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(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.
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 2017 there was
no reclassification into profit or loss (2016:
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 2017 as a part of the bi-annual
testing. There was no hedge ineffectiveness
in the year ended to 30 June 2017 (2016: nil).
Refer to the accounting policy.
Consolidated
2017
$’000
2016
$’000
Current assets
Forward foreign exchange contracts - cash flow hedges
-
38
Total current derivative financial instrument assets
-
38
Current liabilities
Forward foreign exchange contracts - cash flow hedges
19
-
Total current derivative financial instrument liabilities
19
-
(iii) Classification of derivatives
Derivatives are classified as hedging instruments and accounted for at fair value in other
comprehensive income and deferred in equity in the hedging reserve. It is reclassified into
the income statement when the hedged interest expense is recognised.
105
NOTE 11
FINANCIAL RISK MANAGEMENT (CONTINUED)
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:
(a) Market risk (continued)