4 financial instruments

(a) Credit risk

Excluding credit risk, if any, arising from currency swaps settled on a gross basis, the best representation of our maximum exposure (excluding income tax effects) to credit risk, which is a worst-case scenario and does not reflect results we expect, is set out in the following table:


	June 30,		December 31,
As at (millions)	2020		2019

Cash and temporary investments, net	$	971	$	535
Accounts receivable		2,323		2,187
Contract assets		750		1,065
Derivative assets		423		84
	$	4,467	$	3,871

Cash and temporary investments, net

Credit risk associated with cash and temporary investments is managed by ensuring that these financial assets are placed with: governments; major financial institutions that have been accorded strong investment grade ratings by a primary rating agency; and/or other creditworthy counterparties. An ongoing review evaluates changes in the status of counterparties.

Accounts receivable

Credit risk associated with accounts receivable is inherently managed by the size and diversity of our large customer base, which includes substantially all consumer and business sectors in Canada. We follow a program of credit evaluations of customers and limit the amount of credit extended when deemed necessary.

Accounts are considered to be past due (in default) when customers have failed to make the contractually required payments when due, which is generally within 30 days of the billing date. Any late payment charges are levied at an industry-based market or negotiated rate on outstanding non-current customer account balances.


		June 30, 2020						December 31, 2019
As at (millions)	Note	Gross		Allowance		Net 1		Gross		Allowance		Net 1
Customer accounts receivable, net of allowance for doubtful accounts
Less than 30 days past billing date		$	826	$	(22)	$	804	$	803	$	(10)	$	793
30-60 days past billing date			262		(15)		247		331		(8)		323
61-90 days past billing date			129		(14)		115		74		(5)		69
More than 90 days past billing date			114		(27)		87		73		(14)		59
Unbilled customer finance receivables			717		(26)		691		523		(18)		505
		$	2,048	$	(104)	$	1,944	$	1,804	$	(55)	$	1,749
Current		$	1,719	$	(94)	$	1,625	$	1,570	$	(46)	$	1,524
Non-current	20		329		(10)		319		234		(9)		225
		$	2,048	$	(104)	$	1,944	$	1,804	$	(55)	$	1,749

(1)

Net amounts represent customer accounts receivable for which an allowance had not been made as at the dates of the Consolidated statements of financial position (see Note 6(b)).

We maintain allowances for lifetime expected credit losses related to doubtful accounts. Current economic conditions (including forward-looking macroeconomic data), historical information (including credit agency reports, if available), reasons for the accounts being past due and the line of business from which the customer accounts receivable arose are all considered when determining whether to make allowances for past-due accounts. The same factors are considered when determining whether to write off amounts charged to the allowance for doubtful accounts against the customer accounts receivable; amounts charged to the customer accounts receivable allowance for doubtful accounts that were written off but were still subject to enforcement activity as at June 30, 2020, totalled $541 million (December 31, 2019 – $449 million). The doubtful accounts expense is calculated on a specific-identification basis for customer accounts receivable above a specific balance threshold and on a statistically derived allowance basis for the remainder. No customer accounts receivable are written off directly to the doubtful accounts expense.

The following table presents a summary of the activity related to our allowance for doubtful accounts.


	Three months				Six months
Periods ended June 30 (millions)	2020		2019		2020		2019
Balance, beginning of period	$	56	$	43	$	55	$	53
Additions (doubtful accounts expense)		46		10		58		21
Accounts written off, net of recoveries		(6)		(11)		(18)		(33)
Other		8		—		9		1
Balance, end of period	$	104	$	42	$	104	$	42

Contract assets

Credit risk associated with contract assets is inherently managed by the size and diversity of our large customer base, which includes substantially all consumer and business sectors in Canada. We follow a program of credit evaluations of customers and limit the amount of credit extended when deemed necessary.


	June 30, 2020						December 31, 2019
As at (millions)	Gross		Allowance		Net (Note 6(c))		Gross		Allowance		Net (Note 6(c))

Contract assets, net of impairment allowance
To be billed and thus reclassified to accounts receivable during:
The 12-month period ending one year hence	$	730	$	(41)	$	689	$	952	$	(42)	$	910
The 12-month period ending two years hence		209		(12)		197		322		(14)		308
Thereafter		16		(1)		15		21		(1)		20
	$	955	$	(54)	$	901	$	1,295	$	(57)	$	1,238

We maintain allowances for lifetime expected credit losses related to contract assets. Current economic conditions, historical information (including credit agency reports, if available), and the line of business from which the contract asset arose are all considered when determining impairment allowances. The same factors are considered when determining whether to write off amounts charged to the impairment allowance for contract assets against contract assets.

