Annual Report

Notes to the Financial Statements

Washington H. Soul Pattinson and Company Limited

Annual Report 2016

100

Risk Management

NOTE 22

DERIVATIVE FINANCIAL INSTRUMENTS

Accounting policy –

Derivative financial instruments

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subse-

quently remeasured to their fair value at each reporting 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 Group designates derivatives as hedges of highly probable forecast transactions (cash flow hedges).

The Group documents at the inception of the transaction, the relationship between hedging instruments and

hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions.

The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the

derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting

changes in fair values or cash flows of hedged items.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow

hedges is recognised in the hedging reserve. The gain or loss relating to the ineffective portion is recognised

immediately in the income statement.

Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item

will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the

forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a

non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included

in the measurement of the initial cost or carrying amount of the asset or liability.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for

hedge accounting, any cumulative gain or loss in equity at that time remains in equity and is recognised when

the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no

longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the

income statement.

At reporting date the outstanding contractual receivables/payables at fair value are (AUD Equivalents):

2016

2015

$’000

Current Assets

– Forward exchange contracts

2,313

–

Current Liabilites

– Forward exchange contracts

–

23,144

– Interest rate swaps

167

–

167

23,144

Fair value measurement

The fair value measurement of forward exchange contracts is determined using forward exchange market rates at

the reporting date.

The fair value of interest rate swaps is determined using forward interest rates at the reporting date.

New Hope Corporation Limited and certain of its controlled entities are parties to derivative financial instruments

in the normal course of business in order to hedge exposure to fluctuations in foreign currency exchange rates.

These instruments are used in accordance with the Group’s financial risk management policies.