Foreign Exchange Policy and Procedures

Transcription

1 Foreign Exchange Policy and Procedures Commencement Date: 23 August, 2006 Category: Finance 1. PURPOSE The purpose of this policy is to regulate Foreign Currency transactions of Material amounts and to determine the responsibilities of key stakeholders. 2. APPLICATION The Policy and its Procedures apply to those engaged in Foreign Currency transactions that expose the University to Foreign Exchange Risk. This includes the Library, Faculties, Financial Services and any other Administrative Area that engages in Foreign Currency transactions. 3. EXCEPTIONS Nil 4. DEFINITIONS Administrative Area Means any area headed by the Vice-Chancellor, the Deputy Vice-Chancellors, Executive Managers, Heads of Organisational Areas and Heads of Organisational Units. Appropriate Counterparty Means a supplier of Hedges such as a bank or other financial institution that has a current credit rating of a least Investment Grade A using Standard and Poor's long-term ratings (or the equivalent of another rating agency) or the University's Foreign Currency Providers. For Hedges with a time horizon of greater than twelve months the current credit rating of the bank or other financial institution must be higher than Investment Grade A using Standard and Poor's long-term ratings. AUD Means the Australian Dollar. Closing Rate Means the Spot Rate at the reporting date. Contracted Means a contract for goods or services with an external party to the University that has been signed or is in the process of being finalised and signed. Executive Manager Means any manager with broad strategic and operational responsibility for a Faculty/School/Area or an Area in the University, who reports directly to the Vice-Chancellor, Deputy Vice-Chancellor, Vice President or Chief Financial Officer and has been designated as an Executive Manager by the Vice- Chancellor. External Hedge Means an agreement between and Appropriate Counterparty and the University to use a Permitted Instrument to reduce Foreign Exchange Risk. Float Means a balance held by Financial Services in a Foreign Currency denominated bank account. Foreign Currency Means a currency other than the Australian Dollar.

2 Foreign Currency Option Contract Means the right but not the obligation to buy or sell a specific amount of Foreign Currency at a specified price during a specified period of time. Foreign Currency Providers Means a specialist firm (not necessarily a bank), such as Custom House or Travelex, which will undertake to buy and sell currency and make transfers on behalf of their customers. Foreign Exchange Risk Means the uncertainty regarding a future Foreign Currency exchange rate between two currencies. Forward Rate Contract Means an agreement (obligation) to buy or sell a specified amount of a Foreign Currency at a specified exchange rate during a specified period or on a specified date. GAAP Means Generally Accepted Accounting Principles. Head of Organisational Area Means any manager, with broad strategic and operational responsibility for an area, who reports directly to an Executive Manager. Head of Organisational Unit Means any manager, with broad strategic and operational responsibility for an area, who reports directly to a Head of Organisational Area. Hedge Means a method of limiting the risk posed by adverse movements in foreign exchange rates. Highly Probable Means a forecast Foreign Currency transaction that is justifiably anticipated to occur. The justification for the expectation that the transaction will occur may be based on historic trends such as payment or receipts patterns of previous periods or may be based on other reliable information about future events. Material Means an individual transaction in excess of an equivalent Australian Dollar amount of at least AUD 200,000, or, a series of similar transactions with an equivalent Australian Dollar value of at least AUD 250,000. An example of a series of transactions is the subscriptions expenditure of the Library. Permitted Instrument Means using a Spot Trade, Forward Rate Contract or Foreign Currency Option Contract or other instrument as approved by the Finance Committee to buy or sell an agreed amount of a Foreign Currency. Borrowing in a Foreign Currency (eg. a loan from a bank or other financial institution) is also a Permitted Instrument. Spot Rate Means the current rate of exchange between two currencies. Spot Trade Means an agreement (obligation) to buy or sell an agreed amount of Foreign Currency at the Spot Rate. 5. POLICY STATEMENT 5.1 The University seeks to manage its exposure to Foreign Exchange Risk to ensure responsible financial management. Consequently, where it is commercially practicable to do so, the University will conduct its contracts and business in Australian Dollars. 5.2 Administrative Areas must adopt the following approach for Material transactions that involve Foreign Exchange Risk: Identify the risk Quantify the transaction/s

