Note 19 - Financial instruments - financial instrument risks (2023)

The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates is called currency risk.

Inland Revenue purchases goods and services from overseas suppliers, and it is therefore exposed to currency risk arising from various currency exposures, primarily for United States and Australian dollars.

Under its foreign exchange policy, Inland Revenue enters into foreign currency forward exchange contracts to manage foreign exchange exposures when single foreign exchange transactions exceed NZ $100,000 or the transaction exposure for an individual currency exceeds NZ $100,000. This policy has been approved by the Treasury and is in line with the requirements of Te Tai Ōhanga the Treasury’s Guidelines for the Management of Crown and Departmental Foreign-Exchange Exposure.

Assuming that all other variables remained constant, the impact on the surplus of a 5% increase/decrease in the New Zealand dollar against various other currencies held by Inland Revenue in its foreign currency account at 30 June 2023 would be a $7.413 million decrease and a $8.198 million increase respectively.

Interest rate risk is the risk that the fair value of a financial instrument will fluctuate or the cash flows from a financial instrument will fluctuate due to changes in market interest rates. Inland Revenue has no interest-bearing financial instruments so it has no exposure to interest rate risk.

The risk that a third party will default on its obligations to Inland Revenue, causing a loss to be incurred, is called credit risk. In the normal course of its business, credit risk from receivables is concentrated with the Crown and other government agencies but not with any individual agencies. The carrying amount of financial assets recognised in the Statement of Financial Position best represents Inland Revenue’s maximum exposure to credit risk at balance date.

Inland Revenue does not require any collateral, security or other credit enhancements to support financial instruments with the financial institutions that it deals with, because these entities have high credit ratings. Westpac is Inland Revenue’s main bank for departmental transactions and has a S&P Global Ratings' credit rating of AA–. Inland Revenue enters into foreign currency transactions with Treasury Capital Markets (S&P Global Ratings' credit rating of AA+). For its other financial instruments, Inland Revenue does not have significant concentrations of credit risk.

The carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated is not material.

Liquidity risk is the risk that Inland Revenue will encounter difficulty raising liquid funds to meet commitments as they fall due.

As all but an insignificant proportion of revenue and funds come from the New Zealand Government and cash is drawn down on a fortnightly basis, Inland Revenue does not have significant liquidity risk. In meeting its liquidity requirements, Inland Revenue closely monitors its forecast cash requirements with expected cash drawdowns from the Treasury Capital Markets. Inland Revenue maintains a target level of available cash to meet daily liquidity requirements.

The table below analyses Inland Revenue’s financial liabilities that will be settled, based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.

The table below analyses Inland Revenue’s forward foreign exchange contract derivatives into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows.