Council uses derivative financial instrument to hedge exposure to interest rate risks arising from financing activities. In accordance with its treasury policy, Council does not hold or issue derivative financial instruments for trading purposes.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value at each balance date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.
The associated gains or losses of derivatives that are not hedge accounted are recognised in the surplus or deficit.
Council has elected not to hedge account for its interest rate swaps
Council’s associate Port Nelson Limited has applied hedge accounting to its interest rate swaps.
Fair Value
The fair values of interest rate swaps have been determined using a discounted cash flows valuation technique based on quoted market prices. The inputs into the valuation model are from independently sourced market parameters such as interest rate yield curves.
Interest Rate Swaps
The notional principal amounts of the outstanding interest rate swap contracts for the Council were $235.78m of which
$140.78m is 'live' at balance date (2015: $215.8m of which $130.78m is 'live' at balance date.) At 30 June 2016, the fixed interest rates of cash flow hedge interest rate swaps vary from 2.95% to 5.528% . [2015: 3.22% to 5.895%]
Sensitivity Analysis
Councils interest rate swaps are sensitive to market movements. Will all other variables held constant, based on Council’s financial instrument exposures at balance date, a movement in interest rates of plus or minus 1% has an effect on the swap value of plus $8.4m or minus $9.2m.
2014/15 Note 12 2015/16
$(000's) DERIVATIVE FINANCIAL INSTRUMENTS $(000's)
(8,129)
Interest Rate Swaps (17,946) (8,129)
Total derivative financial instruments (17,946)
Comprising (54)
Current portion - (8,075)
Non Current (17,946)
(8,129)
Total Trade & Other Receivables (17,946)
169
Council classifies its financial assets into the following four categories: financial assets at fair value through surplus or deficit, held- to-maturity investments, loans and receivables and financial assets at fair value through comprehensive revenue and expense. The classification depends on the purpose for which the investments were acquired.
Financial assets and liabilities are initially measured at fair value plus transaction costs unless they are carried at fair value through surplus or deficit in which case the transaction costs are recognised in the surplus or deficit.
Purchases and sales of investments are recognised on trade-date, the date on which Council commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Council has transferred substantially all the risks and rewards of ownership.
The fair value of financial instruments traded in active markets is based on quoted market prices at the Statement of Financial Position date. The quoted market price used is the current bid price.
The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. Council uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments.
The four categories of financial assets are:
Financial assets at fair value through surplus or deficit include financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of short-term profit-taking. Derivatives are also categorised as held for trading unless they are designated into a hedge accounting relationship for which hedge accounting is applied.
After initial recognition, financial assets in this category are measured at their fair values with gains or losses on re- measurement recognised in the surplus or deficit.
Currently, Council holds interest rate swaps in this category.
Loans and receivables
These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance date, which are included in non- current assets.
After initial recognition they are measured at amortised cost using the effective interest method. Gains and losses when the asset is impaired or derecognised are recognised in the surplus or deficit. Loans and receivables are classified as “trade and other receivables” in the Statement of Financial Position.
Loans to community organisations made at nil or below-market interest rates are initially recognised at the present value of their expected future cash flows, discounted at the current market rate of return for a similar financial instrument. The loans are subsequently measured at amortised cost using the effective interest method. The difference between the face value and present value of the expected future cash flows of the loan is recognised in the surplus or deficit as a grant.
Council currently has trade and other receivables and other financial assets in this category.
Held to maturity investments
Held to maturity investments are assets with fixed or determinable payments and fixed maturities that Council has the positive intention and ability to hold to maturity.
After initial recognition they are measured at amortised cost using the effective interest method. Gains and losses when the asset is impaired or derecognised are recognised in the surplus or deficit.
Council currently has disaster fund and short term deposits in this category.
Financial assets at fair value through comprehensive revenue and expense
Financial assets at fair value through comprehensive revenue and expense are those that are designated as fair value through comprehensive revenue and expense or are not classified in any of the other categories above.
This category encompasses:
- Investments that Council intends to hold long-term but which may be realised before maturity; and - Shareholdings that it holds for strategic purposes.
After initial recognition these investments are measured at their fair value.
Gain and losses are recognised directly in comprehensive revenue and expense except for impairment losses, which are recognised in the surplus or deficit. In the event of impairment, any cumulative losses previously recognised in other
170
On de-recognition the cumulative gain or loss previously recognised in equity is recognised in the surplus or deficit.
Impairment of financial assets
At each balance date Council assesses whether there is any objective evidence that a financial asset or group of financial assets is impaired. Any impairment losses are recognised in the surplus or deficit.
Loans and other Receivables
Impairment of a loan or a receivable is established when there is objective evidence that Council will not be able to collect amounts due according to the original terms. The amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted using the original effective interest rate. For debtors and other receivables, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the surplus or deficit. When the receivable is uncollectible, it is written off against the allowance account. Overdue receivables that have been renegotiated are reclassified as current (i.e. not past due).
Financial assets at fair value through other comprehensive revenue and expense
For equity investments classified as fair value through comprehensive revenue and expense, a significant or prolonged decline in the fair value of the investment below its cost is considered an indicator of impairment. If such evidence exists for investments at fair value through comprehensive revenue and expense, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the surplus or deficit) recognised in other comprehensive revenue and expense is reclassified from equity to the surplus or deficit. Impairment losses recognised in the surplus or deficit on equity investments are not reversed through the surplus or deficit.
2014/15 Note 13 2015/16
$(000's) OTHER FINANCIAL ASSETS $(000's)
Current Portion Loans and receivab les
191 Current portion of community loans 186
100 Current portion of related party loans 100
Held to maturity
1,200 Disaster funds 1,200
-
Monies administered for organisations 35
1,491 Total Current Portion 1,521
Non-current portion Loans and receivab les
227 Community Loans 271
620 Loans to Related Parties 554
Fair value through comprehensive revenue and expense
79 Unlisted shares - NZ LG Insurance 93
2,617 Unlisted shares - NZ LG Funding Agency 3,657
1,541 Borrower Notes - NZ LG Funding Agency 1,590
Held to maturity
17 Monies administered for organisations -
5,101 6,165
171
determined by calculating Tasman District Council's share of total equity based on shares held. The fair value of the borrower notes have been determined based on cost.
There were no impairment provisions for other financial assets.
The total value of other financial assets that can only be used for a specific purpose is $1,200,000 (2015: $1,200,000).
The loan to related parties is at a nil interest rate. (2015: Nil). The fair value of the loan has been determined using cashflows discounted at 5.35%.
Interest rates receivable on community loans range from nil to 9%, with an average rate of 4.87% (2015: Nil to 7.97%, with an average rate of 5.56%).
Community loans
The face value of community loans is $465,814. (2015: $431,933)
The community loans are to help not-for-profit organisations in the Tasman district to develop or improve new or existing facilities and other major projects. Only organisations with the ability to repay are granted loans.
The fair value of loans at initial recognition has been determined using cashflows discounted at a rate based on the loan recipients assessed financial risk factors.
2014/15 2015/16
$(000's) $(000's)
288 At 1 July 227
-
Amount of new loans granted during the year 110 (65)
Loans repaid during the year (44) -
Loans forgiven during the year (26)
4 Unwind of discount 4
227 271