3 Report the transaction/s, if Material, to Financial Services Liaise with Financial Services to manage the risk exposure Where an Administrative Area is uncertain of a transaction's Foreign Exchange Risk it must contact Financial Services in order to obtain assistance. Administrative Areas must not seek to arrange their own External Hedges but must arrange them via Financial Services. 5.3 The University will Hedge its Material Foreign Currency transactions by way of a Permitted Instrument with an Appropriate Counterparty. Material Foreign Currency transactions should also be at least Highly Probable in order to be Hedged. Foreign Currency transactions that are not Material will generally be taken at the Spot Rate. 5.4 The University does not undertake speculative positions on movements in Foreign Currency exchange rates. Thus, a Permitted Instrument must only be executed in order to Hedge the Foreign Exchange Risk of an underlying Foreign Currency transaction. 5.5 When a Permitted Instrument is used to Hedge a Foreign Exchange Risk, the University will adopt the hedge accounting provisions of Australian Accounting Standard AASB 139. Audit Committee can effect a change in the accounting treatment adopted without requiring the approval of Council. This Policy will comply with the relevant Australian Accounting Standards and Commonwealth and State Government laws and regulations. 6. OBJECTIVES The University is exposed to Foreign Exchange Risk from some of its operations. Typically these transactions include the Library's subscriptions prepayments, some capital expenditure in Foreign Currency and the proceeds of courses undertaken outside of Australia. Additionally, financing and taxation transactions may incur Foreign Exchange Risk. Within the context of the University as a whole the amounts involved are not significant. However, the Foreign Exchange Risk of Material Foreign Currency transactions can have a pronounced impact upon the Administrative Area affected. Financial Services will seek to reduce Foreign Exchange Risk by working with the Administrative Areas of the University in order to effectively Hedge, where possible, Material Foreign Currency cashflows. This is the objective of the Foreign Exchange Policy & Procedures. 7. PROCEDURES 7.1 Background: Australian Accounting Standard AASB 139 "Financial Instruments: Recognition and Measurement" Australian Accounting Standard AASB 139 "Financial Instruments: recognition and Measurement" specifies that changes in the fair value of Permitted Instruments used for External Hedging should be recognised in the income and expenditure statement unless certain criteria are met. If the criteria are met then changes in the fair value of Permitted Instruments used by the University need not be recognised in the income and expenditure statement until realised. This reduces the volatility of the income and expenditure arising from Foreign Currency exchange rate movements. The Foreign Exchange Policy & Procedures addresses the required criteria. The criteria include, for the purpose of Foreign Currency Hedging, that the cashflows must be at least Highly Probable and that an adequate level of documentation is maintained by the University to justify its allocation of External Hedges against forecast cashflows. 7.2 The Approach to Foreign Exchange Risk The following approach is to be adopted by Administrative Areas and Financial Services (Refer 5.2): Identify the risk Quantify the transaction/s Report the transaction/s, if Material, to Financial Services Liaise with Financial Services to manage the risk exposure

4 It should be noted that Financial Services can be contacted at any stage of the above process in order to provide any assistance required Identification Where an Administrative Area considers that it may face a Foreign Exchange Risk, it should seek to identify the risk. Typically this will be apparent from an unavoidable requirement to transact in a Foreign Currency. For example, there may be a need to purchase equipment where the supplier can stipulate that payment must be made in a Foreign Currency. Another example would be where the University agrees to perform research or training for an overseas funding body and the funds must be received in a Foreign Currency. A Foreign Exchange Risk may present itself in the form of a Contracted or a Highly Probable Foreign Currency cashflow. When the Administrative Area becomes aware of the existence or either of these, it should act as a trigger to enact the procedures given below Quantification The Administrative Area should quantify the Foreign Currency transaction/s in the equivalent of AUD using the Spot Rate in order to establish if it is Material. Where it would take only a small movement in the Spot Rate to make a transaction Material then it should be treated as such, as a matter of prudence Reporting Where the transaction is Material it should be reported to the Senior Accountant, Financial Analysis and Treasury. The information reported should include: The amount and Foreign Currency of the exposure The exact timing of the exposure or the best estimate Whether it is Contracted or Highly Probable The nature of the transaction/s The counterparty to the Foreign Currency transaction/s Managing the Exposure The Senior Accountant, Financial Analysis and Treasury will discuss with the Administrative Area the nature of the Foreign Exchange Risk. The Senior Accountant, Financial Analysis and Treasury will recommend a method of managing the exposure to the Director, Financial Accounting, the Chief Financial Officer and the Administrative Area and act upon the decision that is reached. The final decision will rest with the Chief Financial Officer, subject to the approval of Finance Committee if it is required. 7.3 Hedging Material Transactions Hedging Contracted and Highly Probable Cashflows A Foreign Currency contract may specify the exact date at which a Foreign Currency transaction may occur. Thus it may be able to know with certainty when the Foreign Currency transaction will be executed however, it is more often the case that whilst the amount of the Contracted Foreign Currency transaction/s may be known, the timing is not finalised. For example, a signed contract for capital expenditure may exist but the exact date of the payment of the invoice may be uncertain. Additionally, the amount of Foreign Currency involved in a Contracted Foreign Currency transaction may not be known with certainty. For example, the Foreign Currency proceeds of an offshore course may depend upon uncertain final student enrolment numbers. Likewise, in the case of a Highly Probable Foreign Currency cashflow, whilst there may be no signed contract in existence, it is known with certainty that the Foreign Currency transaction/s will occur. For example, the subscriptions prepayments of the Library.

