City of Melbourne Annual Report 2015-16


Note 37. Financial instruments



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Note 37. Financial instruments

  1. Objectives and policies


Council's principal financial instruments comprise cash assets, term deposits, receivables (excluding statutory receivables), payables (excluding statutory payables) and bank borrowings. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument is disclosed in Note 1 of the financial statements. Risk management is carried out by senior management under policies approved by Council. These policies include identification and analysis of the risk exposure to Council and appropriate procedures, controls and risk minimisation.

  1. Market risk

Market risk is the risk that the fair value or future cash flows of our financial instruments will fluctuate because of changes in market prices. Council's exposures to market risk is primarily through interest rate risk with only insignificant exposure to other price risks and no exposure to foreign currency risk.

Interest rate risk

Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Council's interest rate liability risk arises primarily from long term loans and borrowings at fixed and floating rates which exposes council to fair value interest rate risk. Council does not hold any interest bearing financial instruments that are measured at fair value, and therefore has no exposure to fair value interest rate risk. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Council has minimal exposure to cash flow interest rate risk through its cash and deposits.

Investment of surplus funds is made with approved financial institutions under the Local Government Act 1989. Council manages interest rate risk by adopting an investment policy that ensures:


  • diversification of investment product

  • monitoring of return on investment

  • benchmarking of returns and comparison with budget.

There has been no significant change in Council's exposure, or its objectives, policies and processes for managing interest rate risk or the methods used to measure this risk from the previous reporting period.

Interest rate movements have not been sufficiently significant during the year to have an impact on Council's year end result.

Council's interest rate liability risk arises from fixed and floating rate borrowing and our subsidiary company’s Citywide Service Solutions Pty Ltd borrowings.

Council's subsidiary company Citywide Service Solutions Pty Ltd has a borrowing and overdraft facility which has been arranged with a major Australian bank. Council's subsidiary company manages the interest rate risk by:



  • an ongoing review or borrowing levels

  • having a limit imposed on the maximum borrowing amount allowed by Council.

  1. Credit risk

Credit risk is the risk that a contracting entity will not complete its obligations under a financial instrument and cause us to make a financial loss. Council has exposure to credit risk on some financial assets included in Council’s balance sheet. To help manage this risk:

  • Council has a policy for establishing credit limits for the entities it deals with

  • Council may require collateral, where appropriate

  • Council only invests surplus funds with financial institutions which have a recognised credit rating specified in Council’s investment policy.

Credit risk associated with Council’s financial assets is minimal because the largest item in the receivables balance is comprised of a very large number of small amounts, being rate revenues due from ratepayers. In addition, all unpaid rates are secured by charges over rateable properties.

There are no material financial assets which are individually determined to be impaired.

Council may also be subject to credit risk for transactions which are not included in the balance sheet, such as when Council provides a guarantee for another party. Details of Council’s contingent liabilities are disclosed in note 35.

The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. Council does not hold any collateral.


