and services consumed...

  • Page 105
    ...) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 3. Our core assets and working capital (continued) 3.2 Goodwill and other intangible assets (continued) 3.2.2 Recognition and measurement (continued) Capitalisation of development costs Management judgement...

  • Page 106
    ...from continuing operations - foreign currency exchange differences Closing balance Year ended 30 June 2016 $m (113) (70) 46 3 (134) 2015 $m (120) (55) 52 12 (2) (113) The interest rate inherent in the leases is fixed at the contract date for the entire lease term. The average contracted effective...

  • Page 107
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 3. Our core assets and working capital (continued) 3.3 Trade and other receivables (continued) 3.3.2 Recognition and measurement (continued) (a) Leased property, plant and ...

  • Page 108
    ... are required to make future payments as a result of purchases of assets or services. Trade and other payables are financial liabilities initially recognised at fair value and carried at amortised cost using the effective interest method. 106 106| Telstra Corporation Limited and controlled entities

  • Page 109
    ... the financial year 2015, we completed an off-market share buy-back, which included a fully franked dividend component of $494 million. Refer to note 4.2 for further details. Table A Telstra Group Contributed equity Share loan to employees Shares held by employee share plans Net services received...

  • Page 110
    ...assets in proportion to the total shares issued in the event of the Company winding up. On 2 May 2016, Telstra announced a capital management program of up to approximately $1.5 billion. The details of the capital management program are disclosed in note 7.5. In the prior financial year we completed...

  • Page 111
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 4. Our capital and risk management (continued) 4.2 Equity (continued) 4.2.2 Reserves (continued) During the financial year 2016 due to issue of shares to employees, we ...

  • Page 112
    ... B Telstra Group Opening net debt Debt issuance Net commercial paper Debt repayments Finance lease repayments Net cash (inflow)/outflow Fair value (losses)/gains impacting Equity Other expenses Finance costs Other non-cash movements Debt on acquisition of Pacnet Limited Finance lease additions Total...

  • Page 113
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 4. Our capital and risk management (continued) 4.3 Capital management (continued) 4.3.1 Net debt (continued) (a) Borrowings and repayment of debt (continued) Term debt ...

  • Page 114
    ... 12 months from the reporting date, which are classified as current liabilities. Table D Telstra Group Interest expense on Domestic borrowings Offshore borrowings Bank loans Commercial paper Finance leases Other Total interest on borrowings Year ended 30 June 2016 $m 138 666 17 27 24 12 884 2015...

  • Page 115
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 4. Our capital and risk management (continued) 4.3 Capital management (continued) 4.3.3 Derivatives Derivatives are financial instruments that derive their value from the ...

  • Page 116
    ...being hedged. Right to set-off (b) Utilisation of derivatives to manage risks We enter into derivative transactions in accordance with policies approved by the Board to manage our exposure to market risks and volatility of financial outcomes that arise as part of our normal business operations. We...

  • Page 117
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 4. Our capital and risk management (continued) 4.3 Capital management (continued) 4.3.3 Derivatives (continued) (b) Utilisation of derivatives to manage risks (continued) ...

  • Page 118
    ... Net loss after tax 274 (267) 7 5 2015 $m (5,779) 28 (5,751) (543) (6,294) Table H shows the ineffectiveness recognised in the income statement. We have excluded foreign currency basis spreads from our designated fair value and cash flow hedge relationships. 116 116| Telstra Corporation Limited...

  • Page 119
    ... to goods and services purchased - changes in fair value transferred to finance costs - changes in fair value transferred to property, plant and equipment - income tax on movements in the cash flow hedging reserve Year ended 30 June 2016 $m 32 (196) (7) 204 (3) (9) 21 2015 $m 91 (277) (13...

  • Page 120
    ...related to those of the host contracts and the host contracts are not measured at fair value through profit or loss. 4.4 Financial instruments and risk management Our underlying business activities result in exposure to operational risks and a number of financial risks, including interest rate risk...

  • Page 121
    ...exchange contract liability includes final pay legs of $1,450 million (2015: $654 million) as described in Table E. The $468 million notional value above represents forward foreign exchange contracts used to hedge United States dollar commercial paper borrowings at 30 June 2016. Telstra Corporation...

  • Page 122
    ... the current level of both short-term and long-term interest rates. This is not a forecast or prediction of future market conditions. The results of the sensitivity analysis are driven by the following main factors: • any increase or decrease in interest rates will impact our net unhedged floating...

