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13. FINANCIAL RISK MANAGEMENT (CONTINUED)
Impact on Net profit
Impact on Equity
50 basis
points
increase
$000
50 basis
points
decrease
$000
50 basis
points
increase
$000
50 basis
points
decrease
$000
30 June 2016
Variable rate
instruments
(1,362)
1,362
-
-
Interest rate swaps
875
(875)
2,615 (2,680)
Net impact
(487)
487
2,615 (2,680)
30 June 2015
Variable rate
instruments
(1,429)
1,429
-
-
Interest rate swaps
900
(900)
2,196 (2,235)
Net impact
(529)
529
2,196 (2,235)
Derivative financial instruments
As detailed on the previous page, the Trust enters into derivative
financial instruments in the form of interest rate swap agreements,
which are used to convert the variable interest rate of its borrowings
to fixed interest rates. For the purpose of hedge accounting, these
hedges are classified as cash flow hedges. The swaps are entered
into with the objective of reducing the risk associated with interest
rate fluctuations.
The portion of the gain or loss on the hedging instrument that
is determined to be an effective hedge is recognised in other
comprehensive income and any ineffective portion is considered
a finance cost and is recognised in profit or loss in the statement
of profit or loss and other comprehensive income. The cumulative
gain or loss previously recognised in other comprehensive income
and presented in the hedging reserve in equity remains there until
the forecast transaction affects profit or loss, at which point it is
transferred to profit or loss.
If the hedging instrument no longer meets the criteria for hedge
accounting, expires or is sold, terminated or exercised, then hedge
accounting is discontinued prospectively.
The Trust manages its financial derivatives (interest rate swaps) to
ensure they meet the requirements of a cash flow hedge.
d) Capital management
Capital requirements are assessed based on budgeted cash flows,
capital expenditure commitments and potential growth opportunities
and are monitored on an ongoing basis. Information on capital
and equity markets is reviewed on an ongoing basis to ascertain
availability and cost of various funding sources.
In order to maintain a manageable level of debt, the responsible entity
has established a preferred range of 20 to 30 per cent for the Trust’s
gearing ratio (debt to total assets), which is monitored on a monthly
basis. At 30 June 2016, the gearing level was 21.5 per cent (2015:
24.1 per cent).
The DRP was in place for both the interim distribution and final
distribution for the year ended 30 June 2016 and the preceding year.
e) Fair values
The fair values and carrying amounts of the Trust’s financial assets and
financial liabilities recorded in the financial statements are materially
the same with the exception of the following:
June 2016
$000
June 2015
$000
Corporate bonds – book value
(200,033)
(199,701)
Corporate bonds – fair value
(209,087)
(206,743)
The methods and assumptions used to estimate the fair value of
financial instruments are as follows:
Loans and receivables, and payables and deferred income
Due to the short-term nature of these financial rights and obligations,
their carrying amounts are estimated to represent their fair values.
Cash and short-term deposits
The carrying amount is fair value due to the liquid nature of these assets.
Bank debt facilities and corporate bonds
Market values have been used to determine the fair value of corporate
bonds using a quoted market price. The fair value of bank debt
facilities have been calculated by discounting the expected future cash
flows at prevailing interest rates using market observable inputs.
Interest rate swaps
Interest rate swaps are measured at fair value by valuation techniques
for which all inputs which have a significant effect on the recorded fair
value are observable, either directly or indirectly (Level 2).
Key judgement
Interest rates used for determining fair value
The interest rates used to discount estimated cash flows,
where applicable, are based on current market rates for
similar instruments and were as follows:
June 2016
June 2015
Interest rate swaps
1.83% to 2.42%
2.15% to 3.62%
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2016
BWP Trust Annual Report 2016
42
Financial Report