5 Thus for the purpose of Hedging, Contracted and Highly Probable Foreign Currency cashflows will be treated in the same way and the absence of a contract is no barrier to Hedging. The criteria for Hedging are that the anticipated transaction is at least Highly Probable and Material Taxation and Financing Cashflows Where Financial Services is aware of the timing and magnitude of such Material receipts or payments it should arrange an External Hedge. One exception to this is where the University has decided to invest in foreign operations (for example by purchasing Foreign Currency denominated equity in an offshore partner) when there may be a variety of ways to Hedge the transaction. The Chief Financial Officer in consultation with Finance Committee will determine any other exceptions and the most appropriate way of managing the Foreign Exchange Risk of such transactions Time Horizon for Hedging Under normal circumstances it is envisaged that Hedging will not extend beyond a twelve-month time horizon from the current date. The reason for this is that the uncertainty of future cashflows usually increases, the further forward in time they are. Thus, setting a time horizon of twelve months should reduce the risk of the University having to honour External Hedges where the cashflow does not occur as envisaged. However there may be occasions where it is beneficial for the University to enter into External Hedges that have a time horizon greater than twelve months. For example, where there exists a Contracted Foreign Currency cashflow with certain payment dates. In this case the whole contract should be hedged for each relevant date in order to manage the Foreign Exchange Risk. It should be noted that for External Hedges with a time horizon of greater than twelve months, the current credit rating of the Appropriate Counterparty is required to be higher than Investment Grade A using Standard and Poor's long term credit ratings. Thus, when an External Hedge of greater than twelve months has been executed, the Chief Financial Officer will report it to the Finance Committee The Most Appropriate Method of Hedging and Permitted Instruments The most appropriate method of Hedging a Foreign Currency transaction will vary with the nature of the transaction/s. For example, where a Foreign Currency receipt is known to occur within a calendar month it may be most appropriate to execute a Forward Rate Contract to sell the Foreign Currency on the last working day of the month. Alternatively, where a Foreign Currency payment is to be made at some time over a three-month period, the most appropriate method to Hedge the transaction may be to purchase a Foreign Currency Option Contract that covers the whole period. Thus, the most appropriate method of Hedging will vary but all Hedging must be undertaken using only Permitted Instruments. The decision regarding which is the most appropriate method rests with the Chief Financial Officer Appropriate Counterparties and Counterparty Limits for Permitted Instruments Where a Permitted Instrument is used for Hedging a Foreign Exchange Risk, it must be executed with an Appropriate Counterparty. In order to mitigate the risk of default, the University shall not have more than the equivalent of AUD 5 million of Permitted Instruments with any one Appropriate Counterparty without express approval from Finance Committee. Additionally the University shall not have more than the equivalent of AUD 10 million of Permitted Instruments at any one time unless approved by the Finance Committee Employees Permitted to Execute External Hedges Under normal circumstances, the Chief Financial Officer, the Director, Financial Accounting or the Senior Accountant, Financial Analysis and Treasury, may singly execute External Hedges. Each

