28. Financial instruments

Credit risk

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

		Consolidated		Company
		2008	2007	2008	2007
		$000	$000	$000	$000
Cash and cash equivalents		36,687	83,382	14,804	43,917
Trade receivables and other receivables		152,193	127,651	24,821	19,529
Forward exchange contracts used for hedging		33,093	22,080	33,093	22,080
		221,973	233,113	72,718	85,526

The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:

		Consolidated		Company
		2008	2007	2008	2007
		$000	$000	$000	$000
Americas		43,666	43,354	-	-
Europe		69,346	54,861	-	-
Asia Pacific		30,821	18,682	22,033	13,359
		143,833	116,897	22,033	13,359

Impairment losses

The ageing of the Consolidated Entity’s trade receivables at the reporting date was:

		2008	2007
		$000	$000
Gross receivables
Not past due		95,219	68,847
Past due 0 – 30 days		17,255	18,634
Past due 31 – 120 days		22,579	20,087
Past due 121 – 270 days		6,643	7,120
Past due 271 days and over		4,880	4,146
		146,576	118,834
Impairment		(2,743)	(1,937)
Trade receivables net of impairment loss		143,833	116,897

There are certain jurisdictions in which the Consolidated Entity operates where it is customary practice for customers to extend the terms for payment beyond 270 days. As such, the Consolidated Entity discloses the balance as overdue, however it is not indicative of a higher than normal credit risk as payments typically flow to the Consolidated Entity within the extended timeframes.

The ageing of the Company’s trade receivables at the reporting date was:

		2008	2007
		$000	$000
Gross receivables
Not past due		14,636	8,333
Past due 0 – 30 days		2,975	1,740
Past due 31 – 120 days		3,386	1,783
Past due 121 – 270 days		551	282
Past due 271 days and over		693	1,334
		22,241	13,472
Impairment		(208)	(113)
Trade receivables net of impairment loss		22,033	13,359

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

		Consolidated		Company
		2008	2007	2008	2007
		$000	$000	$000	$000
Balance at 1 July		(1,937)	(2,885)	(113)	(120)
Impairment loss (recognised)/utilised		(1,041)	616	(95)	7
Effect of movements in foreign exchange		235	332	-	-
Balance at 30 June		(2,743)	(1,937)	(208)	(113)

Impairment losses recognised in the year relate to significant individual customers or portfolios of customers which have been assessed as impaired under the Consolidated Entity’s accounting policy as detailed in Note 3(j).

Based upon past experience, the Consolidated Entity believes that no impairment allowance is necessary in respect of trade receivables not past due.

The allowance accounts used in respect of trade receivables are used to record impairment losses unless the Consolidated Entity is satisfied that no recovery of the amount owing is possible; at that point, the amount considered non-recoverable is written off against the financial asset directly.

Liquidity risk

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

	Consolidated
	Effective interest rate per annum	Carrying amount $000	Contractual cash flows $000	6 months or less $000	6-12 months $000	1-2 years $000	2-5 years $000	More than 5 years $000
Non-derivative financial liabilities 2008
GBP floating rate loan	6.2%	10,820	11,491	336	11,155	-	-	-
EUR floating rate loan	5.0%	4,618	4,854	118	4,736	-	-	-
SEK floating rate loan	5.9%	100,207	110,641	1,521	2,971	106,149	-	-
USD floating rate loan	3.2%	31,400	32,232	251	498	31,483	-	-
AUD floating rate loan	8.1%	20,000	21,321	247	806	20,268	-	-
JPY floating rate loan	2.3%	2,938	3,086	33	33	66	2,954	-
Trade and other payables	-	60,830	60,830	60,830	-	-	-	-
Total		230,813	244,455	63,336	20,199	157,966	2,954	-
	Effective interest rate per annum	Carrying amount $000	Contractual cash flows $000	6 months or less $000	6-12 months $000	1-2 years $000	2-5 years $000	More than 5 years $000
Non-derivative financial liabilities 2007
GBP floating rate loan	6.2%	12,169	12,921	376	12,545	-	-	-
EUR floating rate loan	4.5%	4,396	4,597	100	4,497	-	-	-
SEK floating rate loan	4.6%	115,347	122,483	2,653	79,255	1,727	38,848	-
USD floating rate loan	5.8%	35,332	37,382	1,025	36,357	-	-	-
AUD floating rate loan	7.0%	30,000	30,279	30,279	-	-	-	-
JPY bank overdraft	2.0%	1,422	1,422	1,422	-	-	-	-
AUD bank overdraft	9.5%	223	223	223	-	-	-	-
Trade and other payables	-	61,923	61,923	61,923	-	-	-	-
Total		260,812	271,230	98,001	132,654	1,727	38,848	-

