Financial Risk Management Essay For Telstra Corporation Limited.

Telstra Corporation Limited

Discuss about the Financial Risk Management for Telstra Corporation Limited.

Financial risk management is considered to be the ultimate practice of economic value in a company by using instruments so as to manage risks exposure such as market risk, credit risk, and liquidity risk (Black, Kirkwood, Williams, & Rai, 2013). Financial risk management usually occurs when a particular investor or a fund manager analyzes and attempts to quantify the probability of losses in securities and they undertake the proper action given their risk tolerance and investment objectives. This assignment discusses the aspect of financial risk management in Telstra Corporation Limited and how the company uses Hedge accounting rules in its operations.

Telstra Corporation Limited is known to be the biggest media and telecommunication company domiciled in Melbourne, Australia. The company makes and operates telecommunication systems and markets mobile, pay television, internet access, voice, and various other telecommunication products. The company was formed in 1901 as a result of Australian Federation. Telstra Corporation Limited has a long history in Australia as it initiated its operations as a government department and later was privatized as it has been undergoing a change strategy in order to become more consumer focused under its CEO, David Thodey. In the FY2016, the company had revenue of A$27.1 Billion, operating income of A$6.3 Billion and a net profit of A$5.8 Billion respectively. The company is considered to be the leading Technology and Telecommunication Company in Australia that basically offers a full range communication products and competing in all the communication markets (Telstra Corporation Limited annual reports, 2015, 2014 & 2013). The company offers about 17.2 Million mobile phones, 7.0 Million fixed voices products and 3.4 Million retail fixed broadband products. Telstra Corporation Limited has faced competition from Optus which is the Australian second largest communication firm and a number of small providers. The company usually operates through four divisions; Telstra Retail division that provided telecommunication services and products (Chang, González & Jimenez, 2013). Global Enterprise and Services division that offers sales for both government and business clients, Telstra Wholesale division that provides a range of telecommunication services and products delivered via Telstra Corporation Limited network and carriage services providers.

Financial risks Telstra Corporation Limited exposed to

According to the company’s FY2015 reports, the risks associated with the firm operations comprise of credit risks, market risks and liquidity risks.

According to the firm, a market risk is considered to be the risk that the future cash flows or fair value of the firm financial instruments will basically fluctuates because of variations in the market prices (Christoffersen, 2012).

Overview and Business Activities

Interest rate risk: The aspect of interest rates usually keeps fluctuating thus exposing the company to floating interest rate

Credit risk is another risk that a company may not be able finishes its obligations under a financial security that leads to the company making a financial loss. The company faces credit risk exposure on all financial assets that include statements of financial position and assets. Yes, the company is exposed to these risks next year (Black et al. 2013). According to the company financial report, these risks are assessed as significant for the company within the next year because it assists the firm evaluate its operation success and allow the firm to maximize profits as it minimizes expenses on diverse activities that do not produce any return on investment. 

Liquidity risk is another risk that is basically associated with the company operations that includes the diverse arising from the company operations. These kinds of risk usually cause the company incapable to settling any financial obligation or even reposes financial assets at all.

As most of Telstra Corporation Limited activities are exposed to diverse financial risks, the company executives seek to mitigate these risks through employing diverse finance instruments such as securities. The company uses the following aspects as primary risks for mitigating risks;

Fair value interest rate risk management:  In order to manage the interest rate risk, Telstra Corporation Limited decides to maintain the proper mix between the fixed and floating interests’ borrowings and also using the interests’ rate swap contracts (Dong, Kouvelis, & Su, 2014). These types of activities are often evaluated so as to make sure that hedging techniques are aligned with interests’ rates views.

Management of credit risks: For the company to minimize this kind of risk, the company only deals with the creditworthiness counterparties. The credit trustworthy and the credit rating is often monitored by the aggregate cost of the concluded transaction which is basically separated among approved business partners since there is no vital credit risk exposure to a single partner (Hull, 2012). Telstra Corporation Limited mitigates this kind of risks by ensuring that its business operations are performed effectively.

Telstra Corporation Limited management assesses its short term and long term funding since it is usually their responsibility. Adequate banking facilities, reserves, and reserve borrowings are basically maintained by the firm so as to minimize the liquidity risks as it is often monitored to make sure that the firm has sufficient resources to avoid this type of risks. Financing plans such as taking unsecured bank overdrafts and unsecured banks facilities are basically maintained so as to ensure that the company has enough resources for utilization.

Financial risks Telstra Corporation Limited exposed to

The following are the approaches that form the overall risks management;

Development of risk management framework: This framework is developed and implemented in Telstra Corporation Limited as it is inconsistent with the accounting standards’ used in Australia (Brigham, & Ehrhardt, 2013).  The Risk management framework identifies, monitor and assesses the risks. The aspect also develops and implements the process of risk management. 

Enhanced responsibilities: According to the aspect of risk management, responsibilities are categorized among the Audit and Risk Management member, board and the company management. Each group embraces its responsibilities as they will make sure that the company mitigates its risks at all levels.

