(33) Financial Instruments

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Financial risk management

Overview

Telekom Austria Group is exposed to market risks, including liquidity risk, interest rate and foreign currency exchange rate risk and credit risk associated with underlying financial assets, liabilities and anticipated transactions. Potential risks relating to interest rate and foreign exchange rate fluctuations can be limited by entering into derivative financial instruments. These policies are laid down in the Treasury Guidelines. Telekom Austria Group neither holds nor issues derivative financial instruments for trading or speculative purposes.

This Note presents information about Telekom Austria Group’s exposure to each of the above risks, as well as the objectives, policies and the processes for limiting and measuring these risks.

The Chief Financial Officer (CFO) of the holding company has overall responsibility for the implementation and oversight of Telekom Austria Group’s risk management and is responsible for monitoring Telekom Austria Group’s risk management process.

Telekom Austria Group’s risk management policies are established in order to identify and analyse the risks faced by Telekom Austria Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are regularly reviewed to reflect changes in market conditions and Telekom Austria Group’s activities. Telekom Austria Group aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

Liquidity risk

Liquidity risk is the risk that Telekom Austria Group will not be able to meet its financial obligations as they fall due. Telekom Austria Group’s approach to managing liquidity is to ensure that Telekom Austria Group will always have sufficient liquidity to meet liabilities when due, under both normal and stressed conditions. Furthermore, all measures required to assure sufficient liquidity for the needs according to the liquidity plan shall be taken. The liquidity risk expresses itself in the monthly and yearly cumulated difference between incoming and outgoing payments (dynamic liquidity risk) as well as in the structure of the statements of financial position (structural liquidity risk).

The analysis of the dynamic liquidity risk is conducted by means of liquidity planning. The given monthly liquidity requirement based on the forecasted liquidity planning is compared against the existing financing or available lines of credit and liquid financial assets. The difference between the two will result in either a liquidity gap, which will be financed, or excess liquidity, which, if necessary, will be invested. On the basis of the existing business plan, a rolling monthly liquidity plan is drawn up for Telekom Austria Group. In the liquidity plan, all known incoming and outgoing payments are processed and a worst-case scenario is calculated.

An analysis of the structural liquidity risk takes place upon determining the net working capital and the redemption structure of the financing portfolio (risk of concentration of maturities). Individual investment financing is structured in such a way that a balanced redemption schedule can be adhered to in the aggregate portfolio and any concentration of maturities in a single year is avoided.

Telekom Austria Group invests excess liquidity in instruments with counterparties and within limits approved by the CFO. All long-term instruments and derivatives, if used, are contracted with counterparties having an investment grade rating from Standard & Poor’s or an equivalent rating from another globally recognised rating agency. If no such external rating is available, an internal rating based on quantitative ratios is carried out.

The exposure to liquidity risk, the set targets, the principles and processes to monitor the risk on an ongoing basis as well as the methods used to assess liquidity risk remained unchanged to prior years.

Funding sources

Telekom Austria Group pursues a central treasury approach in meeting the capital needs of its subsidiaries. Telekom Austria Group’s treasury department acts as an internal financial services provider, realising potential synergies in financing the operations of Telekom Austria Group’s subsidiaries. Its primary goal is to assure liquidity in a cost-effective manner by applying the pooling of cash flows and the clearing of Telekom Austria Group’s accounts to enable the management of short-term investments and borrowings at optimal interest rates with minimal administrative effort.

Cash flow from operations is the basis for securing sufficient liquidity of Telekom Austria Group. Principal sources of external funding are bonds issued on Austrian and international debt capital markets as well as bank loans. For details of outstanding long-term debt and a description of the different classes of the debt as of the reporting date see Note (25).

Other funding sources

In order to diversify its short-term funding sources, Telekom Austria Group implemented a multi-currency short-term and medium-term treasury notes programme (multi-currency notes) with a maximum volume of TEUR 300,000 in 2007. The programme was concluded for an indefinite period. As of 31 December 2014 and 2013, no multi-currency notes were issued.

In August 2014, Telekom Austria Group terminated the contract relating to the revolving period securitisation of trade receivables to a special purpose entity (“Asset Backed Securitisation (ABS) Programme”), which was entered into in 2012. As of 31 December 2013, no amount was drawn, thus no relating short-term debt was recorded. For further information on accounts receivable – trade sold in the course of this programme in 2013, see Note (9).

In accordance with IFRS 10, Telekom Austria Group controlled the SPE because the activities of the SPE were conducted on behalf of Telekom Austria Group according to its specific business needs so that Telekom Austria Group obtained the benefits from the SPE’s operations. In substance, Telekom Austria Group retained the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the benefits of its activities. Consequently, Telekom Austria Group included the SPE in the Consolidated Financial Statements until August 2014. In 2014 and 2013, liquidity fees amounting to TEUR 1,133 and TEUR 1,679, respectively, were recognised in interest expense.

