NOTE 12
FINANCIAL RISK MANAGEMENT
The Group’s principal financial instruments comprise
receivables, payables, bonds, banking facilities,
cash, short term deposits and derivatives. The
carrying amount equates to the fair value of the
financial instruments.
Risk management framework
The Group’s board of Directors has overall
responsibility for the establishment and oversight of
the Group’s risk management framework. The Treasury
Committee, a committee reporting to the CEO, is
responsible for reviewing, monitoring and endorsing
funding and risk management strategies. Group
Treasury identifies, evaluates and monitors compliance
and manages financial risks in accordance with the
Treasury Policy and Strategy. Treasury provides
updates to the Audit and Compliance Committee
which oversees adequacy, quality and effectiveness of
governance and financial risk management.
The Group’s activities expose it to a variety of financial
risks: market risk (including currency risk, interest rate
risk and price risk), credit risk and liquidity risk. The
Group’s overall financial risk management program
focuses on the unpredictability of financial markets
and seeks to minimise potential adverse effects on the
financial performance of the Group. The Group uses de-
rivative financial instruments such as foreign exchange
contracts and interest rate swaps to hedge cash flow
risk exposures. Derivative financial instruments are
exclusively used for hedging purposes, that is, not as
trading or other speculative instruments. The Group
uses different methods to identify and measure various
different types of risk to which it is exposed.
(a) Market risk
(i)
Foreign exchange risk
Foreign exchange risk arises from future commercial
transactions such as purchases of equipment and
supplies from overseas. All significant non Australian
dollar denominated payments require Treasury to
assess and mitigate the Group’s foreign exchange risk.
Forward contracts, are generally used to manage
foreign exchange risk. Treasury is responsible for
managing the Group’s exposures in each foreign
currency by using external foreign currency
instruments in accordance with Board approved
Treasury Policy.
The portion of the gain or loss on the hedging
instrument that is determined to be an effective hedge
is recognised directly in equity. When the cash flows
occur, the Group adjusts the initial measurement of
the component recognised in the consolidated income
statement by the related amount deferred in equity.
During the year ended 30 June 2014 there was a
reclassification of cash flow hedge from equity to the
income statement of $(70k) (2013: $(99k)). There was
no hedge ineffectiveness in the current or prior year.
(ii) Cash flow and interest rate risk
The Group’s main interest rate risk arises from
borrowings. Bonds issued at variable rates expose
the Group to cash flow interest rate risk. The Group
policy is to maintain borrowings within the fixed
floating rate control limits as specified for defined time
periods. Interest rate instruments are used to achieve
this when necessary. During the financial year, the
Group’s borrowings at fixed and variable rates were
denominated in Australian dollars.
The Group’s policy is to invest its available cash
reserves with due regard to the timing and magnitude
of operational cash flow requirements. The Group
manages its cash flow interest rate risk by entering
into and designating interest rate related authorised
hedging instruments as hedges. As at the reporting
date, cash reserves are being held as cash and short
term investments.
The gain or loss from re-measuring the hedging
instruments at fair value is recognised in other
comprehensive income and deferred in equity in
the hedging reserve, to the extent that the hedge is
effective. It is reclassified into the income statement
when the hedged interest expense is recognised. In the
year ended 30 June 2014 there was no reclassification
into profit or loss (2013:nil). Hedge effectiveness was
assessed at the inception of the bonds and was found
to be effective. Hedge effectiveness was also assessed
prospectively and retrospectively using the cumulative
dollar offset method as at 30 June 2014 as a part of the
bi-annual testing. There was no hedge ineffectiveness
in the year ended to 30 June 2014 (2013: nil).
Instruments used by the group
Derivatives are only used for economic hedging
purposes and not as trading or speculative
instruments. The group has the following derivative
financial instruments:
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