  • Page 123
    ... Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 4. Our capital and risk management (continued) 4.4 Financial instruments and risk management (continued) 4.4.2 Managing our foreign currency risk (continued) (b) Trading The performance of our business is increasingly...

  • Page 124
    ... customer credit risk) and financing activities. We manage credit risk by applying stringent credit policies monitoring exposure to high risk debtors requiring collateral where appropriate assigning credit limits to all financial counterparties. Table F Telstra Group 2016 As at 30 June 2015 Gain...

  • Page 125
    ... of funding through the use of liquid financial instruments, long-term and short-term borrowings, and committed available bank facilities. Table G Telstra Group Less than 1 year $m Domestic borrowings Offshore borrowings Commercial paper Interest on borrowings, excluding finance lease liabilities...

  • Page 126
    ... to discounted cash flows and fair values of recent orderly sell transactions between market participants involving instruments that are substantially the same. Initial recognition: expectations of future performance of the business. Subsequent measurement: present value of the future expected cash...

  • Page 127
    ... securities is the fair value of our retained interest in Autohome Inc. of $200 million based on the New York Stock Exchange 30 June 2016 closing share price of US$20.11. This represented a quoted price in an active market. Telstra holds 7,420,820 shares at 30 June 2016. Refer to section 6.4 for...

  • Page 128
    ...offset in the statement of financial position, i.e. our material rights of set-off that are not otherwise included in column B, related to: • our inter-operative tariff arrangements with some of our international roaming partners, where we have executed agreements that allow the netting of amounts...

  • Page 129
    Notes to the financial statements (continued) Section Title | Telstra Annual Report 2016 Section 5. Our people We are working to attract and retain employees with the skills and passion to best serve our markets. This section provides information about our employee benefits obligations. It also ...

  • Page 130
    ... being released from restriction. 5.2.2 Description of long-term incentive (LTI) share-based payment arrangements We have three key types of LTI share-based payment arrangements being: • Executive LTI performance rights • Employee Share Plan restricted shares • Group Executive (GE) Telstra...

  • Page 131
    ... statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 5. Our people (continued) 5.2 Employee share plans (continued) 5.2.2 Description of long-term incentive (LTI) share-based payment arrangements (continued) (a) Executive LTI performance rights...

  • Page 132
    ... Employee share plans (continued) 5.2.2 Description of long-term incentive share-based payment arrangements (continued) (d) Outstanding equity based instruments Table C provides further information about each type of LTI plan that was outstanding during the financial year. End date refers to the end...

  • Page 133
    Notes to the financial statements (continued) Financial Report2016 2016 Section TitleTelstra | Telstra Annual Report Section 5. Our people (continued) 5.2 Employee share plans (continued) 5.2.2 Description of long-term incentive share-based payment arrangements (continued) (e) Summary of ...

  • Page 134
    ...66 for the release of performance rights under the financial year 2011 LTI plan • $6.10 for the release of restricted shares under the financial year 2015, 2014, 2013 and 2012 ESP plans These weighted average share prices were based on the closing market price on the exercise dates. No LTI equity...

  • Page 135
    ... in the statement of financial position. Table A Telstra Group Fair value of defined benefit plan assets Present value of the defined benefit obligation Net defined benefit asset Attributable to Telstra Super Scheme Other As at 30 June 2016 $m 2,638 2,627 11 15 (4) 11 2015 $m 2,694 2,402...

  • Page 136
    ... interest rate risk, equity price risk and foreign currency risk. The strategic investment policy of the fund is to build a diversified portfolio of assets to match the projected liabilities of the defined benefit plan. (a) Reconciliation of changes in fair value of defined benefit plan assets Table...

  • Page 137
    ... benefit obligation as at 30 June 2016 would have increased/(decreased) as a result of a change in the respective assumptions by 1 percentage point (1pp). Table E Telstra Super Defined benefit obligation 1pp increase $m 1pp decrease $m 264 (136) Discount rate Expected rate of increase in future...

  • Page 138
    ... final obligation. The present value is determined by discounting the estimated future cash outflows using rates based on high quality corporate bonds. We recognise all our defined benefit costs in the income statement, with the exception of actuarial gains and losses that are recognised directly in...

  • Page 139
    ... development and softwarefocussed consulting and managed services. Table A Telstra Group Year ended 30 June 2016 $m Consideration for acquisitions Cash consideration Contingent consideration Non-cash consideration Total purchase consideration Cash balances acquired Contingent consideration Non...

