S E C T I O N 1 2 : Our Financial Review
ALLIANCE ANNUAL REP ORT 2018
INTERE ST R ATE RISK The group is exposed to interest rate risk on movements in floating interest rates on loans and borrowings. In managing interest rate risk, the group aims to reduce the impact of short-term fluctuations on the group’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates will have an impact on profit. Cash flow sensitivity* At 30 September 2018, it is estimated that an increase in interest rates of 100 basis points would decrease the group’s profit before income tax by approximately $1.6 million (2017 $1.2 million). *Calculated using average of year rates Fair value sensitivity At 30 September 2018, it is estimated that for interest rate hedge instruments, an increase in interest rates of 100 basis points would increase the group’s profit before income tax by approximately $0.05 million (2017 decrease $0.04 million). FOREIGN CURRENCY RISK The group operates internationally, and is subject to the risk of financial losses arising from adverse exchange rate movements in USD, EUR, GBP CAD, JPY and AUD. To manage the foreign exchange risks arising the Group enters into financial market derivatives. The following table shows the estimated pre-tax impact on the group of a general 10% change in the value of the New Zealand dollar in respect to foreign exchange currency derivatives that the company had in place at balance date: 2018 Profit & loss
10% increase in value of NZD 10% decrease in value of NZD D2
2017 Equity
Profit & loss
Equity
$000
$000
$000
$000
1,789 (2,041)
2,947 (3,625)
2,734 (3,301)
2,264 (3,388)
D E RI VAT I VE F INANC IAL I N STRUME NT S What is a derivative? A derivative is a type of financial instrument typically used to manage the interest rate and foreign exchange risks that the Group faces due to its business operations. The different types of derivative used are: Forward exchange contracts: This contract enables the Group to purchase or sell foreign currency at a set rate at a future date. Foreign exchange option: An option gives the ability to manage risk with the potential to benefit from favourable foreign exchange movements, while defining the best/worst case cash-flow outcome on an agreed future date. Interest rate swap: This contract allows the Group to obtain a fixed interest rate on a fixed borrowing amount for a future date. RECOGNITION Derivative financial instruments are recognised at fair value on the date the contracts are agreed and are re-measured on a periodic basis. The recognition of movements in fair value depends upon the hedging instrument and its designation or classification, as summarised below:
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