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6.5 Financial risk management

6.5 Financial risk management

Management’s objectives are to protect BCE and its subsidiaries on a consolidated basis against material economic exposures and variability of results from various financial risks that include credit risk, liquidity risk, foreign currency risk, interest rate risk, equity price risk and longevity risk. These risks are further described in Note 2, Significant accounting policies, Note 8, Other income (expense), Note 22, Post-employment benefit plans and Note 24, Financial and capital management in BCE’s 2016 consolidated financial statements.

The following table outlines our financial risks, how we manage these risks and their financial statement classification.

FINANCIAL RISK DESCRIPTION OF RISK MANAGEMENT OF RISK AND FINANCIAL STATEMENT CLASSIFICATION
Credit risk We are exposed to credit risk from operating activities and certain financing activities, the maximum exposure of which is represented by the carrying amounts reported in the statements of financial position. We are exposed to credit risk if counterparties to our trade receivables and derivative instruments are unable to meet their obligations.
  • Large and diverse customer base
  • Deal with institutions with investment-grade credit ratings
  • Regularly monitor our credit risk and exposure
  • Our trade receivables and allowance for doubtful accounts balances at December 31, 2016 were $2,967 million and $60 million, respectively
Liquidity risk We are exposed to liquidity risk for financial liabilities.
  • Sufficient cash from operating activities, possible capital markets financing and committed bank facilities to fund our operations and fulfill our obligations as they become due
  • Refer to section 6.7, LiquidityContractual obligations, for a maturity analysis of our recognized financial liabilities, for a maturity analysis of our recognized financial liabilities
Foreign currency risk We are exposed to foreign currency risk related to anticipated transactions and certain foreign currency debt.

A 10% depreciation (appreciation) in the value of the Canadian dollar relative to the U.S. dollar would result in a gain (loss) of $30 million recognized in net earnings at December 31, 2016 and a gain (loss) of $84 million recognized in OCI at December 31, 2016, with all other variables held constant.

Refer to the following Fair value section for details on our derivative financial instruments.

  • Foreign currency forward contracts on our purchase commitments and commercial paper maturing in 2017 to 2018 of $3.2 billion U.S. ($4.2 billion Canadian) at December 31, 2016, to manage foreign currency risk related to anticipated transactions and foreign currency debt
    • For cash flow hedges, changes in the fair value are recognized in OCI, except for any ineffective portion, which is recognized immediately in earnings in Other income (expense). Realized gains and losses in Accumulated OCI are reclassified to Operating costs in the income statements in the same periods as the corresponding hedged items are recognized in earnings
    • For economic hedges, changes in the fair value are recognized in Other income (expense)
  • Cross currency basis swaps on one of our credit facilities maturing in 2017 of $357 million U.S. ($474 million Canadian) at December 31, 2016, to hedge foreign currency risk on a portion of our long-term debt due within one year
    • Changes in the fair value of these derivatives and the related credit facility are recognized in Other income (expense) in the income statements and offset, unless a portion of the hedging relationship is ineffective
Interest rate risk We are exposed to risk on the interest rates of our debt, our post-employment benefit plans and on dividend rate resets on our preferred shares.

A 1% increase (decrease) in interest rates would result in a decrease of $25 million (increase of $20 million) in net earnings at December 31, 2016.

Refer to the following Fair value section for details on our derivative financial instruments.

  • In 2016, we redeemed prior to maturity long-term debt maturing in February 2017 and settled the interest rate swap used to hedge the interest rate exposure on the redeemed debt, having a notional amount of $700 million
    • Changes in the fair value of these derivatives and the related long-term debt were recognized in Other income (expense) in the income statements and offset
  • In 2016, we settled interest rate locks with a notional amount of $500 million which hedged the interest rates on long-term debt
    • Changes in the fair value of these derivatives were recognized in OCI, except for any ineffective portion, which was recognized immediately in earnings in Other income (expense). Realized gains and losses in Accumulated OCI were reclassified to Interest expense in the income statements in the same periods as the interest expense on the debt was recognized in earnings
  • In 2016, we settled interest rate locks with a notional amount of $350 million which hedged the interest rate risk on preferred share rate resets
    • Changes in the fair value of these derivatives were recognized immediately in earnings in Other income (expense)
  • As a result of the settlements, there were no interest rate swaps and locks outstanding as of December 31, 2016
  • For our post-employment benefit plans, the interest rate risk is managed using a liability matching approach which reduces the exposure of the DB pension plans to a mismatch between investment growth and obligation growth
Equity price risk

 

We are exposed to risk on our cash flow related to share-based payment plans.

