For certain foreign currency transactions, IR 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 New Zealand Debt Management.
The use of foreign currency forward exchange contracts is governed by IR’s foreign exchange policy, which provides principles on the use of financial derivatives consistent with IR’s risk management strategy.
IR does not hold or issue derivative financial instruments for trading purposes and 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 a liability of $12.236 million as at 30 June 2024 (2023: a liability of $12.211 million).
The notional principal amount of outstanding forward exchange contract derivatives as at 30 June 2024 was NZ $152.706 million (2023: NZ $190.205 million).
The contracts consisted of the purchase of US $75.885 million and AU $0.199 million (2023: US $105.129 million and AU $0.262 million). The unrealised loss on the forward exchange contract derivatives was NZ $0.025 million at 30 June 2024 (2023: unrealised loss of NZ $12.232 million). The majority of the forward exchange contracts relate to software maintenance and support.