Our Year in Review Strategy
Our Leadership
Divisions
Business Sustainability
Financials and Governance
BACK HOME
Financial statements
Trend statement
Independent auditor's report
Remuneration report
Governance Statutory disclosures
Corporate directory
Notes to the Financial Statements 2018
16. Financial instruments continued
• cash flow hedge relationship where CCIRS are used to manage the variability in cash flows arising from interest rate movements on floating interest rate payments and foreign exchange movements on payments of principal and interest. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency, reference interest rates, tenors, repricing dates and maturities and the notional amounts. The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in the fair value of the hedged item using the hypothetical derivative method. In these hedging relationships, the main sources of ineffectiveness are: • changes in counterparty credit risk and cross currency basis spreads which are not reflected in the change in the fair value of the hedged item; and • differences in repricing dates between the cross currency interest rate swaps and the borrowings. The effect of the Group’s hedge accounting policies in managing both its foreign exchange risk and interest rate risk related to borrowings denominated in foreign currency is presented in the table below.
Change in value used for calculating hedge ineffectiveness NZ$M
Hedging (gain) or loss recognised in other comprehensive income NZ$M
Fair value hedge (income statement) (gain)/loss NZ$M
Nominal amount of the hedging instrument NZ$M
Carrying amount NZ$M
Hedge type
Cash flow hedging and fair value hedging Cross-currency interest rate swaps USD denominated borrowings Maturity: 97-121 months Weighted average interest rate: floating Weighted average NZD/USD exchange rate: 0.7055 USD denominated borrowings Maturity: 42-66 months Weighted average interest rate: floating Weighted average AUD/USD exchange rate: 1.0082 JPY denominated borrowings Maturity: 104 months Weighted average interest rate: floating Weighted average AUD/JPY exchange rate: 82.1950
371
(18)
11
1
(22)
296
76
3
10
69
134
6
8
(9)
16
64
22
2
63
There was no hedge ineffectiveness recognised in profit or loss during the year. (b) Interest rate risk
Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will change due to changes in market interest rates and arises primarily from the Group’s interest bearing borrowings. The Group manages the fixed interest rate component of its debt and capital notes obligations and aims to maintain this ratio between 40% to 80% and at 30 June 2018 the Group was within the range at 56% fixed (June 2017: 44% fixed). The position in this range is managed depending upon underlying interest rate exposures and economic conditions. Cross currency interest rate swaps, interest rate swaps, forward rate agreements and options are entered into to manage this position. The financial instruments entered into are in Australian dollars, United States dollars, Japanese Yen and New Zealand dollars and will mature over the next 12 years. Hedge accounting is applied on these instruments for floating-to-fixed instruments as cash flow hedges or for fixed-to-floating instruments as fair value hedges. The Group applies a hedge ratio of 1:1. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional amounts. The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in the fair value of the hedged item using the hypothetical derivative method. In these hedging relationships, the main sources of ineffectiveness are: • the effect of the counterparty and the Group's own credit risk on the fair value of the interest rate swaps which is not reflected in the change in the fair value of the hedged item; and • differences in repricing dates between the interest rate swaps and the borrowings.
80 Fletcher Building Limited Annual Report 2018
Made with FlippingBook - professional solution for displaying marketing and sales documents online