Telstra 2016 Annual Report Download - page 116

114
Notes to the financial statements (continued)
Section 4. Our capital and risk management (continued)
114 | Telstra Corporation Limited and controlled entities
4.3 Capital management (continued)
4.3.3 Derivatives (continued)
(a) Recognition and measurement (continued)
(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 do not speculatively trade in derivative
financial instruments.
Hedging refers to the way in which we use financial instruments,
primarily derivatives, to manage our exposure to financial risks. The
gain or loss on the underlying item (the ‘hedged item’) is expected to
move in the opposite direction to the gain or loss on the derivative
(the ‘hedging instrument’), therefore offsetting our risk position.
Hedge accounting allows the matching of the gains and losses on
hedged items and associated hedging instruments in the same
accounting period to minimise volatility in the income statement. In
order to qualify for hedge accounting, prospective hedge
effectiveness testing must meet all the following criteria:
• an economic relationship exists between the hedged item and
hedging instrument
• the effect of credit risk does not dominate the value changes
resulting from the economic relationship
• the hedge ratio is the same as that resulting from actual amounts
of hedged items and hedging instruments for risk management.
Our major exposure to interest rate risk and foreign currency risk
arises from our long-term borrowings. We also have translation
foreign currency risk associated with investments in foreign
operations and transactional foreign currency exposures such as
purchases in foreign currencies. These risks are discussed further in
note 4.4.
Recognition and measurement
Recognition and
measurement
All derivatives are initially recognised at fair value and subsequently remeasured at fair value at each
reporting date. Where the fair value of a derivative is positive it is carried as an asset and where negative,
as a liability. Refer to note 4.4.5 for details on the determination of fair value.
Right to set-off We record derivative financial instruments on a net basis in our statement of financial position 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
• enter into master netting arrangements relating to a number of financial instruments, have a legal
right of set-off, and intend to exercise that right.
For our interest rate swaps, 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.
Derecognition 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.
Derivative liabilities are derecognised when the contractual obligations are discharged, cancelled or
expired.
Impact to the income
statement
The method of recognising the resulting gain or loss depends on whether the derivative is designated as
a hedging instrument and, if so, on the nature of the item being hedged.