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Notes to the Financial Statements
Washington H. Soul Pattinson and Company Limited
Annual Report 2016
98
Risk Management
NOTE 20
FINANCIAL RISK MANAGEMENT
NOTE 21
FAIR VALUE ESTIMATION
20
21
e) Cash flow and fair value interest rate risk
The Group currently holds interest-bearing assets which are placed with reputable investment counterparties
for up to 12 months. The Group has treasury investment policies approved by each of the relevant entity’s Board
which stipulates the maximum exposure to each financial institution. Significant changes in market interest rates
may have an effect on the Group’s income and operating cash flows. Cash flow interest rate risk is managed by
placing excess funds in term deposits and other fixed interest bearing assets. Refer to notes 13 and 14 for details.
Based on the deposits held at reporting date, the sensitivity to a hypothetical 1% per annum increase or decrease
in interest rates would increase/(decrease) after tax profit by $1.221 million (2015: $8.935 million). This scenario
assumes all cash and term deposits at balance date continue to remain invested for the whole year.
Investment properties are partly funded by borrowings. The long term borrowings are issued at variable rates and
the Group partially hedges its exposure to interest rate risk by using a derivative financial instrument, an interest
rate swap, to effectively convert the variable interest rate facility into a fixed interest rate facility. Refer to note 23a
for further details.
Accounting policy –
Fair value estimation
The fair value of financial assets, financial liabilities and investment properties must be estimated for recognition
and measurement or for disclosure purposes.
The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting
date. The quoted market price used for financial assets held by the Consolidated entity is the last sale price; the
appropriate quoted market price for financial liabilities is the last sale price.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter
derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assump-
tions that are based on market conditions existing at each balance date. The fair value of forward exchange
contracts is determined using forward exchange market rates at the reporting date.
The carrying value less estimated credit adjustments and impairment provision of trade receivables and payables
are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for
disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest
rate that is available to the Group for similar financial instruments.
Fair value hierarchy
Judgements and estimates are made in determining the fair values of assets and liabilities. To provide an indica-
tion of the reliability of the inputs used in determining fair value, the Group categorises each asset and liability
into one of the following three levels as prescribed by accounting standards:
Level 1: Fair value is determined by reference to quoted prices (unadjusted) in activemarkets for identical assets or
liabilities as at the end of the reporting period.
Level 2: Fair value is determined by using valuation techniques incorporating observable market data inputs.
Level 3: Fair value is determined by using valuation techniques that rely on inputs that are not based on observ-
able market data.