Consolidated

2016

Notes

Floating Interest Rate

$’000

Fixed Interest

$’000

Non-interest bearing

$’000

Total

$’000

Financial assets

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

16

88,269

0

71

88,340

Trade and other receivables

17

2,034

0

51,416

53,450

Other financial assets


N/A

7,550

5,000

0

12,550

Subtotal

N/A

97,853

5,000

51,487

154,340

Weighted average rate

N/A

4.29%

N/A

N/A

N/A

Financial liabilities

N/A

N/A

N/A

N/A

N/A

Trade and other payables

25

0

0

70,228

70,228

Trust funds and deposits

26

0

0

9,112


9,112

Interest-bearing loans and borrowings

28

0

30,000

0

30,000

Total

N/A

0

30,000

79,340

109,340

Council

Council

2016

Notes

Floating Interest Rate

$'000

Fixed Interest

$’000

Non-interest bearing

$’000

Total

$'000

Financial assets

N/A

N/A


N/A

N/A

N/A

Cash and cash equivalents

16

83,069

0

41

83,110

Trade and other receivables

17

0

0

26,625

26,625

Other financial assets

18

0

5,000

0

5,000

Subtotal

N/A

83,069

5,000

26,666

114,735

Weighted average rate

N/A

4.33%

N/A

N/A

N/A

Financial liabilities

N/A


N/A

N/A

N/A

N/A

Trade and other payables

25

0

0

47,553

47,553

Trust funds and deposits

26

0

0

6,718

6,718

Interest-bearing loans and borrowings

28

0

30,000

0

30,000

Total

N/A

0

30,000

54,271

84,271

Consolidated

Consolidated

2015

Notes


Floating Interest Rate

$'000

Fixed Interest

$'000

Non-interest bearing

$'000

Total

$'000

Financial assets

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

16

110,396

0

76

110,472

Trade and other receivables

17

1,742

0

48,842

50,584

Other financial assets

18

13,800

0

0

13,800

Subtotal

N/A

125,938


0

48,918

174,856

Weighted average rate

N/A

4.74%

N/A

N/A

N/A

Financial liabilities

N/A

N/A

N/A

N/A

N/A

Trade and other payables

25

0

0

77,175

77,175

Trust funds and deposits

26

0

0

8,526

8,526

Total

N/A

0

0

85,701

85,701

Council

Council

2015


Notes

Floating Interest Rate

$'000

Fixed Interest

$'000

Non-interest bearing

$'000

Total

$'000

Financial assets

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

16

101,482

0

37

101,519

Trade and other receivables

17

0

0

27,135

27,135

Other financial assets

18

7,000

0

0

7,000

Subtotal


N/A

108,482

0

27,172

135,654

Weighted average rate

N/A

4.67%

N/A

N/A

N/A

Financial liabilities

N/A

N/A

N/A

N/A

N/A

Trade and other payables

25

0

0

53,308

53,308

Trust funds and deposits

26

0

0

6,111

6,111

Total

N/A

0

0

59,419

59,419

  1. Liquidity risk


Liquidity risk includes the risk that, as a result of our operational liquidity requirements or Council will not have sufficient funds to settle a transaction when required, Council will be forced to sell a financial asset at below value or may be unable to settle or recover a financial asset.

To help reduce these risks Council:



  • have a liquidity policy which targets a minimum and average level of cash and cash equivalents to be maintained

  • have readily accessible standby facilities and other funding arrangements in place

  • have a liquidity portfolio structure that requires surplus funds to be invested within various bands of liquid instruments

  • monitor budget to actual performance on a regular basis.

Council's maximum exposure to liquidity risk is the carrying amounts of financial liabilities as disclosed in the face of the balance sheet.

There has been no significant change in Council's exposure, or its objectives, policies and processes for managing liquidity risk or the methods used to measure this risk from the previous reporting period.

With the exception of borrowings, all financial liabilities are expected to be settled within normal terms of trade. Details of the maturity profile for borrowings are disclosed at Note 28.

The Consolidated Entity’s exposure to liquidity risk is deemed insignificant given our high levels of cash and cash equivalents unused facilities, Citywide Service Solutions Pty Ltd borrowing levels and our current assessment of risk.

Council has two loan facilities, CEFC $30 million  interest only loan with interest rate fixed at 3% due for repayment on 8 October 2020 and a $75 million floating rate loan facility with ANZ Bank which expires on  30 June 2017. The interest rate on the ANZ Bank facility is the Bank Bill Interest Rate (for the relevant interest period plus a margin of 0.61%). A line fee of 0.05% is also applicable to the facility. Both facilities are secured by a charge over the general rates levied by Council.

With respect to borrowings at Citywide Service Solutions Pty Ltd the following should be noted. The bank overdraft facility is a secured facility. In February 2012 the Bill Acceptance and Discount Facility was increased. This facility is also a secured facility. There is a 1st ranking fixed and floating charge. The bank facilities may be drawn at any time and may be terminated by the bank subject to default under the loan agreement. Subject to the continuance of satisfactory covenant achievement, the bank facilities may be drawn at any time. The facilities expire on the 27 July 2019.

The table below lists the contractual maturities for financial liabilities. These amounts represent undiscounted gross payments including both principal and interest amounts.

