Note 25: Financial instrument risks
Te Motu Regional Economic Development Trust: Model financial statements 2008/09.
Note 24: Categories of financial instruments
Financial instrument risks
| NZ IFRS 7.31 | The Trust has policies to manage the risks associated with financial instruments. The Trust is risk averse and seeks to minimise exposure from its treasury activities. The Trust has established borrowing and investment policies. These policies do not allow any transactions that are speculative in nature to be entered into. | ||||||
| NZ IFRS 7.33(a),(b) | Market risk | ||||||
| Fair value interest rate risk | |||||||
| Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate due to changes in market interest rates. The Trust’s exposure to fair value interest rate risk is limited to its fixed interest borrowings and bank deposits. However, because these borrowings and bank deposits are not accounted for at fair value, fluctuations in interest rates do not have an impact on the surplus/deficit of the Trust or the carrying amount of the financial instruments recognised in the statement of financial position. | |||||||
| Cash flow interest rate risk | |||||||
| Cash flow interest rate risk is the risk that the cash flows from a financial instrument will fluctuate because of changes in market interest rates. Borrowings and investments issued at variable interest rates expose the Trust to cash flow interest rate risk. | |||||||
| The Trust’s investment policy requires a spread of investment maturity dates to limit exposure to short-term interest rate movements as investments mature. | |||||||
| The Trust currently has no variable interest rate financial instruments. | |||||||
| Currency risk | |||||||
| Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Trust is not exposed to currency risk, as it does not enter into foreign currency transactions. | |||||||
| Sensitivity analysis | |||||||
| NZ IFRS 7.40 | For financial instruments held at the balance date, the Trust has no exposure to market risks on those financial instruments that give rise to an impact on the surplus/deficit and equity.22 | ||||||
| NZ IFRS 7.33(a),(b) | Credit risk | ||||||
| Credit risk is the risk that a third party will default on its obligation to the Trust, causing the Trust to incur a loss. | |||||||
| Due to the timing of its cash inflows and outflows, the Trust invests surplus cash with registered banks, which gives rise to credit risk. The Trust’s investment policy also limits the amount of credit exposure to any one registered bank at 40% of total term deposits. | |||||||
| The Trust has processes in place to review the credit quality of customers prior to the granting of credit. | |||||||
| NZ IFRS 7.36(a) | The Trust’s maximum credit exposure for each class of financial instrument is represented by the total carrying amount of cash equivalents (note 7), financial asset investments (note 10) and debtors and other receivables (note 8). | ||||||
| NZ IFRS 7.36(c), IG23-IG25 | Cash at bank and term deposits are held with financial institutions that have a current Standard’s and Poor’s credit rating of AA or greater. | ||||||
| The Trust’s debtors are mostly from Te Motu District Council, government entities, and small business in the Te Motu Region. | |||||||
| NZ IFRS 7.34(c) | The Trust has no significant concentrations of credit risk, as it has a large number of credit customers and limits have been established that restrict the maximum amount of funds that can be invested in a single registered bank. | ||||||
| Liquidity risk | |||||||
| NZ IFRS 7.33,39(b) | Liquidity risk is the risk that the Trust will encounter difficulty raising liquid funds to meet commitments as they fall due. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Trust aims to maintain flexibility in funding by keeping committed credit lines available. | ||||||
| In meeting its liquidity requirements, the Trust maintains a target level of investments that must mature within specified timeframes. The Trust manages its borrowings in accordance with its borrowing policy. | |||||||
| Contractual maturity analysis of financial liabilities | |||||||
| NZ IFRS 7.39(a) | The table below analyses the Trust’s financial liabilities into relevant maturity groupings based on the remaining period at the balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.23 | ||||||
| Carrying amount | Contractual cash flows | Less than 1 year | 1-2 years | 2-5 years | More than 5 years | ||
|---|---|---|---|---|---|---|---|
| $000 | $000 | $000 | $000 | $000 | $000 | ||
| 2009 | |||||||
| Creditors and other payables | 157,672 | 157,672 | 157,672 | 0 | 0 | 0 | |
| Bank overdraft | 2,687 | 2,687 | 2,687 | 0 | 0 | 0 | |
| Unsecured loan | 36,313 | 55,000 | 8,000 | 0 | 27,000 | 20,000 | |
| Total | 196,672 | 215,359 | 168,359 | 0 | 27,000 | 20,000 | |
| 2008 | |||||||
| Creditors and other payables | 152,627 | 152,627 | 152,627 | 0 | 0 | 0 | |
| Unsecured loan | 35,000 | 60,000 | 11,000 | 0 | 29,000 | 20,000 | |
| Total | 187,627 | 212,627 | 163,627 | 0 | 29,000 | 20,000 | |
22: Entities are required to disclose a sensitivity analysis for each type of market risk (e.g. currency, interest rate, and equity price) it is exposed to at the balance date showing how profit or loss and equity would have been affected by changes in the relevant market risk variable that were reasonsble possibly at that date. For example, a sensitivity analysis would be required for borrowings at floating interest rates, or financial asset investments that are measured at fair value.
23: NZ IFRS 7 does not prescribe the time bands to use. Entities will need to exercise their judgement in determining the appropriate time bands to use when presenting the maturity analysis.
