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5. Financial and Capital Risk Management

ASC PTY LTD
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
For the year ended 30 June 2019

Financial risk management
The Group's activities expose it to a variety of financial risks. This note presents information about the Group's exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital.

The board has overall responsibility for the establishment and oversight of the risk management framework. The board has charged the Group Audit Committee with the responsibility for the oversight of how management monitors compliance with the Group's financial risk management policies and procedures. It also reviews the adequacy of the financial risk management framework of the Group. The Group Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes regular reviews of financial risk management controls and procedures, the results of which are reported to the Group Audit Committee.

The board has also established the Business Assurance and Security Committee, which is responsible for the oversight of non financial risks.

Both committees report regularly to the board on their activities.

June 2019 $'000

June 2018 $'000

Financial assets

Cash and cash equivalents

204,105

315,427

Trade and other receivables

130,251

111,824

334,356

427,251

Financial liabilities

Trade and other payables

87,691

85,972

Interest bearing liabilities

65,788

90,770

Non interest bearing liabilities

3

3

153,482

176,745

a. Credit Risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers and investment securities.

Trade and other receivables
The Group's credit exposures to customers, including outstanding receivables and committed transactions, are minimal, as one substantial customer of the Group is the Commonwealth of Australia with a Aaa credit rating from Moody's.

Cash and cash equivalents
The Group limits its exposure to credit risk by only investing in liquid investments with counterparties that have a credit rating of at least A3 from Moody's. The Group also has policies that limit the amount of credit exposure to any one financial institution based on their credit rating. The lower the independent credit rating, the lower the limit of credit exposure is allowed. Given these high credit ratings, management does not expect any counterparty to fail to meet its obligations.

Guarantees
Credit risk arises in relation to financial guarantees given to certain parties (see note 15 for details). Such guarantees are issued in accordance with the ASC corporate management policies and are only provided to support a financial/commercial arrangement.

Financial securities received
Credit risk also arises in relation to $3.6 million of financial securities issued by domestic and foreign banks in favour of ASC, in respect of mobilisation payments made by ASC to overseas suppliers. Downgrades in the Standard & Poor's credit ratings of several foreign banks in 2012 has resulted in the credit ratings of these banks falling below the rating level approved by the ASC corporate management policies. All practical means of remedying the non-compliance have been exhausted. The risk exposure to these securities (amounting to $0.5 million) is assessed as low.

Recognised financial instruments

June 2019 $'000

June 2018 $'000

Trade receivables

Counterparties with external credit rating

Aaa (Commonwealth of Australia)

127,145

103,009

A3

2,683

8,130

Baa2

19

33

Credit rating not determined

309

406

Total trade receivables

130,156

111,578

Aa3- rated cash at bank, short term deposits and interest receivable

Cash and cash equivalents

204,105

315,427

Interest receivable

95

246

204,200

315,673

The credit risk on financial assets of the consolidated entity which have been recognised on the statement of financial position, is the carrying amount, net of any provision for doubtful debts as summarised above.

A substantial proportion of the consolidated entity's operations are in relation to the through life support for six Collins Class submarines and the Hobart Class Air Warfare Destroyer (AWD) Program for the construction of the Navantia designed AWDs.

The projects receive a substantial portion of their entire funding from the Commonwealth Government of Australia, who has a Moody's credit rating of Aaa. Therefore the consolidated entity has immaterial exposure to credit risk in its operations.

Off statement of financial position financial instruments

The Group has not entered into any off statement of financial position financial instruments during the period.

b. Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

Contracts of the Group are mostly based on a cash flow neutral billing regime which enables the timing of the receipts of the billings to meet the timing of the payments for the operating expenditure of the relevant contracts. Due to the nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available.

The Group maintains the following lines of credit:

  • $47,000,000 overdraft facility not utilised at balance date (2018: $12,000,000). Interest would be payable at the rate of Bank Bill Official Rate plus 100 basis points; and
  • $30,000,000 multi option bank facility not utilised at balance date (2018: $30,000,000).

The Group received advance funding for the AWD project by the Commonwealth of Australia (CoA) under the Alliance Based Target Incentive Agreement (ABTIA). The ABTIA requires regular review of the advance amount which may be increased or decreased after consideration by the CoA as to the working capital requirements for the AWD project.