Review: The risk management policies and framework are often monitored are regular bases to measure its success (Conway, 2012). Telstra Corporation Limited often monitors and evaluates its risk management frameworks so as to check for effectiveness and replace any framework and policy that is ineffective.

Adoption: Telstra Corporation Limited adopts the risk management policy and framework so as to ensure that the company productions are enhanced.  

Hedging describes the manner in which Telstra uses the financial instrument and in this case the derivatives to manage the exposure to financial risks. The gain or loss that is accrued to the underlying item that is an item that has been hedged is anticipated that it moves in a reverse direction to the gain or loss incurred on the derivative that is a mechanism that has been hedged hence offsetting the risk position of Telstra.

Hedge accounting for this case heightens a technique that enables a perspective where the gains or losses to be matched with the instruments and items that have been hedged in the equivalent period of accounting to minimize the unpredictability in the income report (Kaplan, 2012). The standard of accounting that is applicable for Telstra is AASB 9-Financial Instruments which necessitates that certain norms are encountered in order for the application for hedge accounting. Telstra is also obliged by AASB –Financial Instruments; Revelations to deliver some precise exposes in respects to the activities for hedging.

Fair value hedges objective is to transform the interest borrowings that are fixed to rate of interest rate borrowings that is floating. Telstra enters into interest rate and swaps in cross currency to moderate the acquaintance of the company to fair value of the long term borrowing changes. AASB9 permits a component of the borrowing margins for Telstra with the cross currency swaps to be submitted in equity. The element is included in the interest on borrowing in the income report over the outstanding maturity of the borrowing.

Market Risk

The objectives of Telstra hedging for cash flow are to hedge the revelation that ascends from the inconsistency in future for cash flows of interest and foreign currency arising from borrowings that accept interest at adjustable rates or are foreign currency denominated. Hedging for cash flow is also encapsulated to alleviate the exposure of foreign exchange that arise from foreseen connections in the future (Klettner, Clarke, & Boersma, 2014). The contracts of forward foreign exchange for Telstra are used to hedge a certain quota of the highly likely projection dealings that are denominated in foreign currency. The contracts in hedging for foreign currency risk for Telstra that arises from changes in the spot rates.

The exposure of foreign exchange for Telstra ascends from investment in operations in a foreign country. The possibility ascends from the transaction of the net assets of the enterprises from their functional currency in AUD. The enterprise term the contracts for forwards in foreign currency, swaps that are cross currency and borrowings made in foreign legal tender as hedges for the risk.

Telstra hold some financial instruments derivatives that are not legally designated in hedging relations as normal offsets realizes substantial the equivalent accounting outcomes. The primary composition include the contracts of forward in foreign currency that are encapsulated to economically hedge the movement of fair value that is attributable to fluctuations in the rate of  exchange which include trade creditors from trading activities and other obligation and balances of assets that are denominated in foreign currency.

The implementation of AASB 9 (2013) has led to a smaller amount ineffectiveness being recognized as definite cost of hedging may now be left out from the relationships that are designated for the hedges (Mayorga, & Sidhu, 2012). The company utilizes the preference to disregard foreign currency base extents from the designated fair value and cash flow associations. The reserves for cash flow hedge is attuned to the lower of the collective gain or loss on the hedging mechanism and the cumulative alteration in fair value of the hedged time. The alteration does not effect in any ineffectiveness that is material.

References

Black, S., Kirkwood, J., Williams, T., & Rai, A. (2013). A history of Australian corporate bonds. Australian Economic History Review, 53(3), 292-317.

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Conway, S. L. (2012). Guidelines for Corporate Governance Disclosure–are Australian listed companies conforming?. Journal of the Asia-Pacific Centre for Environmental Accountability, 18(1), 5-24.

Chang, C. L., González-Serrano, L., & Jimenez-Martin, J. A. (2013). Currency hedging strategies using dynamic multivariate GARCH. Mathematics and Computers in Simulation, 94, 164-182.

Christoffersen, P. F. (2012). Elements of financial risk management. Academic Press.

Dong, L., Kouvelis, P., & Su, P. (2014). Operational hedging strategies and competitive exposure to exchange rates. International Journal of Production Economics, 153, 215-229.

Hull, J. (2012). Risk Management and Financial Institutions,+ Web Site (Vol. 733). John Wiley & Sons.

Kaplan, R. S., & Mikes, A. (2012). Managing risks: a new framework.

Klettner, A., Clarke, T., & Boersma, M. (2014). The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), 145-165.

Mayorga, D. M., & Sidhu, B. K. (2012). Corporate disclosures of the major sources of estimation  uncertainties. Australian Accounting Review, 22(1), 25-39.

Telstra Corporation Limited annual reports. (2015, 2014 & 2013). Retrieved from https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-Report.pdf

Telstra Corporation Limited risk management. Retrieved from https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20D/governance-at-telstra.pdf