2008 Annual report - Sappi

sappi //
30. Financial instruments (continued)
In order to create a complete set of data for the regression analysis, both the hedging instrument and the hedged item are
back dated at the inception date by creating a proxy trade. Actual historical 3-month US$ LIBOR curves are used to generate
net present values of the proxy trades. As time passes, REVAL will update the regression by adding new actual observations
and excluding the same number of the oldest simulated observations from the data set.
The prospective test is considered to be identical to the retrospective test, which implies that for the prospective test the same
past data (i.e. actual historical curves and remaining cash flows at each Sappi month-end date of the retrospective test) is
used for the retrospective test.
Changes in fair value will represent period-to-period changes in ‘clean’ fair value (accruals of interest excluded).
During September and October 2006, Sappi entered into firm commitments for the purchase of equipment in foreign
currency. These commitments were hedged for foreign exchange risk by forward exchange contracts and were designated
as a fair value hedge. The hedged risk was designated to be the foreign currency risk arising from fluctuations in the foreign
currency rates relating to the purchase of equipment.
The fair value hedge was accounted for as follows:
The hedging instrument was recorded at fair value in the balance sheet with changes in fair value recorded through
the income statement. The full fair value method is used to calculate the changes in fair value of the hedging instrument.
At maturity of the foreign exchange contract the related cash flows were booked at the spot rate of that day according
to IAS 21.
The firm commitment (hedged item) was not recognised in the balance sheet at inception of the hedge because it was an
executory contract for the future delivery of equipment. Only the subsequent changes in fair value of the commitment
attributable to the hedged risk are recorded on the balance sheet and through the income statement.
In 2008, Sappi took delivery of the purchased equipment. Hedge accounting has been discontinued in the 2008 fiscal year.
The portion of the hedge that was determined to be effective has been included on the balance sheet as part of the cost of
purchase for the equipment.
c) Liquidity risk
Liquidity risk is the risk that the group will be unable to meet its current and future financial obligations as they fall due.
The group’s objective is to manage its liquidity risk by:
– managing its bank balances, cash concentration methods and cash flows;
– managing its working capital and capital expenditure;
– ensuring the availability of a minimum amount of short-term borrowing facilities at all times, to meet any unexpected
funding requirements; and
– ensuring appropriate long-term funding is in place to support the group’s long term strategy.
Details of the group’s borrowings, including the maturity profile thereof, as well as the group’s committed and uncommitted
facilities are set out in note 20.
The group is in compliance with all material financial covenants applicable to its borrowing facilities.
// 2008 Annual report
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