Annual Report 2011 - Watercare

Watercare Services Limited
2011 ANNUAL REPORT
Notes to the financial statements (continued)
for the year ended 30 June 2011
21. Financial Assets and Liabilities (continued)
Loans and receivables
Due to their relatively short-term nature, the carrying amount of trade receivables is considered a reasonable approximation of fair value.
Amortised cost
Due to their relatively short-term nature, the carrying amount of trade payables is considered a reasonable approximation of fair value.
The fair value of loans and borrowings is calculated based on the present value of contractual principal and interest cash flows, discounted
at the market rate of interest in the reporting period.
Fair value through profit and loss
Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves
derived from quoted interest rates and the forward foreign exchange contracts are measured using observable market forward exchange rates.
Fair value hierarchy
The fair value hierarchy groups financial assets and liabilities into three levels as explained below based on the significance of inputs used
in measuring the fair value of the financial assets and liabilities.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices); and
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The level in which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair
value measurement.
The only financial assets and financial liabilities that are measured at fair value in the statement of financial position are derivative financial
instruments. The valuation for derivative financial instruments is based on level 2 fair value hierarchy. The derivative financial instruments that
the group holds at balance date comprise of interest rate swaps and forward foreign exchange contracts.
Fair values at balance date have been assessed using a range of market interest rates between 2.68% and 5.35% (2010: 3.13% and 5.34 %),
derived from the interest rate swap curve.
There have been no transfers between levels 1, 2 and 3 during the year ended 30 June 2011.
Financial instrument risks
Risk management objectives and policies
The group’s management monitors and manages the financial risks relating to the operations of the group through internal risk reports which
analyse exposures by degree and magnitude of risks. The main types of risks are market risk, credit risk and liquidity risk.
The group seeks to manage the effects of these risks by using derivative financial instruments to minimise these risk exposures. The use of
financial derivatives is governed by the group’s policies approved by the Board of Directors, which provide written principles on interest rate risk,
credit risk, the use of derivative and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and
exposure limits is reviewed by the Board of Directors on a regular basis.
Market risk
The group is exposed to market risk through its use of financial instruments and specifically to interest rate, foreign currency and certain other
price risks. The group manages its market risk by regularly assessing the impact of changes in the market interest rates and foreign currency rates
on the group’s portfolio.
2011 Financial Report
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest
rates. The group is exposed to interest rate risk when it borrows funds at floating interest rates. The risk is managed by the group through
monitoring market interest rates and reviewing the impact of these on interest rate exposure.
The group has a mixture of borrowings with both fixed rates and floating rates of interest. It is group policy to ensure that a proportion of interest
rate exposure is maintained on a fixed-rate basis. To achieve this, the group enters into contracts that allow some of its floating interest rate
exposure to be swapped from floating to fixed, and vice versa. The contracts are called interest rate swaps and interest rate options.
The group’s exposure to market interest rates relates primarily to the group’s debt obligations which are disclosed in note 20, page 95.
The group regularly analyses its interest rate exposure. Within this analysis, consideration is given to potential renewals of existing positions,
alternative financing, alternative protective positions and the mix of fixed and variable interest rates.
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