Derivative assets (and derivative liabilities)

Counterparties to our share-based compensation cash-settled equity forward agreements and foreign exchange derivatives are major financial institutions that have been accorded investment grade ratings by a primary credit rating agency. The total dollar amount of credit exposure under contracts with any one financial institution is limited and counterparties’ credit ratings are monitored. We do not give or receive collateral on swap agreements and hedging items due to our credit rating and those of our counterparties. While we are exposed to the risk of potential credit losses due to the possible non-performance of our counterparties, we consider this risk remote. Our derivative liabilities do not have credit risk-related contingent features.

(b) Liquidity risk

As a component of our capital structure financial policies, discussed further in Note 3, we manage liquidity risk by:

maintaining a daily cash pooling process that enables us to manage our available liquidity and our liquidity requirements according to our actual needs;

maintaining an agreement to sell trade receivables to an arm’s-length securitization trust and bilateral bank facilities (Note 22), a commercial paper program (Note 26(c)) and syndicated credit facilities (Note 26(d),(e));

maintaining an in-effect shelf prospectus;

continuously monitoring forecast and actual cash flows; and

managing maturity profiles of financial assets and financial liabilities.

Our debt maturities in future years are as disclosed in Note 26(g). As at June 30, 2020, we could offer $2.5 billion of debt or equity securities pursuant to a shelf prospectus that is in effect until June 2022 (December 31, 2019 – $2.0 billion pursuant to a shelf prospectus that was in effect until August 2021). We believe that our investment grade credit ratings contribute to reasonable access to capital markets.

We closely match the contractual maturities of our derivative financial liabilities with those of the risk exposures they are being used to manage.

The expected maturities of our undiscounted financial liabilities do not differ significantly from the contractual maturities, other than as noted below. The contractual maturities of our undiscounted financial liabilities, including interest thereon (where applicable), are set out in the following tables:


	Non-derivative								Derivative
					Composite long-term debt
					Long-term
	Non-interest				debt,
	bearing				excluding				Currency swap agreement						Currency swap agreement
	financial		Short-term		leases 1		Leases		amounts to be exchanged 2						amounts to be exchanged
As at June 30, 2020 (millions)	liabilities		borrowings 1		(Note 26)		(Note 26)		(Receive)		Pay		Other		(Receive)		Pay		Total
2020 (balance of year)	$	2,329	$	—	$	352	$	213	$	(80)	$	73	$	4	$	(251)	$	244	$	2,884
2021		161		101		867		398		(160)		151		1		(203)		205		1,521
2022		10		—		1,904		252		(160)		151		8		—		—		2,165
2023		8		—		1,137		214		(160)		150		—		—		—		1,349
2024		8		—		1,694		177		(160)		150		—		—		—		1,869
2025-2029		20		—		9,153		475		(2,451)		2,393		—		—		—		9,590
Thereafter		—		—		10,975		418		(3,168)		3,020		—		—		—		11,245
Total	$	2,536	$	101	$	26,082	$	2,147	$	(6,339)	$	6,088	$	13	$	(454)	$	449	$	30,623
						Total (Note 26(g))					$	27,978

(1)

Cash outflows in respect of interest payments on our short-term borrowings, commercial paper and amounts drawn under our credit facilities (if any) have been calculated based upon the interest rates in effect as at June 30, 2020.

(2)

The amounts included in undiscounted non-derivative long-term debt in respect of U.S. dollar-denominated long-term debt, and the corresponding amounts in the long-term debt currency swaps receive column, have been determined based upon the currency exchange rates in effect as at June 30, 2020. The hedged U.S. dollar-denominated long-term debt contractual amounts at maturity, in effect, are reflected in the long-term debt currency swaps pay column as gross cash flows are exchanged pursuant to the currency swap agreements.