6 External Hedge will be approved and reviewed by the Chief Financial Officer before execution of the External Hedge. However, to provide some operational flexibility, all employees who are authorised signatories to the University's operating bank account are permitted to execute an External Hedge on behalf of the University if specifically instructed on each and every occasion to do so by the Chief Financial Officer. The execution of External Hedges should be undertaken in accordance with the Schedule of Delegations Competitive Quoting for External Hedges When an External Hedge is to be entered into, the employee permitted to execute the External Hedge will seek a quote from at least two different Appropriate Counterparties. The most competitive quote should be selected, subject to available credit limits Hedging Rates Where possible, Financial Services will pass on the rate achieved by the External Hedge to the Administrative Area. There may be instances when an invoice is required to be recorded in the general ledger at a rate that is different to the rate of the External Hedge, due to the requirements of Australian GAAP. In such cases Financial Services will absorb any resulting exchange rate gains or losses in order that the Administrative Area's Hedging achieves its objectives Hedging Costs & Re-Hedging of Expired External Hedges Where the Hedging of an expected Foreign Currency cashflow results in an upfront cost, such as the payment to purchase a Foreign Currency Option Contract, this will be charged to the Administrative Area. Similarly, where the Administrative Area has overestimated the size of the External Hedge required for the transaction/s, any consequent gains or losses of honouring the External Hedge will be charged to the Administrative Area. For example, Foreign Currency in excess of the amount required to make a payment may be required to be purchased, based on the estimates of the Administrative Area. If this is the case, then the excess Foreign Currency will be sold back to the Appropriate Counterparty and any resulting gain or loss will be credited or charged (respectively) to the Administrative Area. When the Administrative Area has underestimated the size of a required External Hedge, a Spot Trade will be executed to cover the shortfall. The cost of meeting the shortfall will be charged to the Administrative Area. Where an External Hedge has to be honoured even though the expected cashflow has not occurred, the resulting gain or loss will be credited or charged (respectively) to the Administrative Area. Where a Foreign Exchange Risk remains due to the original estimate of the cashflow timing being incorrect and the External Hedge has expired, the Administrative Area must seek to have a new External Hedge executed through Financial Services Compliance with Australian Accounting Standard AASB 139 "Financial Instruments: Recognition and Measurement" It is the responsibility of the Senior Accountant, Financial Analysis and Treasury to ensure that the University's Foreign Currency Hedging satisfies the criteria of AASB 139 in order to qualify for hedge accounting. To this end the Senior Accountant, Financial Analysis and Treasury will review the Hedging effectiveness of the University's External Hedges on a quarterly basis to ensure that they are in accordance with AASB 139. Where the provisions of AASB 139 are not satisfied, the Senior Accountant, Financial Analysis and Treasury will report this with immediate effect to the Chief Financial Officer in order that remedial action can be taken.

7 Additionally, the Senior Accountant, Financial Analysis and Treasury will maintain the documentation required by AASB 139 to match the underlying transaction/s to the External Hedges. Furthermore in order to comply with AASB 139, it is hereby stated that the time value of any Permitted Instrument is excluded from assessing the Hedging effectiveness and the assessment includes all of the gain or loss on a Hedging instrument. 7.4 Non-Material Transactions, Foreign Currency Providers and Float Levels Non-Material Transactions The incidental day-to-day Foreign Currency payments and receipts of the University will not be Hedged unless they satisfy the definition of Material given above. For example, Foreign Currency receipts such as the USD income received for miscellaneous student fees will be sold as Spot Trades The Use of Foreign Currency Providers Where there are sundry receipts and payments in Foreign Currencies the services of a Foreign Currency Provider or other Appropriate Counterparty may be engaged to assist with the necessary processing and Spot Trades Float Levels The overall Float Levels held in Foreign Currency denominated bank accounts should be kept to as low an amount as it is prudent to hold. It is desirable to keep Float Levels to a low amount since, for accounting purposes, the month end translation of such items is at the Closing Rate, adding to volatility of the income and expenditure statement. Consequently, under normal circumstances, the Float Level should be below the equivalent of AUD 200,000 except where funds are being held for the purpose of the Hedging of specific Material Foreign Currency transaction/s. 7.5 Reporting The Administrative Areas Administrative Areas will: Report to the Senior Accountant, Financial Analysis and Treasury any Material Foreign Exchange Risk that they become aware of in accordance with the Foreign Exchange Policy & Procedures. Report to the Senior Accountant, Financial Analysis and Treasury any changes in the amount and timing of any Hedged transaction/s as soon as they become aware of them. Report to the Senior Accountant, Financial Analysis and Treasury when the payments for or receipts arising from Hedged transactions are about to occur The Financial Services - Senior Accountant, Treasury The Financial Services - Senior Accountant, Treasury will: Report to the Director, Financial Accounting, the Chief Financial Officer and the Administrative Area on what he or she considers to be the most appropriate method to Hedge a reported Material Foreign Exchange Risk. Report the rate achieved on External Hedges to the Administrative Areas. Inform the Administrative Areas when funds have been received into the University's bank account(s). Produce a quarterly report monitoring the Hedging effectiveness in order to ascertain that the University's Foreign Currency Hedging meets the criteria of AASB 139 for the purposes of hedge accounting and provide this to the Chief Financial Officer. Produce a quarterly report of Permitted Instruments executed to Hedge Material Foreign Exchange Risk to Finance Committee.

