84 / 116
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. 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 derivative 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 2016 there
was a reclassification of cash flow hedge from
equity to the income statement of $0.047m
(2015: $(0.022m)) due to the maturing of
the hedges. There was hedge ineffectiveness
of $0.011m in the current year that was
expensed to the income statement (2015: nil).
At 30 June the Group has an outstanding
effective cash flow hedge that is set to
mature in January 2017 at which time the
foreign exchange gain or loss from the
effective hedge will impact the Income
Statement. The ineffective portion of the cash
flow hedge will impact the Income Statement
during this period until maturity in January
2017. Treasury will continue to assess and
mitigate the Groups foreign exchange risk.
(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’s 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.
82