As of 31 December 2014 and 2013, Telekom Austria Group had total credit lines (including ABS) of TEUR 1,000,000 and TEUR 1,060,000, respectively. These credit lines were not utilised. The credit line commitments have a term until November 2019.

Exposure to liquidity risk

The following table sets forth the contractual (undiscounted) interest and redemption payments of financial liabilities. The variable interest payments related to the financial instruments were calculated based on interest rates effective as of 31 December 2014 and 2013. Foreign currencies were translated at the rates valid on the reporting date.

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Contractual cash flow

6 months or less

6 to 12
months

1 to 2
years

2 to 5
years

more than
5 years

At 31 December 2014

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Bonds

3,707,938

99,063

33,938

883,000

713,063

1,978,875

Bank debt

660,255

12,940

257,803

66,985

322,528

0

Accounts payable – trade

523,977

521,492

2,102

171

155

56

Other financial liabilities

54,867

34,950

12,059

3,541

3,273

1,044

 

 

 

 

 

 

 

At 31 December 2013

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Bonds

3,840,807

99,063

34,002

133,304

1,531,691

2,042,748

Bank debt

940,821

60,444

103,466

294,009

402,654

80,247

Accounts payable – trade

573,836

573,050

7

63

191

525

Other financial liabilities

69,198

49,704

9,242

5,612

3,443

1,198

It is not expected that the cash flows of the financial liabilities included in the maturity analysis could occur significantly earlier, or at significantly different amounts.

Market risks

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect Telekom Austria Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters. All financial transactions are carried out within the Treasury Guideline. For derivative financial instruments, if used for risk management purposes, Telekom Austria Group generally applies hedge accounting in accordance with IAS 39.

The calculation of fair values (mark-to-market) is based on contractually agreed future cash flows related to such transactions. For the purpose of determining the fair value of the existing financial instruments, Telekom Austria Group considers the interest rate curve applicable to calculate discount factors of matching maturities.

The exposure to market risk, its origin and the objectives, policies and processes for managing market risk (interest rate risk and exchange rate risk) and the methods used to measure credit risk remained unchanged to prior years.

Interest rate risk

Telekom Austria Group considers changing interest rates as its major market risk exposure. Telekom Austria Group’s risk management strategy strives to balance the related exposure to fair value and cash flow risks.

Since the majority of Telekom Austria Group’s long-term debt has fixed interest rates, the cash flow exposure due to fluctuating interest rates is limited. However, the fair value of fixed rate debt increases when market rates are below the rates fixed on these loans.

Exposure to interest rate risk

The risk of changes in interest rates is considered low due to the short-term nature of financial assets.

For details on the risks related to long-term financial liabilities, see Note (25).

Fair value sensitivity analysis for financial instruments

One measure used to express the potential change in the value of a portfolio of financial liabilities in response to a change in interest rates is the modified duration. Modified duration (sensitivity measure) follows the concept that interest rates and the price of fixed-rate financial instruments move in opposite directions. The sensitivity is based on the assumption of a one percentage point parallel shift in market interest rates for all terms occurring at the reporting date. The methods and assumptions used remained unchanged to those used in prior years. The modified duration (sensitivity) is set forth in the following table (negative amounts represent decreases in financial liabilities):

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Change in financial portfolio

in TEUR, at 31 December

Capital amounts

Increase

Decrease

2014

 

 

 

Fixed rate financial liabilities

3,626,000

 

 

Sensitivity at 4.913%

 

−178,131

178,131

 

 

 

 

2013

 

 

 

Fixed rate financial liabilities

3,723,801

 

 

Sensitivity at 4.969%

 

−185,036

185,036

Cash flow sensitivity analysis for variable-rate financial instruments

A change of one percentage point in interest rates at the reporting date would have increased (decreased) net income or loss by the amounts shown below. The analysis assumes that all other variables remain constant. At 31 December 2014, all financial liabilities have fixed interest rates. The amounts presented refer to the variable portion of the total debt portfolio at 31 December 2013 (negative amounts represent positive effects on the consolidated statements of profit or loss):

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in TEUR, at 31 December

Capital amounts

1 percentage point increase

1 percentage point decrease

2013

 

 

 

Variable rate financial liabilities

175,014

 

 

EMTN bond with interest rate swap (variable leg)

 

 

 

Sensitivity

 

1,750

−1,750

Information with respect to cash flow hedges

Cash flow hedges were entered into by Telekom Austria Group to reduce its exposure to changes in the cash flows resulting from interest payments with respect to floating interest rate liabilities.

