Note 19. Financial instruments - financial instrument risks

IR’s activities expose it to a variety of financial instrument risks, including market risk, credit risk and liquidity risk. IR has policies to manage the risks associated with financial instruments, and seeks to minimise exposure from financial instruments. IR does not 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.

IR purchases goods 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, IR 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 IR in its foreign currency account at 30 June 2024 would be a $5.722 million decrease and a $6.325 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. IR 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 IR, 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 IR’s maximum exposure to credit risk at balance date.

IR does not require any collateral, security or other credit enhancements to support financial instruments with the financial institutions that it deals with because these entities have high credit ratings. Westpac is IR’s main bank for departmental transactions and has an S&P Global Ratings' credit rating of AA–. IR enters into foreign currency transactions with New Zealand Debt Management (S&P Global Ratings' credit rating of AA+). For its other financial instruments, IR 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 IR will encounter difficulty raising liquid funds to meet commitments as they fall due.

As all but an insignificant proportion of revenue and funds come from the New Zealand Government and cash is drawn down on a fortnightly basis, IR does not have significant liquidity risk. In meeting its liquidity requirements, IR closely monitors its forecast cash requirements with expected cash drawdowns from the New Zealand Debt Management. IR maintains a target level of available cash to meet daily liquidity requirements.

Contractual maturity analysis of financial liabilities, excluding forward foreign exchange contracts

The table below analyses IR’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.

Contractual maturity analysis of forward foreign exchange contracts

The table below analyses IR’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.