8 7.6 Responsibilities Administrative Areas Administrative Areas are responsible for: Informing the Financial Services - Senior Accountant, Financial Analysis and Treasury of all Material Foreign Currency transactions by using the Following approach to Foreign Exchange Risk: o Identify the risk o Quantify the transaction/s o Report the transaction/s, if Material, to Financial Services o Liaise with Financial Services to manage the risk exposure Approaching the Financial Services - Senior Accountant, Financial Analysis and Treasury when the Administrative Area requires assistance with its Foreign Exchange Risk. Informing the Financial Services - Senior Accountant, Financial Analysis and Treasury when Hedged Foreign Currency payments or receipts are about to occur. Informing the Financial Services - Senior Accountant, Financial Analysis and Treasury of the most appropriate general ledger cost centre and line items for the posting of Foreign Currency transactions, when requested. Advising the Senior Accountant, Financial Analysis and Treasury of Material Foreign Currency cashflows arising from the University's financing arrangements with offshore partners The Senior Accountant, Financial Analysis and Treasury The Financial Services - Senior Accountant, Financial Analysis and Treasury is responsible for: Advising the Administrative Areas of any required indicative exchange rates. Executing decisions reached on External Hedges using Permitted Instruments with Appropriate Counterparties. Informing Administrative Areas of the rates achieved on External Hedges. Advising Administrative Areas of non-material Foreign Currency receipts and the applicable Spot Rate. Issuing Confirmations, after review by the Chief Financial Officer, to be sent to Appropriate Counterparties for External Hedges. Preparing the accounting journals for External Hedges and ensuring that they are properly authorised and entered into the general ledger. Monitoring the counterparty limits for External Hedges. Monitoring on a quarterly basis the Hedging effectiveness to ensure that the criteria of AASB 139 are being met and reporting this to the Chief Financial Officer. Ensuring all External Hedges are settled as they fall due. Monitoring and managing the University's Foreign Currency bank accounts The Chief Financial Officer The Chief Financial Officer is responsible for: Approving the method and execution of External Hedging recommended by the Senior Accountant, Financial Analysis and Treasury for managing Material Foreign Exchange Risks. Reviewing the reports of the Senior Accountant, Financial Analysis and Treasury regarding the effectiveness of External Hedges for compliance with AASB 139 and approving any remedial action. Determining the most appropriate course of action with Finance Committee for External Hedging and the choice of Permitted Instruments when investing in foreign operations or other exceptions to this Policy and Procedures. Reporting External Hedges with a time horizon of greater than twelve months to Finance Committee The Director, Financial Accounting The Director, Financial Accounting is responsible for:

9 Reviewing the method of External Hedging recommended by the Senior Accountant, Financial Analysis and Treasury for managing Material Foreign Exchange Risks. Advising the Senior Accountant, Financial Analysis and Treasury of Material Foreign Currency cashflows arising from the University's taxation affairs Finance Committee Finance Committee is responsible for: Recommending changes to the Foreign Currency: Policy and Procedures and approving changes to these Procedures. Approving new types of Permitted Instruments for use. Approving the Counterparty Credit Limits for External Hedges using Permitted Instruments in total and through any one Appropriate Counterparty. Determining the most appropriate course of action with the Chief Financial Officer for External Hedging and the choice of Permitted Instruments when investing in foreign operations or other exceptions to this Policy and Procedures. Monitoring Hedging activity and reporting to Council as considered appropriate. RESPONSIBILITIES Policy Manager Contact Chief Financial Officer Senior Accountant, Financial Analysis and Treasury Tel: Fax: Approval Authority Council Review Date Aug 1, 2009 REVISION HISTORY Revision Ref. No. Approved/ Amended/ Rescinded Date Committee/Board Resolution Number Document Reference New Approved 23/08/2006 Council C 118/06 Document No 00874/06 Administratively Updated 20/03/2008 Director, Legal and Compliance Services Amended 10/12/2008 Council C 189/08 Administratively Updated 26/03/2014 Director, Legal and Compliance Services Reformatted and Amended to Reflect Organisational Chart Attachment B to Confidential Document No 01286/08 (Amended Responsibilities to Reflect Organisational Chart) Updated Policy Manager