Maturities of financial liabilities
The tables below analyse the consolidated entity's financial liabilities into relevant maturity groups based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

Contractual maturities of financial liabilities

Less than 6 months

6 - 12 months

1 - 2 years

2 - 5 years

Over 5 years

Total con. cash flows

Carrying amount (assets) / liabilities

At 30 June 2019

$'000

$'000

$'000

$'000

$'000

$'000

$'000

Non-derivatives

Non interest bearing

-

87,691

-

-

160

87,851

87,694

Variable rate (including bank overdraft)

-

65,788

-

-

-

65,788

65,788

Total non-derivatives

-

153,479

-

-

160

153,639

153,482

At 30 June 2018

Non-derivatives

Non interest bearing

-

85,972

-

-

160

86,132

85,975

Variable rate (including bank overdraft)

-

90,770

-

-

-

90,770

90,770

Total non-derivatives

-

176,742

-

-

160

176,902

176,745

c. Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

Foreign exchange risk
Fluctuations on foreign exchange rates for the Group are generally recoverable from their commercial and contractual arrangements. The consolidated entity did not have any outstanding foreign exchange contracts as at reporting date.

The carrying amounts of the financial assets and the liabilities of the consolidated entity are denominated in Australian dollars except as set out below.

Consolidated Entity

Currency

June 2019 AUD $'000

June 2018 AUD $'000

Financial assets

Cash and cash equivalents

USD

2,493

10,948

EUR

2,680

18,104

GBP

417

780

CAD

234

2,062

JPY

-

148

NOK

-

6

Total

5,824

32,048

Trade and other receivables

USD

164

277

EUR

1,474

587

GBP

11

6

Total

1,649

870

Financial liabilities

Trade and other payables

USD

4

1,256

EUR

283

455

GBP

3

3

NOK

-

6

CAD

-

7

Total

290

1,727

Interest bearing liabilities

USD

1,944

9,969

EUR

4,080

18,236

GBP

441

801

CAD

234

2,062

JPY

-

148

Total

6,699

31,216

Interest rate risk
As the Group holds term interest bearing assets, the Group's income and operating cash flows are exposed to changes in market interest rates. The Group's investment policy permits investment in deposits with banks and securities issued by the State and/or Commonwealth Government.

As a general rule, the Group holds these investments to maturity, thereby reducing exposure to changes in market value.

The exposures of the consolidated entity to interest rate risk as well as the effective weighted average interest rate for classes of financial assets and financial liabilities are set out below:

June 2019

June 2018

$'000

Effective interest rate %

$'000

Effective interest rate %

Financial assets

Cash and cash equivalents

204,105

1.33%

315,427

1.34%

Trade and other receivables

130,251

0.00%

111,824

0.00%

Total financial assets

334,356

427,251

Financial liabilities

Trade and other payables

87,691

0.00%

85,972

0.00%

Interest-bearing liabilities

65,788

0.87%

90,770

0.79%

Non interest-bearing liabilities

3

5.50%

3

5.50%

Total financial liabilities

153,482

176,745

The effective interest rate of the non interest-bearing liabilities reflects the effective discount rate applied in calculating the present value of the liabilities.

Sensitivity
At 30 June 2019, if market interest rates had a parallel shift of +75 basis points/- 75 basis points from year-end rates with all other variables held constant, equity and profit or loss would have increased (decreased) by the amounts shown below. The analysis for 30 June 2019 has been performed on the same basis as 30 June 2018. The main interest rate risk arises from cash receivables and loans and other receivables with variable interest rates.

Movements in interest rates result in higher/lower interest income from cash and cash equivalents.

Summarised sensitivity analysis

Interest rate risk

-0.75%

0.75%

At 30 June 2019

Carrying amount $'000

Profit $'000

Other equity $'000

Profit $'000

Other equity $'000

Financial assets

Cash and cash equivalents

204,105

(1,531)

-

1,531

-

Trade and other receivables

130,251

(1)

-

1

-

Financial liabilities

Trade and other payables

(87,691)

-

-

-

-

Interest bearing liabilities

(65,788)

-

-

-

-

Total increase/(decrease)

(1,532)

-

1,532

-

Interest Rate Risk

-0.75%

0.75%

At 30 June 2018

Carrying amount $'000

Profit $'000

Other equity $'000

Profit $'000

Other equity $'000

Financial assets

Cash and cash equivalents

315,427

(2,366)

0

2,366

0

Trade and other receivables

111,824

(2)

0

2

0

Financial liabilities

Trade and other payables

(85,972)

0

0

0

0

Interest bearing liabilities

(90,770)

(465)

0

465

0

Non interest bearing liabilities

(3)

0

0

0

0

Total increase / (decrease)

(2,833)

0

2,833

0

Capital risk management
The objectives of the Group in managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for the shareholder and benefits for other stakeholders and to sustain future development of the business. The Group monitors the return on capital.

There were no changes in the approach adopted by the Group in capital management during the year.