Annual Report 2011 - Watercare
Annual Report 2011 - Watercare 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. PAGE 98 Return to Contents page
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) The notional principal, contract amounts of agreements and fixed interest rates in place, at balance date, to manage interest rate risk were as follows: group and Company company 2011 2010 fixed interest rate Notional amount Fixed interest rate Notional amount $000 $000 Interest rate swaps Receivable maturities (fixed to floating): Within one year 6.86% 50,000 - - One to two years - - 6.86% 50,000 Two to three years 5.26% 170,000 - - Three to four years 5.74% 150,000 5.26% 170,000 Four to five years 5.10% 30,000 - - Beyond five years - - 5.10% 30,000 Payable maturities (floating to fixed): Within one year 5.48% 125,000 6.54% *55,000 One to two years - - 5.48% 125,000 Two to three years - - - - Three to four years 6.25% 15,000 - - Four to five years 5.17% 110,000 6.25% 15,000 Beyond five years 6.30% 720,000 6.35% 660,000 * Includes a ‘knock out’ interest rate swap of $25,000,000. As interest rates change, these derivative financial instruments are revalued to fair value and the change in fair value is recorded in surplus or deficit. Interest rate sensitivity The following sensitivity analysis is based on the interest rate risk exposures in existence at balance date. At balance date, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post-tax deficit and equity would have been affected as follows: group and Company company 2011 2010 Post-tax deficit equity Post-tax deficit equity higher/(lower) higher/(lower) higher/(lower) higher/(lower) $000 $000 $000 $000 Judgments of reasonably possible movements: Interest paid 1% (100 basis points) higher for the year (1,656) (1,656) (501) (501) 1% (100 basis points) lower for the year 1,656 1,656 501 501 Revaluation of derivative financial instruments 1% (100 basis points) higher at year-end 21,548 21,548 20,080 20,080 1% (100 basis points) lower at year-end (23,596) (23,596) (22,095) (22,095) PAGE 99 2011 Financial Report Return to Contents page
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<strong>Watercare</strong> Services Limited<br />
<strong>2011</strong> ANNUAL REPORT<br />
Notes to the financial statements (continued)<br />
for the year ended 30 June <strong>2011</strong><br />
21. Financial Assets and Liabilities (continued)<br />
The notional principal, contract amounts of agreements and fixed interest rates in place, at balance date, to manage interest rate risk were<br />
as follows:<br />
group and Company<br />
company<br />
<strong>2011</strong> 2010<br />
fixed interest rate Notional amount Fixed interest rate Notional amount<br />
$000 $000<br />
Interest rate swaps<br />
Receivable maturities (fixed to floating):<br />
Within one year 6.86% 50,000 - -<br />
One to two years - - 6.86% 50,000<br />
Two to three years 5.26% 170,000 - -<br />
Three to four years 5.74% 150,000 5.26% 170,000<br />
Four to five years 5.10% 30,000 - -<br />
Beyond five years - - 5.10% 30,000<br />
Payable maturities (floating to fixed):<br />
Within one year 5.48% 125,000 6.54% *55,000<br />
One to two years - - 5.48% 125,000<br />
Two to three years - - - -<br />
Three to four years 6.25% 15,000 - -<br />
Four to five years 5.17% 110,000 6.25% 15,000<br />
Beyond five years 6.30% 720,000 6.35% 660,000<br />
* Includes a ‘knock out’ interest rate swap of $25,000,000.<br />
As interest rates change, these derivative financial instruments are revalued to fair value and the change in fair value is recorded in surplus<br />
or deficit.<br />
Interest rate sensitivity<br />
The following sensitivity analysis is based on the interest rate risk exposures in existence at balance date.<br />
At balance date, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post-tax deficit and equity<br />
would have been affected as follows:<br />
group and Company<br />
company<br />
<strong>2011</strong> 2010<br />
Post-tax deficit equity Post-tax deficit equity<br />
higher/(lower) higher/(lower) higher/(lower) higher/(lower)<br />
$000 $000 $000 $000<br />
Judgments of reasonably possible movements:<br />
Interest paid<br />
1% (100 basis points) higher for the year (1,656) (1,656) (501) (501)<br />
1% (100 basis points) lower for the year 1,656 1,656 501 501<br />
Revaluation of derivative financial instruments<br />
1% (100 basis points) higher at year-end 21,548 21,548 20,080 20,080<br />
1% (100 basis points) lower at year-end (23,596) (23,596) (22,095) (22,095)<br />
PAGE 99<br />
<strong>2011</strong> Financial <strong>Report</strong><br />
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