90
2 6 . f i n a n c i a l r i s k ma n ag emen t
26.1 Financial risk factors
Exposure to credit, liquidity and market (currency, interest and price) risks arise in the normal course of the Group’s business.
The Group has various financial instruments with off‑balance sheet risk.
Senior management are required to identify and report major risks affecting the business and develop strategies to mitigate
these risks. The board reviews and approves overall risk management strategies covering specific areas.
(a) Credit risk
Credit risk is the risk that a third party will default on its obligations to the Trust or Group, causing the Trust or Group to incur
a loss. The Trust and Group do not have any significant concentrations of credit risk, other than the Co‑Management debtor
expected from the Crown (see also note 15). The maximum exposure to credit risk at reporting date is the carrying amount of
the financial assets as shown in the statement of financial position. The Trust and Group do not require any collateral or security
to support financial instruments as it only deposits with, or lends to, banks and other financial institutions with high credit
ratings except for funds lent to a related party and an external entity for which the Trust and Group have appropriate security
and guarantees. The Trust and Group further minimise credit exposure by limiting the amount of surplus funds placed with any
one financial institution. The cash and cash equivalents of $172m are held with bank and financial institution counterparties,
which are rated AA‑ to A+, based on Standards and Poors ratings. The Trust and Group do not expect non‑performance of any
obligations at balance date. There are no material financial assets held by the Trust and Group at balance date which are past
due but not impaired.
(b) Market risk
(i) Currency
The Group has no exposure to currency risk at balance date.
There are no notional principal or forward foreign exchange contracts at 31 March 2014 (2013: nil).
(ii) Interest rate risk
The Group’s interest rate risk arises from long‑term borrowings. Borrowings issued at variable rates expose the Group to cash
flow interest rate risk. Borrowings issued at fixed rate expose the Group to fair value interest rate risk.
The Group adopts a policy of ensuring that between 25 and 90 per cent of its exposure to changes in interest rates on
borrowings is on a fixed rate basis.
The Group manages its cash flow interest rate risk by using floating to fixed interest rate swaps. Such interest rate swaps have
the economic effect of converting borrowings from floating rates to fixed rates.
Under interest rate swap contracts, the Group agrees to exchange the difference between fixed contract and floating rate
interest amounts calculated by reference to the agreed notional principal amounts. Such contracts enable the Group to mitigate
the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued
variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash
flows at reporting date and the credit risk inherent in the contract, and are disclosed below. The average interest rate is based on
the outstanding balances at the start of the financial year.
Sensitivity analysis
As at 31 March 2014, if the 90 day bank bill rate had been 50 basis points higher or lower, with all other variables held constant,
the Group’s profit/(loss) for the year and the equity would have been $506,974 (2013: $594,149) higher or lower (parent nil for
2014 and 2013). This movement is attributable to an increase or decrease in the interest expense on floating rate loans and in
the interest income from deposits. The sensitivity is lower in 2014 due to reduced interest rates.
waikato raupatu lands trust
notes to the financial statements
f o r t h e y e a r e n d e d 3 1 m a r c h 2 0 1 4