	Company
	Effective interest rate per annum	Carrying amount $000	Contractual cash flows $000	6 months or less $000	6-12 months $000	1-2 years $000	2-5 years $000	More than 5 years $000
Non-derivative financial liabilities 2008
AUD floating rate loan	8.1%	20,000	21,321	247	806	20,268	-	-
Trade and other payables	-	27,058	27,058	27,058	-	-	-	-
Total		47,058	48,379	27,305	806	20,268	-	-
	Effective interest rate per annum	Carrying amount $000	Contractual cash flows $000	6 months or less $000	6-12 months $000	1-2 years $000	2-5 years $000	More than 5 years $000
Non-derivative financial liabilities 2007
AUD floating rate loan	7.0%	30,000	30,279	30,279	-	-	-	-
AUD bank overdraft	9.5%	223	223	223	-	-	-	-
Trade and other payables	-	33,381	33,381	33,381	-	-	-	-
Total		63,604	63,883	63,883	-	-	-	-

Cash flow hedges

In the year ended 30 June 2008, the Consolidated Entity designated some sales and purchases of various currencies as cash flow hedges to hedge the amount converted into AUD for forecast future transactions. These are hedges of forecast future transactions to manage the currency risk arising from exchange rate fluctuations. The hedged items were highly probable foreign currency transactions.

The effectiveness of the hedging relationship is calculated prospectively using regression analysis on market values. An effectiveness test is carried out retrospectively using the cumulative dollar offset method. For this, the changes in the fair values of the hedged item and the hedging instrument attributable to spot rate changes are calculated and a ratio is created. If this ratio is between 80% and 125%, the hedge is effective.

All material hedges were effective as at the reporting date.

The following table indicates the periods in which the cash flows associated with the Company’s and the Consolidated Entity’s derivatives that are cash flow hedges are expected to occur:

30 June 2008

Amounts $000	Carrying amount	Expected cash flows	6 months or less	6-12 months	1-2 years	2-5 years
Forward exchange contracts	33,093	34,150	13,360	8,515	9,871	2,404

30 June 2007

Amounts $000	Carrying amount	Expected cash flows	6 months or less	6-12 months	1-2 years	2-5 years
Forward exchange contracts	22,080	23,139	10,525	5,955	6,881	(222)

The expected impact on the income statement is not considered to be significantly different to the cash flow impact noted above.

Currency risk

Exposure to currency risk

The Consolidated Entity’s exposure to foreign currency risk was as follows, based upon notional amounts:

Amounts local currency thousands		USD	EUR	GBP	SEK	JPY
2008
Trade receivables		49,346	34,904	3,665	4,376	527,681
Secured bank overdrafts		-	-	-	-	-
Secured bank loans		(30,000)	(2,800)	(5,200)	(571,479)	(300,000)
Trade payables		(9,614)	(2,316)	(4,986)	(19,966)	(38,315)
Gross balance sheet exposure		9,732	29,788	(6,521)	(587,069)	189,366

Amounts local currency thousands		USD	EUR	GBP	SEK	JPY
2007
Trade receivables		42,354	26,066	2,972	4,022	471,672
Secured bank overdrafts		-	-	-	-	(150,000)
Secured bank loans		(30,000)	(2,800)	(5,200)	(457,903)	-
Trade payables		(7,808)	(2,121)	(3,543)	(30,100)	(53,072)
Gross balance sheet exposure		4,546	21,145	(5,771)	(483,981)	268,600

The Company’s exposure to foreign currency risk was as follows, based upon notional amounts:

Amounts local currency thousands	USD	GBP	SEK	JPY
2008
Trade receivables	4,381	-	-	-
Amounts receivable from controlled entities	17,867	9,305	226,217	50,075
Gross balance sheet exposure	22,248	9,305	226,217	50,075

Amounts local currency thousands	USD	GBP	SEK	JPY
2007
Trade receivables	2,776	-	-	-
Amounts receivable from controlled entities	20,892	9,011	119,621	109,383
Gross balance sheet exposure	23,668	9,011	119,621	109,383

The Company enters into forward exchange contracts to hedge anticipated sales and purchases in USD, EUR, JPY and SEK.

The amounts of forward cover taken are in accordance with approved policy and internal forecasts.