  • Page 140
    ... held equity interest at its acquisition fair value and any resulting gain or loss is recognised in income statement. Table B Telstra Group Year ended 30 June 2016 $m 1 Acquisition costs incurred Contributions to the Group's performance Income since acquisition date Loss before income tax expense...

  • Page 141
    ... parent entity Telstra Corporation Limited Controlled entities 1300 Australia Pty Ltd Asia Global Crossing Finance Co. Ltd Asia Netcom Pacnet (Ireland) Limited Bridge Point Communications Pty Ltd Beijing Cheerbright Technologies Co. Ltd 1 CloudMed Pty Ltd DCA Direct Health Pty Ltd FRED IT Group Pty...

  • Page 142
    ...by Telstra Corporation. 7 Refer to note 6.1.1 for details of business combinations for the financial year 2016. 6.2.2 Deed of cross guarantee The following entities are party to the Deed and part of the Closed Group Telstra Corporation Limited Bridge Point Communications Pty Ltd DCA Direct Health...

  • Page 143
    ... payables Provisions Borrowings Derivative financial liabilities Deferred tax liabilities Revenue received in advance Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Equity available to the closed group As at 30 June 2016 $m 3,547 987 3,228...

  • Page 144
    ... to the Closed Group Year ended 30 June 2016 $m 2015 $m Items that will not be reclassified to the Closed Group income statement Retained profits - actuarial gain on defined benefit plans - income tax on actuarial gain on defined benefit plans Fair value of equity instruments reserve - gains from...

  • Page 145
    ...Table A Telstra Group 2016 $m Carrying amount of investments at beginning of year Additional investments Disposal of investments Reclassification to other investment Impairment loss recognised in the income statement Share of net profit/(loss) Share of distributions Share of capital return Carrying...

  • Page 146
    ...Labs Sydney Pty Ltd Cloud based business process guidance software Video analytics software provider Mobile security system provider Voice software provider Internet based ordering gateway Data communication service provider Network cable provider Telecommunication services Software development 144...

  • Page 147
    ... our reporting date of 30 June for financial year 2016 as follows Reach Ltd - 31 December Australia-Japan Cable Holdings Limited - 31 December Asia Netcom Philippines Corporation - 31 December Dacom Crossing Corporation - 31 December Digitel Crossing Inc. - 31 December Gorilla Technology Group Inc...

  • Page 148
    ... D Telstra Group Year ended/As at 30 June Joint ventures 2016 $m 2015 $m 5 Table C Foxtel joint venture Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net liabilities Cash and cash equivalents Current financial liabilities Non-current...

  • Page 149
    ... mainly relate to loans provided to Foxtel Management Pty Ltd of $411 million (2015: $451 million) and Reach Ltd of $7 million (2015: $7 million). In April 2012, Telstra Corporation Limited provided a loan to Foxtel Management Pty Ltd to fund the acquisition of shares in AUSTAR. During the year...

  • Page 150
    ... accounted for using the equity method Deferred tax assets Trade and other payables Current tax payables Revenue received in advance Net assets Foreign currency translation reserve derecognised Adjustment for non-controlling interests Net book value of assets disposed Transaction costs incurred Gain...

  • Page 151
    ... operations Profit after tax on disposal of discontinued operations Net cash provided by operating activities Net cash provided by investing activities Net cash provided by financing activities Net increase in cash and cash equivalents 6.4.2 Sensis discontinued operation Year ended 30 June 2016...

  • Page 152
    ... 117 'Leases'. The new standard significantly changes accounting for lessees requiring recognition of all leases on the balance sheet, including those currently accounted for as operating leases. A lessee will recognise liabilities reflecting future lease payments and 'right-ofuse assets', initially...

  • Page 153
    ... Entity Statement of financial position Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities Share capital Cash flow hedging reserve Foreign currency basis spread reserve General reserve Retained profits Total equity As...

  • Page 154
    ... payments for non-cancellable operating leases not recorded in the financial statements are detailed in Table B. Table B Telstra Group Within 1 year Within 1 to 5 years After 5 years As at 30 June 2016 $m 546 1,206 1,059 2,811 2015 $m 570 1,368 1,003 2,941 152 152| Telstra Corporation Limited...

  • Page 155
    ... customers as part of the solutions management and outsourcing services. Refer to note 3.3 for further details on these finance leases. Refer to note 3.1 for our lease accounting policy (Telstra as a lessee). 7.4.4 Commitments of our joint ventures and associated entities Information about our share...

  • Page 156
    ... for the financial year 2016 are disclosed in note 4.1. 7.5.2 Capital management On 2 May 2016, Telstra announced a capital management program of at least $1.5 billion to commence in the first half of the financial year 2017. On 11 August, the Board resolved to undertake an off-market share buy-back...

