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Note 28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
MLA's principal financial instruments include derivatives, cash and short-term
deposits.
The Company has various other financial assets and liabilities such as trade
receivables and trade payables which arise directly
from its operations. MLA enters into derivative transactions, including forward
currency contracts and currency option contracts.
The purpose is to manage the currency risks arising from the Company's overseas
operations. The main risks arising from
the Company's financial instruments are interest rate risk, foreign currency
risk and credit risk. The Board reviews and agrees
policies for managing each of these risks and they are summarised below.
Details of the significant accounting policies and methods adopted, including
the criteria for recognition, the basis of
measurement and the basis on which income and expenses are recognised, in respect
of each class of financial asset are
disclosed in note 2 to the financial statements.
Interest rate risk
The Company's exposure to the risk of changes in market interest rates relates
primarily to the Company's cash and
short-term deposit holding with a floating interest rate.
Foreign currency risk
The consolidated entity uses derivative financial instruments to manage specifically
identified foreign currency risks. The
consolidated entity is primarily exposed to the risk of adverse movements in
the Australian dollar relative to certain foreign
currencies. The purpose for which derivative instruments are used is as follows.
Forward exchange contracts and options are purchased to hedge a majority of
the Australian dollar value of US dollar,
Japanese yen and korean won payments arising from the overseas branches.
Foreign exchange contracts commit the consolidated entity to purchase specific
amounts of US dollars, Japanese yen or
korean won at an agreed rate of exchange maturing at specific times up to 12
months from balance date.
Option contracts give the consolidated entity the right to purchase specific
amounts of US dollars and Japanese yen at an
agreed rate of exchange maturing at specific times up to 12 months from balance
date. The remaining time value of unexpired
option premiums paid as at year end (2007: $20,000; 2006: $135,000) have been
deferred onto the Balance Sheet (refer Note 8).
Credit risk
The consolidated entity trades only with recognised creditworthy third parties.
There are no significant concentrations of credit
risk. The consolidated entity's maximum exposure to credit risk at reporting
date in relation to each class of recognised financial
assets is the carrying amount of these assets as indicated in the Balance Sheet.
Note 29. FINANCIAL INSTRUMENTS
Hedging activities
Cash flow hedges
At 30 June 2007, the Company held forward exchange contracts and options contracts
designated as hedges of forecasted
future cash outflows to the overseas offices. The following tables summarise
by currency the Australian dollar value of
forward foreign exchange contracts and options contracts. The "buy" amounts
represent the Australian dollar equivalent of
commitments to purchase foreign currencies under forward contracts and the
right to purchase foreign currencies under options
contracts. Contracts to buy foreign currency are entered into to minimise the
short-term impact of currency fluctuations on
overseas programs.
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