	Non-derivative										Derivative
							Composite long-term debt
	Non-interest				Construction		Long-term
	bearing				credit facilities		debt,				Currency swap agreement						Currency swap agreement
As at December 31,	financial		Short-term		commitment		excluding				amounts to be exchanged 2						amounts to be exchanged
2019 (millions)	liabilities		borrowings 1		(Note 21)		leases 1		Leases		(Receive)		Pay		Other		(Receive)		Pay		Total
2020	$	2,639	$	3	$	10	$	1,657	$	373	$	(1,140)	$	1,153	$	—	$	(917)	$	921	$	4,699
2021		43		103		—		1,698		338		(119)		118		—		—		—		2,181
2022		7		—		—		2,235		207		(119)		118		8		—		—		2,456
2023		5		—		—		1,021		189		(119)		118		—		—		—		1,214
2024		5		—		—		1,595		157		(119)		118		—		—		—		1,756
2025-2029		4		—		—		7,311		429		(1,919)		1,944		—		—		—		7,769
Thereafter		—		—		—		10,102		388		(3,019)		3,020		—		—		—		10,491
Total	$	2,703	$	106	$	10	$	25,619	$	2,081	$	(6,554)	$	6,589	$	8	$	(917)	$	921	$	30,566
							Total						$	27,735

(1)

(2)

The amounts included in undiscounted non-derivative long-term debt in respect of U.S. dollar-denominated long-term debt, and the corresponding amounts in the long-term debt currency swaps receive column, have been determined based upon the currency exchange rates in effect as at December 31, 2019. The hedged U.S. dollar-denominated long-term debt contractual amounts at maturity, in effect, are reflected in the long-term debt currency swaps pay column as gross cash flows are exchanged pursuant to the currency swap agreements.

Net income and other comprehensive income for the six-month periods ended June 30, 2020 and 2019, could have varied if the Canadian dollar: U.S. dollar exchange rate, the U.S. dollar: European euro exchange rate, market interest rates and our Common Share price varied by reasonably possible amounts from their actual statement of financial position date amounts.

The sensitivity analysis of our exposure to currency risk at the reporting date has been determined based upon a hypothetical change taking place at the relevant statement of financial position date. The U.S. dollar-denominated and European euro-denominated balances and derivative financial instrument notional amounts as at the statement of financial position dates have been used in the calculations.

The sensitivity analysis of our exposure to interest rate risk at the reporting date has been determined based upon a hypothetical change taking place at the beginning of the relevant fiscal year and being held constant through to the statement of financial position date. The relevant statement of financial position date principal and notional amounts have been used in the calculations.

The sensitivity analysis of our exposure to other price risk arising from share-based compensation at the reporting date has been determined based upon a hypothetical change taking place at the relevant statement of financial position date. The relevant notional number of Common Shares at the relevant statement of financial position date, which includes those in the cash-settled equity swap agreements, has been used in the calculations.

Income tax expense, which is reflected net in the sensitivity analysis, reflects the applicable statutory income tax rates for the reporting periods.


Six-month periods ended June 30	Net income				Other comprehensive income				Comprehensive income
(increase (decrease) in millions)	2020		2019		2020		2019		2020		2019
Reasonably possible changes in market risks 1
10% change in C$: US$ exchange rate
Canadian dollar appreciates	$	4	$	—	$	(66)	$	(55)	$	(62)	$	(55)
Canadian dollar depreciates	$	(4)	$	—	$	66	$	55	$	62	$	55
10% change in US$: € exchange rate
U.S. dollar appreciates	$	—	$	—	$	(55)	$	—	$	(55)	$	—
U.S. dollar depreciates	$	—	$	—	$	55	$	—	$	55	$	—
25 basis point change in interest rates
Interest rates increase
Canadian interest rate	$	—	$	—	$	118	$	94	$	118	$	94
US interest rate	$	—	$	—	$	(129)	$	(90)	$	(129)	$	(90)
Combined	$	—	$	—	$	(11)	$	4	$	(11)	$	4
Interest rates decrease
Canadian interest rate	$	—	$	—	$	(124)	$	(99)	$	(124)	$	(99)
US interest rate	$	—	$	—	$	137	$	95	$	137	$	95
Combined	$	—	$	—	$	13	$	(4)	$	13	$	(4)
25% 2 change in Common Share price 3
Price increases	$	(8)	$	(4)	$	3	$	1	$	(5)	$	(3)
Price decreases	$	13	$	19	$	(3)	$	(1)	$	10	$	18