Consolidated


Consolidated

2016

6 mths

or less

$’000

6-12

months

$’000

1-2

years

$’000

2-5

years

$’000

>5

years

$’000

Contracted

Cash Flow

$’000

Carrying

Amount

$’000

Financial assets

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

88,340


0

0

0

0

88,340

88,340

Trade and other receivables

51,761

332

583

564

210

0

53,450

Other financial assets

11,550

1,000

0

0

0

12,550

12,550

Total

151,651

1,332

583

564

210

100,890

154,340


Financial liabilities

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Trade and other payables

65,328

2,455

2,445

0

0

70,228

70,228

Trust funds and deposits

6,840

85

2,187

0

0

9,112

9,112

Interest-bearing loans and borrowings

0

0

0

30,000

0

30,000

30,000

Total

72,168


2,540

4,632

30,000

0

109,340

109,340

Council

Council

2016

6 mths

or less

$’000

6-12

months

$’000

1-2

years

$’000

2-5

years

$’000

>5

years

$’000

Contracted

Cash Flow

$’000

Carrying

Amount

$’000


Financial assets

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

83,110

0

0

0

0

83,110

83,110

Trade and other receivables

26,625

0

0

0

0

0

26,625

Other financial assets

5,000

0

0

0

0

5,000

5,000

Total

114,735

0

0

0


0

88,110

114,735

Financial liabilities

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Trade and other payables

47,553

0

0

0

0

47,553

47,553

Trust funds and deposits

6,718

0

0

0

0

6,718

6,718

Interest-bearing loans and borrowings

0

0

0

30,000

0

30,000

30,000

Total


54,271

0

0

30,000

0

84,271

84,271

Consolidated

Consolidated

2015

6 mths

or less

$’000

6-12

months

$’000

1-2

years

$’000

2-5

years

$’000

>5

years

$’000

Contracted

Cash Flow

$’000

Carrying

Amount

$’000


Financial assets

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

109,972

500

0

0

0

110,472

110,472

Trade and other receivables

49,508

267

447

362

0

0

50,584

Other financial assets

12,800

1,000

0

0

0

13,800

13,800

Total

172,280


1,767

447

362

0

124,272

174,856

Financial liabilities

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Trade and other payables

74,730

0

2,445

0

0

77,175

77,175

Trust funds and deposits

6,299

90

2,137

0

0

8,526

8,526

Total

81,029

90

4,582


0

0

85,701

85,701

Council

Council

2015

6 mths

or less

$’000

6-12

months

$’000

1-2

years

$’000

2-5

years

$’000

>5

years

$’000

Contracted

Cash Flow

$’000

Carrying

Amount

$’000

Financial assets

N/A


N/A

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

101,519

0

0

0

0

101,519

101,519

Trade and other receivables

27,135

0

0

0

0

0

27,135

Other financial assets

7,000

0

0

0

0

7,000

7,000

Total

135,654

0

0

0

0

108,519


135,654

Financial liabilities

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Trade and other payables

53,308

0

0

0

0

53,308

53,308

Trust funds and deposits

6,111

0

0

0

0

6,111

6,111

Interest-bearing loans and borrowings

0

0

0

0

0

0

0

Total

59,419

0

0

0


0

59,419

59,419

  1. Fair value

Unless otherwise stated, the carrying amount of financial instruments reflect their fair value.

Council's financial assets and liabilities are not valued in accordance with the fair value hierarchy, Council's financial assets and liabilities are measured at amortised cost.



  1. Sensitivity disclosure analysis

Taking into account past performance, future expectations, economic forecasts, and management's knowledge and experience of the financial markets, Council believes the movements 'reasonably possible' over the next 12 months are a parallel shift of + 1.0% and -0.5% in market interest rates (AUD) from year-end rates of 1.72% (2015: 2.05%).

These movements will not have a material impact on the valuation of Council's financial assets and liabilities, nor will they have a material impact on the results of Council's operations.



The table below discloses the impact on net operating result and equity for each category of financial instruments held by Council at year end, if the above movements were to occur.

Item

2016

$’000

Interest rate risk

-0.50%


-50 basis points

Profit

$’000


Interest rate risk

-0.50%

-50 basis points

Equity

$’000

Interest rate risk

+1.00%

+100 basis points

Profit

$’000

Interest rate risk

+1.00%

+100 basis points

Equity

$’000

Consolidated

N/A

N/A

N/A

N/A

N/A

Financial assets

N/A

N/A

N/A

N/A

N/A

Cash and cash equivalents

88,340


(442)

(442)

883

883

Other financial assets

12,550

(63)

(63)

126

126

Financial liabilities

N/A

N/A

N/A

N/A

N/A

Interest-bearing loans and borrowings

30,000

0

0

0

0

Council

N/A

N/A

N/A

N/A

N/A

Financial assets

N/A


N/A

N/A

N/A

N/A

Cash and cash equivalents

83,110

(416)

(416)

831

831

Other financial assets

5,000

(25)

(25)

50

50

Financial liabilities

N/A

N/A

N/A

N/A

N/A

Interest-bearing loans and borrowings

30,000

0

0

0

0

The $30 million interest bearing loan is a fixed interest facility.


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