Mapoon Aboriginal Shire Council

Financial Risk Management Policy

Head of Power

Local Government Act 1993

Objective

To provide a framework for the minimising the risk of loss to the Council in relation to Financial Assets and Liabilities.

Definitions/Application

Definitions

Financial assets – Include:

•          Debts due to the Council

•          Loans made by the Council

•          Bank and cash balances

•          Financial investments

 

Financial liabilities – Include:

•          Borrowings by the Council

•          Debts due by the Council

•          Finance leases

Interest bearing transaction –
Means a transaction resulting in a financial asset or a financial liability which will be settled for an amount different from the value of the goods or services exchanged, to allow for the time difference between the date of the transaction and the date of the payment. 
Examples are:

•          Loans

•          Investments

•          Leases

•          Deferred settlement arrangements

Application

This policy applies to all financial assets and financial liabilities of the Council. It impacts on all transactions resulting in a financial asset or financial liability or the entering into any commitment to such a transaction.

Policy Statement

Authority for transactions

Transactions within the scope of this policy may only be entered into in accordance with official delegations by the Local Government or by the Chief Executive Officer.

No interest bearing transaction may be entered into without the approval of the Manager, Finance and Administration or the Chief Executive Officer.

Borrowing

The Council may only borrow in accordance with the Statutory Bodies Financial Arrangement Act 1982 and with the approval of the Treasurer, given through the Department of Local Government, Sport and Recreation.  Borrowing must only be made as permitted in the Council’s Borrowing policy.

The Council will only borrow from the Queensland Treasury Corporation (QTC). This ensures that any risks in the borrowing have been assessed as appropriate for local government by QTC.

Leasing

The Council will not enter into any finance leases and will only enter into operating leases in accordance with the guidelines issued by Queensland Treasury.

Investment

The Council may only borrow in accordance with the Statutory Bodies Financial Arrangement Act 1982. This limits the range of investment to

a)deposits with a financial institution;

b)investment arrangements accepted, guaranteed or issued by or for the Commonwealth or a State or a financial institution;

c)other investment arrangements secured by investment arrangements accepted, guaranteed or issued by or for the Commonwealth or a State or a financial institution;

d)investment arrangements, managed or offered by QIC or QTC, prescribed under a regulation for this paragraph;

e)an investment arrangement with a rating prescribed under a regulation for this paragraph;

The rating prescribed for an investment arrangement is—

(a) a rating by Fitch IBCA (Australia) Pty Limited of F1+ or F1; or

(b) a rating by Moody’s Investors Service of Prime-1 (P-1); or

(c) a rating by Standard and Poor’s (Australia) Pty Ltd of A1+, A-1, AAm or AAAm.

 

f)other investment arrangements prescribed under a regulation for this paragraph.

However, the investment must be—

a)at call; or

b)for a fixed time of not more than 1 year.

Before making any investment, other than with QTC the Council will obtain three quotes and will invest with the most beneficial.

Specific Financial Risk Management

Council's activities expose it to a variety of financial risks including interest rate risk, creit risk, liquidity risk.
Council minimise these risks by managing exposure to the volitility of financial markets and seeking to minimise postential adverse effects on the financial performance of the Council.

Council measures risk exposure using a variety of methods as follows:

Risk exposure	Measurement method
Interest rate risk	Sensitivity analysis
Liquidity risk	Maturity analysis
Credit Risk	Ageing analysis

Credit Risk

Credit risk exposure refers to the situation where the Council may incur financial loss as a result of another party to a financial instrument failing to discharge their obligations.
In the case of rate receivables, the Council has the power to sell the property to recover any defaulted amounts.
In effect this power protects the Council against credit risk in the case of these debts.
In other cases, the Council assesses the credit risk before providing goods or services and applies normal business credit protection procedures to minimise the risk.

The Council is exposed to credit risk through its investments with the Queensland Treasury Corporation (QTC) and deposits held with banks or other financial institutions.The QTC Cash Fund is an asset management portfolio that invests with a wide variety of high credit rating counterparties.  Deposits are capital guaranteed.  Other investments are held withhighly rated and regulatedbanks orfinancial institutions and whilst not capital guaranteed, the likelihood of a credit failure is remote.

By the nature of the Councils operations, there is a geographical concentration of risk in the Council's area.  Because the area is largely agricultural, there is also a concentration in theagricultural sector.

No collateral is held as security relating to the financial assets held by the Council.

Liquidity Risk

Liquidity risk refers to the situation where the Council may encounter difficulty in meeting obligations associated with financial liabilities.  The Council is exposed to liquidity risk through its trading in the normal course of business and borrowings from the Queensland Treasury Corporation for capital works.

The Corporation manages its exposure to liquidity risk by maintaining sufficient undrawn facilities, both short and long term, to cater for unexpected volatility in cash flows.

Interest Rate Risk

The Council is exposed to interest rate risk through its finance lease borrowings, borrowings from the Queensland Treasury Corporation and investments held with financial institutions. 

The risk in borrowing is effectively managed by borrowing only from the Queensland Treasury Corporation and having access to a mix of floating and fixed funding sources such that the desired interest rate risk exposure can be constructed.Interest rate risk in other areas is minimal.

The Council does not undertake any hedging of interest rate risk.

Related Policies

Risk Management Policy

Review Triggers

This Policy is reviewed internally for applicability, continuing effect and consistency with related documents and other legislative provisions when any of the following occurs:

1.       The related documents are amended.

2.       The related documents are replaced by new documents.

3.       Amendments which affect the allowable scope and effect of a Policy of this nature are made to the head of power.

4.       Other circumstances as determined from time to time by a resolution of Council.

Notwithstanding the above, this Policy is to be reviewed at least once every two years for relevance and to ensure that its effectiveness is maintained.

Responsibility

This Policy is to be:

1. implemented by the Chief Executive Officer and Manger, Finance and Administration; and
2. reviewed and amended in accordance with the "Review Triggers" by the Chief Executive Officer.