Inland Revenue’s activities expose it to a variety of financial instrument risks, including market risk, credit risk and liquidity risk. Inland Revenue has policies to manage the risks associated with financial instruments and seeks to minimise exposure from financial instruments. These policies do not allow Inland Revenue to enter into any transactions that are speculative in nature.
Market risk
Currency risk
The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates is called currency risk.
Inland Revenue purchases fixed assets and services from overseas suppliers and it is therefore exposed to currency risk arising from various currency exposures, primarily for United States and Australian dollars.
Under its foreign exchange policy, Inland Revenue enters into foreign currency forward exchange contracts to manage foreign exchange exposures when single foreign exchange transactions exceed NZ $100,000 or the transaction exposure for an individual currency exceeds NZ $100,000. This policy has been approved by the Treasury and is in line with the requirements of the Treasury’s Guidelines for the Management of Crown and Departmental Foreign-Exchange Exposure.
Sensitivity analysis
Assuming that all other variables remained constant, the impact on the surplus of a 5% increase/decrease in the New Zealand dollar against various other currencies held by Inland Revenue in its foreign currency account at 30 June 2021 would be a $0.212 million decrease and a $0.234 million increase respectively.
Interest rate risk
Interest rate risk is the risk that the fair value of a financial instrument will fluctuate, or the cash flows from a financial instrument will fluctuate, due to changes in market interest rates.
Inland Revenue has no interest-bearing financial instruments, so it has no exposure to interest rate risk.
Credit risk
The risk that a third party will default on its obligations to Inland Revenue, causing a loss to be incurred, is called credit risk. In the normal course of its business, credit risk from receivables is concentrated with the Crown and other government agencies but not with any individual agencies.
The carrying amount of financial assets recognised in the Statement of financial position best represents Inland Revenue’s maximum exposure to credit risk at balance date.
Inland Revenue does not require any collateral, security or other credit enhancements to support financial instruments with financial institutions that it deals with, because these entities have high credit ratings. Westpac is Inland Revenue’s main bank and has a Standard and Poor’s credit rating of AA-. Inland Revenue enters into foreign currency transactions with Treasury Capital Markets (Standard and Poor’s credit rating of AA+).
For its other financial instruments, Inland Revenue does not have significant concentrations of credit risk.
The carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated is not material.
Liquidity risk
Liquidity risk is the risk that Inland Revenue will encounter difficulty raising liquid funds to meet commitments as they fall due.
As all but an insignificant proportion of funds come from the New Zealand Government and cash is drawn down on a fortnightly basis, Inland Revenue does not have significant liquidity risk. In meeting its liquidity requirements, Inland Revenue closely monitors its forecast cash requirements with expected cash drawdowns from Treasury Capital Markets. Inland Revenue maintains a target level of available cash to meet liquidity requirements.
Contractual maturity analysis of financial liabilities, excluding forward foreign exchange contracts
The table below analyses Inland Revenue’s financial liabilities that will be settled, based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.
|
Carrying amount ($000) |
Total contractual cash flows ($000) |
Up to 1 year ($000) |
1 to 5 years ($000) |
Over 5 years ($000) |
|
|---|---|---|---|---|---|
| 2021 | |||||
| Creditors and other payables | $21,930 | $21,930 | $21,930 | – | – |
| Total | $21,930 | $21,930 | $21,930 | – | – |
| 2020 | |||||
| Creditors and other payables | $34,584 | $34,584 | $34,584 | – | – |
| Total | $34,584 | $34,584 | $34,584 | – | – |
Contractual maturity analysis of forward foreign exchange contracts
The table below analyses Inland Revenue’s forward foreign exchange contract derivatives into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.
|
Derivative financial instruments net carrying amount ($000) |
Total contractual cash flows ($000) |
Up to 1 year ($000) |
1 to 5 years ($000) |
Over 5 years ($000) |
|
|---|---|---|---|---|---|
| 2021 | |||||
| Gross settled forward foreign exchange contracts (net liability) | $87 | – | – | – | – |
| Outflow | – | $9,271 | $8,844 | $427 | – |
| Total | $87 | $9,271 | $8,844 | $427 | – |
| 2020 | |||||
| Gross settled forward foreign exchange contracts (net asset) | $11 | – | – | – | – |
| Outflow | – | $2,048 | $2,048 | – | – |
| Total | $11 | $2,048 | $2,048 | – | – |