The three forward-starting interest rate swap contracts (pre-hedges) with a face value of TEUR 100,000 each, which were concluded in 2011 to hedge the interest rate risk of future interest payments, were settled on 28 May 2013 as agreed upon. An amount of TEUR 65,142 was paid to the contractual partners and was recognised in the hedging reserve in stockholders’ equity.

The relating hedging reserve will be released in profit or loss in accordance with the recognition of interest expense on the bond, which was issued on 4 July 2013, as the interest rate risk on that bond was hedged. Telekom Austria Group compared the expenses that will actually be recognised in profit or loss in the following ten years with the hedged fixed payments less the saving for early payment due to settlement. This resulted in a non-recoverable amount of TEUR 6,746 which was immediately recognised in interest expense according to IAS 39.97 (before deduction of the settlement cost of TEUR 978 that had already been recorded in interest expense, see Note (7)). Thus the hedging reserve at 4 July 2013 amounted to TEUR 58,396. In 2014 and 2013, the release of the hedging reserve and, in 2013, the recognition of the non-recoverable amount resulted in interest expense amounting to TEUR 5,840 and TEUR 8,688 and a tax benefit amounting to TEUR 1,460 and TEUR 2,172, respectively. In 2013, the change in fair value of the hedging instrument until settlement resulted in a gain of TEUR 336 which was recognised in other comprehensive income (OCI). For the correction of prior period amounts see “Changes in Accounting Estimates and Errors” in Note (1).

Exchange rate risk

As of 31 December 2014 and 2013, of all accounts receivable – trade and accounts payable – trade, only the following are denominated in a currency other than the functional currency of the reporting entities (for foreign exchange rates, see Note (1)):

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in TEUR, at 31 December

2014

2013

Denominated in

EUR

USD

Other

EUR

USD

Other

Accounts receivable – trade

15,597

2,246

18,673

24,428

1,081

20,311

Accounts payable – trade

57,880

6,057

13,003

41,199

8,310

9,988

A change of 5% in the exchange rate of EUR to HRK would have increased (decreased) foreign exchange rate differences by TEUR 883 and TEUR 1,628 in 2014 and 2013, respectively. A change of 10% in the exchange rate of EUR to RSD would have increased (decreased) foreign exchange rate differences by TEUR 1,267 and TEUR 796 in 2014 and 2013, respectively. A sensitivity analysis for a change of the BYR was not performed due to the application of accounting in hyperinflationary economies. No sensitivity analysis was performed for other accounts receivable or for accounts payable – trade, denominated in foreign currencies, as there is no significant risk due to diversification.

Credit risk

Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from accounts receivable – trade, investment activities and, if used, derivative financial instruments.

The exposure to credit risk, its origin and the objectives, policies and processes for managing credit risk as well as the methods used to measure credit risk remained unchanged to prior years.

Telekom Austria Group does not have significant exposure to any individual customer or counterparty, nor does it have any major concentration or credit risk related to any financial instrument other than noted under the section concentration of risk in “Significant Accounting Policies” (Note (1)). Due to internal guidelines and the setting of counterparty limits, Telekom Austria Group does not have significant exposure to credit risk in respect of financial instruments.

Telekom Austria Group does not require collateral in respect of financial assets. In order to reduce the risk of non-performance by the other parties all swap agreements are concluded under the standards of the “ISDA-Master Agreement” or the German Standards “Framework for Financial Forward Agreements”.

Accounts receivable – trade and other receivables

Telekom Austria Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer or customer groups. The demographics of Telekom Austria Group’s customer base, including the default risk of the industry and country in which customers operate, have less of an influence on credit risk.

The Credit Management Department has established a credit policy that requires each new customer to be analysed individually for creditworthiness.

Credit risk or the risk of default in payment by contractual partners is continuously monitored via credit checks, credit limits and verification routines. Due to the large number of customers and the high level of diversification of the portfolios, the default of any single debtor would not entail grave consequences (low concentration risk) in respect of the Consolidated Financial Statements. Within Telekom Austria Group, operative credit risk management functions are performed at the operating company level.

Telekom Austria Group does not require collateral in respect of accounts receivable – trade and other receivables.

Financial investments

Telekom Austria Group limits its exposure to credit risk by only investing in fungible financial instruments and by placing deposits only with counterparties that have an appropriate external or internal rating based on quantitative and qualitative parameters. As Telekom Austria Group’s investments are generally of a short-term nature, it does not expect any counterparties to fail to meet their obligations. Therefore, the exposure to any significant credit risk is low.

