HORSHAM RURAL CITY COUNCIL
NOTES TO THE FINANCIAL REPORT (Cont.) FOR THE YEAR ENDED 30th JUNE, 2012
36 FINANCIAL INSTRUMENTS (Cont.)
(e) Risks and mitigation The risks associated with our main financial instruments and our policies for minimising these risks are detailed below.
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. The Council's exposures to market risk are primarily through interest rate risk with only insignificant exposure to other price risks and no exposure to foreign currency risk. Components of market risk to which we are exposed are discussed below.
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. Interest rate risk arises from interest bearing financial assets and liabilities that we use. Non derivative interest bearing assets are predominantly short term liquid assets. Our interest rate liability risk arises primarily from long term loans and borrowings at fixed rates which exposes us to fair value interest rate risk.
Our loan borrowings are sourced from major Australian banks by a tender process. Finance leases are sourced from major Australian financial institutions. Overdrafts are arranged with major Australian banks. We manage interest rate risk on our net debt portfolio by: - ensuring access to diverse sources of funding; - reducing risks of refinancing by managing in accordance with target maturity profiles; and - setting prudential limits on interest repayments as a percentage of rate revenue.
We manage the interest rate exposure on our net debt portfolio by appropriate budgeting strategies and obtaining approval for borrowings from the Department of Planning and Community Development each year.
Investment of surplus funds is made with approved financial institutions under the Local Government Act 1989. We manage interest rate risk by ensuring: - conformity with State and Federal regulations and standards, - appropriate liquidity, - diversification of financial institution and investment product, - monitoring of return on investment, - benchmarking of returns and comparison with budget.
Maturity will be staggered for interest rate variations and to minimise interest rate risk.
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. We have exposure to credit risk on some financial assets included in our balance sheet. To help manage this risk: - we may required collateral were appropriate; and - we only invest surplus funds with financial institutions that conform with State and Federal regulations and standards.
Trade and other receivables consist of a large number of customers, spread across the consumer, business and government sectors. Credit risk associated with the Council's financial assets is minimal because the main debtor is the Victorian Government. Apart from the Victorian Government we do not have any significant credit risk exposure to a single customer or groups of customers. Ongoing credit evaluation is performed on the financial condition of our customers and, where appropriate, an allowance for doubtful debts is raised.
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108 Horsham Annual Report 2011 - 2012
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