A 5% increase (decrease) in the market price of BCE’s common shares at December 31, 2016 would result in a gain (loss) of $36 million recognized in net earnings for 2016, all other variables held constant.

Refer to the following Fair value section for details on our derivative financial instruments.

  • Equity forward contracts with a fair value of $111 million at December 31, 2016 on BCE’s common shares to economically hedge the cash flow exposure related to share-based payment plans
    • Changes in the fair value are recorded in the income statement in Operating costs for derivatives used to hedge a cash-settled share based payment plan and Other income (expense) for derivatives used to hedge equity settled share-based payment plans
Longevity risk We are exposed to life expectancy risk on our post-employment benefit plans.
  • The Bell Canada pension plan entered into an investment arrangement to hedge part of its exposure to potential increases in longevity which covers approximately $5 billion of post-employment benefit obligations

 

Fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Certain fair value estimates are affected by assumptions we make about the amount and timing of future cash flows and discount rates, all of which reflect varying degrees of risk. Income taxes and other expenses that would be incurred on disposition of financial instruments are not reflected in the fair values. As a result, the fair values are not the net amounts that would be realized if these instruments were settled.

The carrying values of our cash and cash equivalents, trade and other receivables, dividends payable, trade payables and accruals, compensation payable, severance and other costs payable, interest payable, notes payable and loans secured by trade receivables approximate fair value as they are short-term.

The following table provides the fair value details of financial instruments measured at amortized cost in the statements of financial position.

 

CLASSIFICATION

FAIR VALUE METHODOLOGY

DECEMBER 31, 2016 DECEMBER 31, 2015
CARRYING
VALUE
  FAIR
VALUE
  CARRYING
VALUE
  FAIR
VALUE
 

CRTC tangible benefits obligation

Trade payables and other liabilities and non-current liabilities

Present value of estimated future cash flows discounted using observable market interest rates  

166

 

169

 

227

 

234

 

CRTC deferral account obligation

Trade payables and other liabilities and non-current liabilities

Present value of estimated future cash flows discounted using observable market interest rates

136

 

145

 

154

 

163

 

Debentures, finance leases and other debt

Debt due within one year and long-term debt

Quoted market price of debt or present value of future cash flows discounted using observable market interest rates

17,879   20,093   17,688   19,764  

 

The following table provides the fair value details of financial instruments measured at fair value in the statements of financial position.

 

CLASSIFICATION

CARRYING VALUE OF ASSET (LIABILITY) AT DECEMBER 31

 

FAIR VALUE AT DECEMBER 31

QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)  

OBSERVABLE
MARKET DATA
(LEVEL 2)(1)

 

NON-OBSERVABLE
MARKET INPUTS
(LEVEL 3)(2)

 

2016

 

               

Available-for-sale (AFS) publicly-traded and privately-held investments(3)

Other non-current assets

103

 

1

 

 

102

 

Derivative financial instruments

Other current assets, trade payables and other liabilities, other non-current assets and liabilities

166

 

 

166

 

 

MLSE financial liability(4)

Trade payables and other liabilities

(135

)

 

 

(135

)

Other

Other non-current assets and liabilities

35

 

 

88

 

(53

)

2015

 

               

AFS publicly-traded and privately-held investments(3)

Other non-current assets

128

 

16

 

 

112

 

Derivative financial instruments

Other current assets, trade payables and other liabilities, other non-current assets and liabilities

166

 

 

166

 

 

MLSE financial liability(4)

Other non-current liabilities

(135

)

 

 

(135

)

Other

Other non-current assets and liabilities

30

 

 

56

 

(26

)

 

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