49 Financial instruments49.1 FINANCIAL RISK MANAGEMENT AND OBJECTIVES
EYNL’s financial instruments arise from normal commercial activities and include amounts owed to and receivable from current and retired members. EYNL does not use financial instruments for speculative activities and complex financial instruments are avoided.
Financial instruments give rise to credit, liquidity, interest rate and foreign currency risks. Information about how these risks arise and are managed is set out below.
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. Credit risk arises primarily from financial assets, including deposits with banks and financial institutions and amounts due from members. EYNL’s maximum exposure to credit risk for the components of the statement of financial position at 30 June 2016 and 30 June 2015 is the carrying amounts presented in Notes 39 and 41. Due to the nature of the receivables presented in Note 38 (subsidiaries) no or very limited risk applies.
EYNL maintains procedures to minimize the risk of default by debtors. Credit risk is not covered by credit insurance or other credit instruments.
Amounts due from members are recovered from the current year’s profit distribution or otherwise contractually reclaimed from the members.
Cash deposits are placed with creditworthy banks only. Deposits of surplus funds are made with approved counterparties only and within limits assigned to each counterparty. The limits are set to adhere to professional independence rules, to minimize the concentration of risks and, therefore, to mitigate financial loss from a potential counterparty failure.
Liquidity risk is the risk that EYNL is unable to meet its financial obligations on the due date. Liquidity risk arises from EYNL’s ongoing financial obligations, including settlement of financial liabilities such as trade and other payables, as well as interest-bearing loans and borrowings and members’ capital. The policy is to maintain a positive working capital balance. Depending on the time of year, there can be a considerable balance of cash and cash equivalents.
The maturity profile of the contractual payments, including interest, arising from EYNL’s financial liabilities at year end, is as follows (the amounts disclosed are the gross undiscounted cash flows):
|Year ended 30 June 2016||< 1 year||1 to 2 years||2 to 5 years||> 5 years||Total|
|Interest-bearing loans and borrowings:|
|– Contractual payments||12,944||1,750||39,890||40,000||94,584|
|– Interest payments||2,063||1,919||2,622||-||6,604|
|Trade and other payables||89,627||-||-||-||89,627|
|Year ended 30 June 2015||< 1 year||1 to 2 years||2 to 5 years||> 5 years||Total|
|Interest-bearing loans and borrowings:|
|– Contractual payments||26,244||2,835||28,515||40,000||97,594|
|– Interest payments||2,244||1,504||2,676||-||6,424|
|Trade and other payables||81,995||-||-||-||81,995|
The financing requirements of EYNL vary during the year, primarily as a result of the incidence of major payments. Capital expenditure on cars is funded by both finance leases and operating leases; reference is made to Note 36. The other main source of financing capital expenditure is funding supplied by current and retired members.
During 2014/2015, EYNL had a revolving credit facility at ABN AMRO Bank N.V. for the finance of its operational activities. EYNL has not drawn funds from this credit facility during the fiscal year. This credit facility is terminated from 1 September 2015.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates. Interest rate risk arises primarily from interest-bearing loans and borrowings and cash and cash equivalents.
An inherent feature of a structure in which current and retired members provide a significant part of the funding for activities is that the variability is not hedged by derivatives.
A fixed rate of interest is paid on long-term loans granted by current and retired members. A variable rate of interest is only paid on one loan granted by current and retired members. The interest on current account liabilities to current and retired members is assessed and set quarterly.
Funds drawn for settlement of drawing rights are interest-free or bear a fixed interest rate. Interest on finance leases is fixed for the term of the lease.
Interest rate risks are not hedged in any way by derivatives.
The following table shows the sensitivity to a reasonably possible change in interest rates. With all other variables held constant, the profit of EYNL before tax is affected through the impact on floating rate borrowings as follows:
|Effect on profit
|in basis points||€000|
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Although the majority of the income and expenses of EYNL are denominated in euros, foreign currency risk arises from transactions denominated in other currencies, particularly the US dollar and pound sterling. Balances in foreign currency bank accounts are held to facilitate cash management and to provide means for future payments in other currencies than euros.
If the US dollar exchange rate were to change by 10%, the impact on profit or loss would be €0.7 million (2014/2015: €1.4 million) as a result of changes in the carrying amount of US dollar-denominated cash and amounts receivable/payable. If the pound sterling exchange rate were to change by 10%, the impact on profit or loss would be € 0.01 million (2014/2015: €0.04 million) as a result of changes in the carrying amount of pound sterling-denominated cash and amounts receivable/payable.
49.2 OTHER NOTES
Reconciliation of classes and categories
All presented groups of financial assets, except other non-current financial assets, are part of the loans and receivables category measured at amortized cost. The financial assets in other non-current financial assets are in the available-for-sale category and are measured at fair value, if they can be measured reliably, or otherwise at cost.
All presented groups of financial liabilities are part of the loans and borrowings category, measured at amortized cost.
Initially, financial instruments are measured at fair value. Subsequently, the financial instruments are measured at fair value or amortized cost, depending on the classification of the financial instruments. If the fair value of the available-for-sale (AFS) assets cannot be established reliably, these investments are measured at cost.
As at 30 June 2016 and 30 June 2015, EYNL did not hold financial instruments measured at fair value.
The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair values:
- EYNL assessed, based on a discounted cash flow (DCF) model, that cash, trade and other receivables and trade and other payables approximate their carrying amounts largely due to the short-term maturities of these instruments.
- Long-term fixed-rate receivables are evaluated by EYNL using parameters such as interest rates, individual creditworthiness of the borrower and the risk characteristics of the financed project. Based on this evaluation, no impairment has been deemed necessary to recognize expected losses on these receivables. At 30 June 2016 and 30 June 2015, the carrying amounts of these receivables approximated their fair value.
- The fair value of fixed-rate borrowings and obligations under finance leases is estimated by discounting future cash flows using rates currently available for debt on similar terms and remaining maturities. At 30 June 2016 and 30 June 2015, the carrying amounts of these payables approximated their fair value.
Fair value assessment of the above mentioned financial assets and liabilities is of a level 2-type.