McPHERSON’S LIMITED

 ANNUAL REPORT 2015  



  

63

NOTE 13.   DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are only used for economic hedging purposes and not as trading or speculative instruments.  The Group has the following financial 

instruments:

2015

$’000

2014

$’000

Current assets

Forward foreign exchange contracts – cash flow hedges

1,109

-

Foreign currency options – cash flow hedges

842

-

Total current derivative financial instrument assets

1,951

-

Current liabilities

Interest rate contracts – cash flow hedges

409

834

Forward foreign exchange contracts – cash flow hedges

12

1,952

Foreign currency options – cash flow hedges

790

1,068

Total current derivative financial instrument liabilities

1,211

 3,854

Non-current liabilities

Interest rate contracts – cash flow hedges

1,601

978

(A) INSTRUMENTS USED BY THE GROUP

The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and 

foreign exchange rates in accordance with the Group’s financial risk management policies (refer to Note 2).  For information about the methods 

and assumptions used in determining the fair value of derivatives please refer to Note 2(E).

Forward foreign exchange contracts – cash flow hedges

The Group enters into forward foreign exchange contracts to hedge highly probable forecast purchases denominated in foreign currencies. The 

terms of these commitments are predominately eight months or less.

Foreign currency options – cash flow hedges

The Group has also entered into foreign currency option contracts to partially hedge a portion of anticipated United States dollar purchases.  At 

balance date, the outstanding foreign currency option contracts cover the period from July 2015 to February 2016.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity.  When the 

cash flows occur, the Group adjusts the initial measurement of the component recognised in the balance sheet by the related amount deferred in 

equity.

Interest rate swap contracts - cash flow hedges

The Group has entered into an interest rate swap contract to reduce its exposure to possible increases in interest rates.  Refer to Note 2 for further 

information.

(B) CREDIT RISK EXPOSURE

Credit risk arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity.
Foreign exchange contracts, foreign currency options and interest rate swaps are subject to credit risk in relation to the relevant counterparties, 

which are major banks.  The maximum credit risk exposure on hedging contracts is the full amount the Group pays when settlement occurs should 

the counterparty fail to pay the amount which it is committed to pay to the Group.

(C) INTEREST RATE AND FOREIGN EXCHANGE RISK

For an analysis of the sensitivity of derivatives to interest rate and foreign exchange risk refer to Note 2. There are no material sources of 

ineffectiveness in the Group’s hedge relationships.