  • Page 157
    ..., or may become subject to, under the Deed of Cross Guarantee described in note 6.2.2. For and on behalf of the board John P Mullen Chairman Andrew R Penn Chief Executive Officer and Managing Director 11 August 2016 Sydney, Australia Telstra Corporation Limited and controlled entities |155 155

  • Page 158
    ...equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the Directors' Declaration of the Company. In our opinion: the accompanying financial report of Telstra Corporation Limited...

  • Page 159
    ... about the future cash flows and plans for these assets forecast growth assumptions. We also performed sensitivity and CGUs. analysis around the key drivers of the cash flow projections. Having Further disclosure regarding the Group's impairment can be found in determined the change in assumptions...

  • Page 160
    ... 52 to 73 of the Directors' Report for the year ended 30 June 2016. In our opinion, the Remuneration Report of Telstra Corporation Limited for the year ended 30 June 2016, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the...

  • Page 161
    ..., at www.nzx.com. Further information in relation to Telstra's corporate governance practices are set out in the Governance At Telstra section of this Annual Report and in our 2016 Corporate Governance Statement which can be found at www.telstra.com/governance. Markets on which our debt securities...

  • Page 162
    ... Rights Shareholders (whether residents or non-residents of Australia) may vote at a meeting of shareholders in person, directly or by proxy, attorney or representative, depending on whether the shareholder is an individual or a company. Subject to any rights or restrictions attaching to our shares...

  • Page 163
    Section Title | Telstra Annual Report 2016 Reference Tables 161

  • Page 164
    ... roles within Telstra designated as Band A, B or C within the Telstra Executive Team. 4. Our social and community investment covers four key focus areas: Everyone Connected (customer and community digital inclusion programs, comprising 85 per cent of total investment), employee volunteering and...

  • Page 165
    ...) for the year from discontinued operations for FY15 and FY16 included both Sensis and Autohome Group results, while FY14 and FY13 only included Sensis results. 6. Capital expenditure is defined as additions to property, equipment and intangible assets including capital lease additions, excluding...

  • Page 166
    ..., mergers and acquisitions and purchase of spectrum. Capex to sales guidance excluded externally funded capex. Reported Full year ended 30 June 2016 $m Sales revenue Total revenue Total income (excl. finance income) Labour Goods and services purchased Other expenses Operating expenses Share of net...

  • Page 167
    ... licences in the 3.4GHz band). 7. Autohome is classified as discontinued operation adjustments: The Autohome Group is disclosed as a discontinued operation for the years ended 30 June 2016 and 30 June 2015. The sale was completed on 23 June 2016. Autohome trading results before its disposal have...

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    Notes 166

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    Notes Telstra Annual Report 2016 167

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    Notes 168

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    Notes Telstra Annual Report 2016 169

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    Notes 170

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    Notes Telstra Annual Report 2016 171

  • Page 174
    ...pay-for-use basis. In simple terms, it allows access to information and programs on multiple devices in multiple locations. Hybrid Fibre Coax (HFC) Cyber safety The safe use of information and telecommunications technology (including mobile phones) and the internet. A way of delivering video, voice...

  • Page 175
    ... data, video and voice from multiple locations in one supported product. Earnings per share. A company's profit divided by the number of shares on issue. Multi-Technology Model (MTM) Refers to the current Government's nbnâ„¢ policy to rollout the nbnâ„¢ network using a mix of technologies. Free...

  • Page 176
    ... Senior Management ...40-41 Sensis ...60, 62, 83, 85, 93, 144, 149, 163 Shareholder Information ...159-160 Stan ...10 J Joint Venture (JV) ...143-148 Statement of Cash Flows ...26, 80, 95 Statement of Financial Position ...79 Strategy ...3, 6-19 Sustainability ...4-5, 28-35, 162, 175 D Directors...

  • Page 177
    ... closing share price. Payment and Tax - dividend payment history, tax information, payment instructions and TFN details. Update bank details here. Communication - become an e-Shareholder and update postal/email addresses and communication elections here. Keeping informed To keep up to date with...

  • Page 178
    ... Market Services Limited PO Box 91976, Auckland 1142 New Zealand Telstra Corporation Limited ABN 33 051 775 556 Incorporated in the Australian Capital Territory Telstra is listed on Stock Exchanges in Australia and in New Zealand (Wellington) Websites Telstra Investor Centre: telstra.com/investor...

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    telstra.com/investor