For certain foreign currency transactions, Inland Revenue uses derivative financial instruments (foreign currency forward exchange contracts) to mitigate risks associated with foreign currency fluctuations. The foreign currency forward exchange contracts are entered into with Treasury Capital Markets.
The use of foreign currency forward exchange contracts is governed by Inland Revenue's foreign exchange policy, which provides principles on the use of financial derivatives consistent with Inland Revenue's risk management strategy.
Inland Revenue does not hold or issue derivative financial instruments for trading purposes. It has not adopted hedge accounting.
Derivative financial instruments are recognised at fair value on the date the derivative contract is entered into and are subsequently restated at fair value at each balance date. They are reported as either assets or liabilities, depending on whether the derivative is in a net gain or net loss position, respectively. Movements in the fair value of derivative financial instruments are recognised in the financial result.
Derivative financial instruments are classified as current if the contract is due for settlement within 12 months of balance date. Otherwise, the full fair value is classified as non-current. The net fair value of derivative financial instruments is an asset of $0.021 million as at 30 June 2022 (2021: liability of $0.087 million).
The notional principal amount of outstanding forward exchange contract derivatives as at 30 June 2022 was NZ$7.102 million (2021: NZ$9.272 million). The contracts consisted of the purchase of US$4.158 million and AU$0.393 million (2021: US$5.832 million and AU$0.785 million). The unrealised gain on the forward exchange contract derivatives was NZ$0.108 million at 30 June 2022 (2021: unrealised loss of $0.098 million). The majority of the forward exchange contracts relate to software maintenance and application support.