29 AUGUST 2014 NEW ZEALAND GAZETTE, No. 104 2909

THE COMMUNITY TRUST OF SOUTHLAND

NOTES TO THE FINANCIAL STATEMENTS

For the Year Ended 31 March 2014

22. FINANCIAL INSTRUMENTS

Financial Risk Management

The Group’s activities expose it to a variety of financial risks including market risk (including fair value interest rate risk, cash flow interest rate risk, currency risk, and equity price risk), credit risk and liquidity risk.

The Group has policies to manage the risks associated with financial instruments. The Group is risk averse and seeks to minimise exposure from its treasury activities. The Group has established investment policies. These policies do not allow any transactions that are speculative in nature to be entered into.

Market Risk

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates, interest rates and equity prices.

There has been no change to the Group’s exposure to market risks or in the manner it manages and measures the risk.

The measures the Trustees have put in place to manage these risks are:

• to retain an investment advisor to advise the Trust as to appropriate Investment objectives, policies, and strategies;
• to use external fund managers to undertake the management of the investments; and
• to operate a widely diversified portfolio of investments.

Fair Value Interest Rate Risk

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

Cash Flow Interest Rate Risk

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

Currency Risk

Currency risk is the risk that the value of a foreign currency denominated 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 Group’s functional currency.

Equity Price Risk

The Group is exposed to equity price risk. This arises from managed funds 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 Group, causing the Group to incur a loss.

The Group from time to time has significant funds in trading bank deposits. The Group limits risk by spreading the deposits over several trading banks. The Group has not required collateral or other security to support its financial instruments. The Group further limits risk through its policy of placing Managed Funds with six separate fund managers, with each fund manager having an investment mandate which requires that they diversify their instruments on the Group’s behalf. The Group has sought and obtained the advice of professional investment advisors prior to making its investment allocations and placement decisions.