Exposure to credit risk

The carrying amount of financial assets and accounts receivable – trade represents the maximum credit risk exposure. The maximum exposure to credit risk related to financial assets was:

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in TEUR, at 31 December

2014

2013

Available-for-sale investments

21,279

14,571

Financial investments valued at cost

554

558

Loans and receivables

113,905

60,743

Cash and cash equivalents

1,018,065

201,334

Carrying amount of financial assets

1,153,803

277,206

The following table sets forth the maximum exposure to credit risk for accounts receivable – trade, which equals the carrying amount, by geographic region:

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in TEUR, at 31 December

2014

2013

Domestic

689,556

755,873

Foreign

83,475

108,899

Allowances

−172,963

−180,929

Accounts receivable – trade

600,068

683,843

Accounts receivable – trade from Telekom Austria Group’s most significant customer amount to TEUR 3,155 and TEUR 2,979 as of 31 December 2014 and 2013, respectively. Thus, no major concentration of credit risk exists. With respect to the aging of accounts receivable – trade and the allowance for doubtful accounts, see Note (9).

Fair value of financial instruments

The following table shows the carrying amounts and the fair values of the financial instruments per class of financial assets:

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2014

2013

in TEUR, at 31 December

Carrying amount

Fair value

Carrying amount

Fair value

Financial assets

 

 

 

 

Cash and cash equivalents

1,018,065

1,018,065

201,334

201,334

 

 

 

 

 

Accounts receivable – trade

600,068

600,068

683,843

683,843

Receivables due from related parties

1,255

1,255

58

58

Other current financial assets

75,672

75,672

42,578

42,578

Other non-current financial assets

36,978

36,978

18,106

18,106

Loans and receivables

713,973

713,973

744,585

744,585

 

 

 

 

 

Long-term investments

6,846

6,846

4,690

4,690

Short-term investments

14,433

14,433

9,882

9,882

Available-for-sale investments

21,279

21,279

14,571

14,571

 

 

 

 

 

Investments at cost

554

554

558

558

Cash and cash equivalents, accounts receivable – trade and other current financial assets have maturities lower than one year. As their carrying amounts reported approximate their fair values, no further information on the classification in the fair value hierarchy is provided.

The fair values of other non-current financial assets with a maturity of more than one year correspond to the present values of the payments related to the assets, taking into account the current interest rates that reflect market and partner-based changes to terms, conditions and expectations and are thus classified as Level 2 of the fair value hierarchy.

The fair values of available-for-sale investments are based on market prices.

Telekom Austria Group estimates the fair values of investments in equity instruments and investments in unconsolidated subsidiaries that do not have a quoted market price in an active market based on the audited financial statements, if available. For information on the stake in CEESEG AG, see Note (16).

The following table shows the carrying amounts and the fair values of the financial instruments per class of financial liabilities:

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2014

2013

in TEUR, at 31 December

Carrying amount

Fair value

Carrying amount

Fair value

Non-current liabilities to financial institutions including their short-term portion.

Financial liabilities

 

 

 

 

Bonds

3,029,679

3,430,116

3,025,452

3,206,764

Other current financial liabilities

53,755

53,755

68,247

68,247

Non-current liabilities to financial institutions

602,632

655,521

848,801

911,356

Other non-current liabilities

969

969

942

942

Accounts payable – trade

522,344

522,344

573,836

573,836

Payables due to related parties

7,058

7,058

5,891

5,891

Accrued interest

93,459

93,459

93,720

93,720

Financial liabilities at amortised cost

4,309,895

4,763,222

4,616,890

4,860,757

Accounts payable – trade and other payables have maturities below one year. As their carrying amounts approximate their fair values, no further information on the classification in the fair value hierarchy is provided.

The fair values of the quoted bonds (EMTN bonds and Eurobonds) equal the face value multiplied by the price quotations at the reporting date and are thus classified as Level 1 of the fair value hierarchy.

The fair values of liabilities to financial institutions, promissory notes and other financial liabilities are measured at the present values of the cash flows associated with the debt, based on the applicable yield curve and credit spread curve for specific currencies and are thus classified as Level 2 of the fair value hierarchy.

Fair value hierarchy of financial instruments

The following table shows the fair value hierarchy (per class of financial instrument) of financial instruments measured at fair value that reflects the significance of the inputs in such fair value measurements:

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Level 1

Level 2

Level 3

Total

2014

 

 

 

 

Available-for-sale & other investments

7,296

13,983

21,279

Financial assets measured at fair value

7,296

13,983

21,279

 

 

 

 

 

2013

 

 

 

 

Available-for-sale & other investments

6,429

8,143

0

14,571

Financial assets measured at fair value

6,429

8,143

0

14,571

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