(1)

These sensitivities are hypothetical and should be used with caution. Changes in net income and/or other comprehensive income generally cannot be extrapolated because the relationship of the change in assumption to the change in net income and/or other comprehensive income may not be linear. In this table, the effect of a variation in a particular assumption on the amount of net income and/or other comprehensive income is calculated without changing any other factors; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

The sensitivity analysis assumes that we would realize the changes in exchange rates and market interest rates; in reality, the competitive marketplace in which we operate would have an effect on this assumption.

No consideration has been made for a difference in the notional number of Common Shares associated with share-based compensation awards made during the reporting period that may have arisen due to a difference in the Common Share price.

(2)

To facilitate ongoing comparison of sensitivities, a constant variance of approximate magnitude has been used. Reflecting a six-month data period and calculated on a monthly basis, the volatility of our Common Share price as at June 30, 2020, was 22.8% (2019 – 12.5%).

(3)

The hypothetical effects of changes in the price of our Common Shares are restricted to those which would arise from our share-based compensation awards that are accounted for as liability instruments and the associated cash-settled equity swap agreements.

(d) Fair values

Derivative

The derivative financial instruments that we measure at fair value on a recurring basis subsequent to initial recognition are set out in the following table.


	June 30, 2020								December 31, 2019
		Maximum			Fair value 1				Maximum			Fair value 1
		maturity	Notional		and carrying			Price or	maturity	Notional		and carrying		Price or
As at (millions)	Designation	date	amount		value			rate	date	amount		value		rate
Current Assets 2
Derivatives used to manage
Currency risk arising from U.S. dollar-denominated purchases	HFH 3	2021	$	249	$	8		US$1.00: C$1.32	—	$	—	$	—	—
Currency risk arising from U.S. dollar revenues	HFT 4	2021	$	76		2		US$1.00: C$1.36	2020	$	36		1	US$1.00: C$1.30
Changes in share-based compensation costs (Note 14(b))	HFH 3	—	$	—		—		—	2020	$	72		4	$24.40*
Currency risk associated with European euro-denominated business acquisition	HFH 3	—	$	—		—		—	2020	$	472		3	€1.00: US$1.12
					$	10						$	8
Other Long-Term Assets 2
Derivatives used to manage
Currency risks arising from U.S. dollar-denominated long-term debt 6 (Note 26(b)-(c))	HFH 3	2049	$	5,495	$	413		US$1.00: C$1.30	2048	$	3,068	$	76	US$1.00: C$1.28
Current Liabilities 2
Derivatives used to manage
Currency risk arising from U.S. dollar-denominated purchases	HFH 3	2021	$	123	$	3		US$1.00: C$1.40	2020	$	412	$	6	US$1.00: C$1.32
Changes in share-based compensation costs (Note 14(b))	HFH 3	2020	$	72		4	$	24.39*	—	$	—		—	—
Currency risk arising from U.S. dollar-denominated long-term debt (Note 26(b)-(c))	HFH 3	—	$	—		—		—	2020	$	1,037		17	US$1.00: C$1.32
Currency risk arising from European euro functional currency operations purchased with U.S. dollar-denominated long-term debt 7 (Notes 18(b), 26(e))	HFH 5	2024	$	33		2		€1.00: US$1.09	—	$	—		—	—
Interest rate risk associated with non-fixed rate credit facility amounts drawn (Note 26(e))	HFH 3	2022	$	8		—		2.64%	2022	$	8		—	2.64%
					$	9						$	23
Other Long-Term Liabilities 2
Derivatives used to manage
Currency risk arising from U.S. dollar-denominated long-term debt 6 (Note 26(b)-(c))	HFH 3	—	$	—	$	—		—	2049	$	2,485		22	US$1.00: C$1.34
Currency risk arising from European euro functional currency operations purchased with U.S. dollar-denominated long-term debt 7 (Notes 18(b), 26(e))	HFH 5	2025	$	563		19		€1.00: US$1.09	—	$	—		—	—
Interest rate risk associated with non-fixed rate credit facility amounts drawn (Note 26(e))	HFH 3	2022	$	133		8		2.64%	2022	$	130		4	2.64%
					$	27						$	26

* Amounts reflect retrospective application of March 17, 2020, share split (See Note 28(b)).

