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Notes to the Financial Statements 2018
16. Financial instruments
June 2018 NZ$M
June 2017 NZ$M
Fletcher Building Group
Reconciliation of derivatives to the balance sheet: Derivatives classified as current assets in the balance sheet Derivatives classified as non-current assets in the balance sheet Derivatives classified as current liabilities in the balance sheet
6
8
86
91
(7)
(7)
(19)
Derivatives classified as non-current liabilities in the balance sheet
(48)
Net derivatives
66
44
Derivative financial instruments Derivative financial instruments, including foreign exchange contracts, interest rate swaps, foreign currency swaps, cross currency interest rate swaps, options, forward rate agreements and commodity price swaps are utilised to reduce exposure to market risks. The Group policy specifically prohibits the use of derivative financial instruments for trading or speculative purposes. Non-derivative financial instruments Non-derivative financial instruments comprise borrowings, trade and other payables, cash and cash equivalents, and trade and other receivables. Non-derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Financial risk management overview Exposures to credit, liquidity, currency, interest rate and commodity price risks arise in the normal course of the Group’s business. The principles under which these risks are managed are set out in policy documents approved by the board. The policy documents identify the risks and set out the Group’s objectives, policies and processes to measure, manage and report the risks. The policies are reviewed periodically to reflect changes in financial markets and the Group’s businesses. Risk management is carried out in conjunction with the Group's central treasury function, which ensures compliance with the risk management policies and procedures. Derivative financial instruments and hedge accounting All the Group’s derivative financial instruments are held to hedge risk on underlying assets, liabilities and forecast and committed trading and funding transactions. Derivatives are initially recorded at fair value and are then revalued to fair value at balance date with the resulting gain or loss on re-measurement recognised in the income statement unless the derivative is designated into an effective hedge relationship as a hedging instrument, in which case the timing of recognition in the income statement depends on the nature of the designated hedge relationship. For a derivative instrument to be classified and accounted for as a hedge, it must be highly correlated with, and effective as a hedge of the underlying risk being managed. This relationship is documented from inception of the hedge. The fair values of derivative financial instruments are determined by applying quoted market prices, where available, or by using inputs that • Fair value hedges (where the derivative is used to manage the variability in the fair value of recognised assets and liabilities); • Cash flow hedges (where the derivative is used to manage the variability in cash flows relating to recognised liabilities or forecast transactions); or • Net investment hedges (where borrowings or derivatives are used to manage the risk of fluctuation in the translated value of its foreign operations). The Group holds derivative instruments until expiry except where the underlying rationale from a risk management point of view changes, such as when the underlying asset or liability that the instrument hedges no longer exists, in which case early termination occurs. Fair value hedges Where a derivative financial instrument is designated as a hedge of a recognised asset or liability, or of a firm commitment, any gain or loss on the derivative (hedging instrument) is recognised directly in earnings, together with any changes in the fair value of the hedged risk (hedged item). Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of assets or liabilities, or of a highly probable forecasted transaction, the effective part of any gain or loss is recognised directly in the cash flow hedge reserve within equity and the ineffective part is recognised immediately in earnings. The effective portion is transferred to earnings when the underlying cash flows affect earnings. Net investment hedges Where the derivative financial instruments are designated as a hedge of a net investment in a foreign operation, the derivative financial instruments are accounted for on the same basis as cash flow hedges through the currency translation reserve (FCTR) within equity. An amount of $0.4 million has been recognised through FCTR as at 30 June 2018 (June 2017: Nil). are observable for the asset or liability. The Group may designate derivatives as:
78 Fletcher Building Limited Annual Report 2018
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