South African Local Government Association
Schedule 3A public entity i. t. o. the Public Finance Management Act, 1999 and recognised i. t. o. the Organised Local Government Act, 1997
Annual Financial Statements for the year ended 31 March 2017
Notes to the Annual Financial Statements
Figures in Rand 34. Risk management( continued)
Based on the activities of SALGA, the only area affected by interest rate risk is finance leases and investment income earned on call deposits and other bank balances.
At 31 March 2017, if interest rates at that date had been 200 basis points lower with all other variables held constant, surplus for the year would have been R368 447( 2016: R341 018) lower arising mainly as a result of lower interest earned on call deposits and bank balances.
If interest rates had been 200 basis points higher, with all other variables held constant, surplus would have been R368 447( 2016: R341 018) higher, arising mainly as a result of higher interest expense on variable payable and receivables.
The sensitivity is higher in 2017 than in 2016 because of an increase in average cash and cash equivalents held during the year.
Cash flow interest rate risk
SALGA’ s exposure to this type of risk arises when the entity has a financial instrument with a floating interest rate. The entity is seldom exposed to this type of risk. When the need arises management employs conservative approaches with a limited risk exposure such as call accounts or limit the risk completely by employing fixed deposits. The following credit facilities are available, which are payable 30 days from statement date:
• Lodge cards |
R 15 000 000 |
• Office equipment rentals |
R 2 000 000 |
• Fleet cards |
R 50 000 |
Fair value interest rate risk
SALGA’ s exposure to this type of risk is slightly higher than the cash flow interest rate risk, primarily due to the conservative investment philosophy. Ordinarily fixed deposits expose the entity to this type of risk. The entity manages this risk by keeping fixed investments on a shorter-term to mitigate the impact that this type of risk might have on the organisation.
Foreign exchange risk
SALGA does not hedge foreign exchange fluctuations.
SALGA is seldom exposed to this type of risk. Whenever the risk arises it is normally on the incurrence of per diem for international travel. The organisation’ s policy on international travel allows for payment of USD 215 per day. As the allowance is denominated in foreign currency, SALGA is exposed to currency fluctuations on payment based on the ruling spot rate. Furthermore, an infrequent incurrence of a foreign currency denominated expenditure relating to Microsoft product suite licences, the organisation is also exposed to this risk as it settles these expenditures at the ruling spot rate on payment date.
Due to the infrequent nature and magnitude of the expenditure management does not employ any hedging mechanisms against this risk.
241 SALGA ANNUAL REPORT 2016 / 17