The following table sets out the gross value to be received (sell) or paid (buy) under forward exchange contracts and the weighted average contracted exchange rates of outstanding contracts:

		Foreign exchange rates		Consolidated and Company
		2008	2007	2008	2007
				$000	$000
Sell USD
Not later than one year				141,599	135,043
Later than one year but not later than two years				78,951	72,287
Later than two years but not later than three years				17,615	8,640
Weighted average exchange rates contracted		0.83	0.78
Sell EUR
Not later than one year				129,394	118,250
Later than one year but not later than two years				78,650	61,289
Later than two years but not later than three years				15,914	6,750
Weighted average exchange rates contracted		0.57	0.59
Sell JPY
Not later than one year				10,725	9,396
Later than one year but not later than two years				5,248	3,771
Later than two years but not later than three years				1,270	1,287
Weighted average exchange rates contracted		86.52	82.99
Buy SEK
Not later than one year				-	36,600
Weighted average exchange rates contracted		-	5.29

The following significant exchange rates applied to the Company and the Consolidated Entity during the year:

		Average rate		Reporting date spot rate
AUD 1 =		2008	2007	2008	2007
USD		0.897	0.789	0.956	0.849
EUR		0.612	0.610	0.606	0.637
GBP		0.449	0.411	0.481	0.427
SEK		5.706	5.602	5.703	5.886
JPY		99.290	94.425	102.110	105.450
CHF		0.997	0.977	0.978	1.047

Interest rate risk

Profile

At the reporting date, the interest rate profile of the Company’s and Consolidated Entity’s interest-bearing financial instruments was:

		Consolidated		Company
		2008	2007	2008	2007
		$000	$000	$000	$000
Carrying amount
Variable rate instruments
Financial assets		36,687	83,382	14,804	43,917
Financial liabilities		169,983	198,889	20,000	30,223

Sensitivity analysis

In managing interest rate and currency risks, the Consolidated Entity aims to reduce the impact of short-term fluctuations on the Consolidated Entity’s earnings. Over the longer term, however, permanent changes in foreign exchange and interest rates will have an impact on profit.

For the year ended 30 June 2008, it is estimated that a general increase of one percent in interest rates would have decreased the Consolidated Entity’s profit after income tax and equity by approximately $0.9 million (2007: $0.8 million). A one percent decrease in interest rates would have had the equal but opposite effect on the Consolidated Entity’s profit and equity.

It is estimated that a general increase of ten percent in the value of the AUD against other foreign currencies would have decreased the Consolidated Entity’s profit for the year ended 30 June 2008, including hedging results and after income tax by approximately $5.7 million (2007: $4.6 million) and increased the Consolidated Entity’s equity by $1.0 million (2007: $6.0 million). A ten percent decrease in the value of the AUD against other foreign currencies would have had the equal but opposite effect on the Consolidated Entity’s profit and equity.

Fair values

The fair values of financial assets and liabilities, together with carrying amounts shown in the balance sheet, are as follows:

		Consolidated
		2008		2007
	Note	Carrying amount $000	Fair value $000	Carrying amount $000	Fair value $000
Cash and cash equivalents		36,687	36,687	83,382	83,382
Trade and other receivables – current	12	173,266	173,266	143,076	143,076
Trade and other receivables – non-current	12	15,963	15,963	6,655	6,655
Trade and other payables		(60,830)	(60,830)	(61,923)	(61,923)
Bank overdrafts	18	-	-	(1,645)	(1,645)
Secured bank loans	18	(169,983)	(169,983)	(197,244)	(197,244)
Total		(4,897)	(4,897)	(27,699)	(27,699)

		Company
		2008		2007
	Note	Carrying amount $000	Fair value $000	Carrying amount $000	Fair value $000
Cash and cash equivalents		14,804	14,804	43,917	43,917
Trade and other receivables – current	12	119,941	119,941	99,275	99,275
Trade and other receivables – non-current	12	11,574	11,574	6,305	6,305
Other financial assets	14	65,656	65,656	63,989	63,989
Trade and other payables		(27,058)	(27,058)	(33,381)	(33,381)
Bank overdrafts	18	-	-	(223)	(223)
Secured bank loans	18	(20,000)	(20,000)	(30,000)	(30,000)
Total		164,917	164,917	149,882	149,882

Basis for determining fair values

The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in the table above.

Derivatives

The fair value of forward exchange contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk free rate (based on government bonds). These fair values are provided by independent third parties.

Non-derivative financial assets and liabilities

The fair value of cash, receivables, payables and short-term borrowings is considered to approximate their carrying amount because of their short maturity.

The directors consider the carrying amount of long-term borrowings recorded in the financial statements approximates their fair value.