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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2016
96 Independence Group NL
Notes to the consolidated financial statements
30 June 2016
(continued)
20 Derivatives (continued)
(c) Recognition and measurement (continued)
The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of
the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the
hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. Movements in the
hedging reserve in shareholder's equity are shown in note 18.
(i)
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or
loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
(ii)
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is
recognised in other comprehensive income and accumulated in the hedging reserve in equity. The gain or loss relating
to the ineffective portion is recognised immediately in profit or loss.
Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or
loss. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is
recognised in profit or loss within 'sales'.
The changes in the time value component of options are recognised in the hedge reserve. The cumulative changes
accumulated in the hedge reserve are reclassified to the profit or loss when the hedged item affects profit or loss.
When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the
forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur,
the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss.
(iii)
Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative
instrument that does not qualify for hedge accounting are recognised immediately in profit or loss.
21 Financial risk management
The Group’s activities expose it to a variety of financial risks; market risk (including currency risk, interest rate risk,
equity price risk and commodity price risk), credit risk and liquidity risk. The Group's overall risk management program
focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial
performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts, forward
commodity contracts and collar arrangements to hedge certain risk exposures.
Risk management relating to commodity and foreign exchange risk is overseen by management, under policies
approved by the Board of Directors. The Board identifies, evaluates and hedges financial risks in close co-operation
with the Group’s operating units. The Board provides written principles for overall risk management, as well as written
policies covering specific areas, such as mitigating foreign exchange, commodity price, interest rate and credit risks,
use of derivative financial instruments and investing excess liquidity.
(a) Risk exposures and responses
(i)
Foreign currency risk
As the Group’s sales revenues for nickel, copper, zinc, gold and silver are denominated in United States dollars (USD)
and the majority of operating costs are denominated in Australian dollars (AUD), the Group’s cash flow is significantly
exposed to movements in the AUD:USD exchange rate. The Group mitigates this risk through the use of derivative
instruments, including, but not limited to, forward contracts denominated in AUD.
Financial instruments, including derivative instruments, denominated in USD and then converted into the functional
currency (i.e. AUD) were as follows:
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