(1)

Fair value measured at reporting date using significant other observable inputs (Level 2).

(2)

Derivative financial assets and liabilities are not set off.

(3)

Designated as held for hedging (HFH) upon initial recognition (cash flow hedging item); hedge accounting is applied. Unless otherwise noted, hedge ratio is 1:1 and is established by assessing the degree of matching between the notional amounts of hedging items and the notional amounts of the associated hedged items.

(4)

Designated as held for trading (HFT) and classified as fair value through net income upon initial recognition; hedge accounting is not applied.

(5)

Designated as a hedge of a net investment in a foreign operation and hedge accounting is applied. Hedge ratio is 1:1 and is established by assessing the degree of matching between the notional amounts of hedging items and the notional amounts of the associated hedged items.

(6)

We designate only the spot element as the hedging item. As at June 30, 2020, the foreign currency basis spread included in the fair value of the derivative instruments, and which is used for purposes of assessing hedge ineffectiveness, was $92 (December 31, 2019 – $38).

(7)

Non-derivative

Our long-term debt, which is measured at amortized cost, and the fair value thereof, are set out in the following table.


	June 30, 2020				December 31, 2019
	Carrying				Carrying
As at (millions)	value		Fair value		value		Fair value
Long-term debt, excluding leases (Note 26)	$	16,797	$	18,121	$	16,813	$	17,930

(e) Recognition of derivative gains and losses

The following table sets out the gains and losses, excluding income tax effects, arising from derivative instruments that are classified as cash flow hedging items and their location within the Consolidated statements of income and other comprehensive income.

Credit risk associated with such derivative instruments, as discussed further in (a), would be the primary source of hedge ineffectiveness. There was no ineffective portion of the derivative instruments classified as cash flow hedging items for the periods presented.


		Amount of gain (loss)
		recognized in other				Gain (loss) reclassified from other comprehensive
		comprehensive income				income to income (effective portion) (Note 11)
		(effective portion) (Note 11)					Amount
Periods ended June 30 (millions)	Note	2020		2019		Location	2020		2019
THREE-MONTH
Derivatives used to manage currency risk
Arising from U.S. dollar-denominated purchases		$	(13)	$	(7)	Goods and services purchased	$	5	$	4
Arising from U.S. dollar-denominated long-term debt 1	26(b)-(c)		(216)		(29)	Financing costs		(129)		(58)
Arising from net investment in a foreign operation 2			(21)		—	Financing costs		(3)		—
			(250)		(36)			(127)		(54)
Derivatives used to manage other market risk
Arising from changes in share-based compensation costs and other	14(b)		—		(5)	Employee benefits expense		1		(1)
		$	(250)	$	(41)		$	(126)	$	(55)
SIX-MONTH
Derivatives used to manage currency risk
Arising from U.S. dollar-denominated purchases		$	18	$	(15)	Goods and services purchased	$	7	$	9
Arising from U.S. dollar-denominated long-term debt 1	26(b)-(c)		424		(151)	Financing costs		223		(123)
Arising from net investment in a foreign operation 2			(22)		—	Financing costs		—		—
			420		(166)			230		(114)
Derivatives used to manage other market risk
Arising from changes in share-based compensation costs and other	14(b)		(10)		5	Employee benefits expense		(1)		6
		$	410	$	(161)		$	229	$	(108)

(1)

Amounts recognized in other comprehensive income are net of the change in the foreign currency basis spread (which is used for purposes of assessing hedge ineffectiveness) included in the fair value of the derivative instruments; such amount for the three-month and six-month periods ended June 30, 2020, were $(4) (2019 – $NIL) and $54 (2019 - $7), respectively.

(2)

The following table sets out the gains and losses arising from derivative instruments that are classified as held for trading and that are not designated as being in a hedging relationship, and their location within the Consolidated statements of income and other comprehensive income.


		Gain recognized in income on derivatives
		Three months				Six months
Periods ended June 30 (millions)	Location	2020		2019		2020		2019
Derivatives used to manage currency risk	Financing costs	$	3	$	3	$	4	$	5