14 AUGUST 2008 NEW ZEALAND GAZETTE, No. 127 3363

Fair value interest rate risk

Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The trust’s exposure to fair value interest rate risk is limited to its cash at bank and cash deposits with fund managers.

A 100 basis point increase or decrease is used when reporting interest rate risk, as it represents a reasonable assessment of the possible change in interest rates.

Cash flow interest rate risk

Cash flow interest rate risk is the risk that the cash flows from a financial instrument will fluctuate because of changes in market interest rates. Investments issued at variable interest rates expose the trust to cash flow interest rate risk.

A 100 basis point increase or decrease is used when reporting interest rate risk, as it represents a reasonable assessment of the possible change in interest rates.

The trust’s exposure to interest rate risk for fair value and cash flow interest rate risk on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Foreign exchange risk arises from transactions and recognised assets that are denominated in a currency that is not the trust’s functional currency. The table below details the trust’s sensitivity to a 10% increase and decrease in the New Zealand dollar against the relevant foreign currencies. 10% is the sensitivity rate used as it represents a reasonable assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates.

Equity Price Risk

The trust is exposed to equity price risk. This arises from investments held by the trust and classified as financial assets at fair value through profit and loss.

Credit Risk Management

Credit risk is the risk that a third party will default on its obligation to the trust, causing the trust to incur a loss.

Due to the timing of its cash inflows and outflows, the trust invests surplus cash with registered banks. The trust’s investment policy limits the amount of credit exposure to any one institution.

The trust has processes in place to review the credit exposure and credit quality of funds prior to the funds being deposited with financial institutions.

The trust’s maximum credit exposure for each class of financial instrument is represented by the total carrying amount of cash equivalents (note 9), other financial assets at fair value through profit or loss (note 11) and trade and other receivables (note 10).

Liquidity Risk Management

Liquidity risk is the risk that the trust will encounter difficulty raising liquid funds to meet commitments as they fall due. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The trust aims to maintain flexibility in funding by keeping committed credit lines available.

In meeting its liquidity requirements, the trust maintains a target level of investments that must mature within specified timeframes.

Capital Risk Management

The trust’s objectives when managing trust capital is to safeguard its ability to continue as a going concern so that it can continue to provide returns for the community. The capital structure of the trust consists of cash and cash equivalents and trust funds. The trust’s investment committee reviews the trust funds and risks associated with the trust funds.

Following the sale of the trust’s shares in Trust Bank New Zealand Limited in April 1996, the trustees agreed that the value of the trust at that time should be maintained for the benefit of current and future generations living in the Waikato region. For this purpose, the trustees agreed that $169,800,000 would be considered as the initial capital of the trust and increased each year to reflect growth due to inflation and regional growth.

The trustees have adopted an investment strategy with a targeted long term annual rate of return of 6.8% (2007 – 6.8%, 2008 – 7.14%) of the trust’s capital value. Recognising that actual returns are likely to fluctuate from year to year, the trust retains the variation from the target in trust funds so that in years when investment returns are less than the target, sufficient funds are available to meet expenditure and make distributions. If the trust fund falls below the value that needs to be maintained for the benefit of current and future generations, the level of expenditure and distributions are reviewed by the trust.

The trust’s present donation policy is to distribute annually as donations between 3.5% and 4.5% of the trust fund value that should be maintained for the benefit of current and future generations. The trustees recognise that for a number of reasons this might not always be achievable and that there will inevitably be fluctuations between the donations distributed and the actual target.

The trust uses the services of an investment adviser to pursue an investment policy considered appropriate for the trust. The policy at 1 April 2007 was to achieve a long-term asset allocation of: