Financial Instrument Analysis Report - Woolworths Case Study

This report provides a detailed analysis of Woolworths' financial instruments. It examines the company's on-balance sheet instruments, including short-term loans, non-current borrowings, and cross-currency swaps, and how they are used. The analysis also covers the company's hedging strategies, including the use of cross-currency swaps, interest rate swaps, and foreign exchange contracts to manage risks associated with foreign exchange rates and interest rates. Furthermore, the report delves into Woolworths' off-balance sheet activities, specifically its operating lease agreements. The analysis highlights the impact of AASB 16 Leases on the company's financial statements and the recognition of right-of-use assets and lease liabilities. The report also references the 2018 Balance Sheet and Income Statements of Woolworths, attached as an exhibit, and includes a reference list of relevant sources.

Running head: FINANCIAL INSTRUMENT ANALYSIS
Financial Instrument Analysis
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Author Note

2FINANCIAL INSTRUMENT ANALYSIS
Table of Contents
Answer to Question A................................................................................................................3
Answer to Question B................................................................................................................3
Appendix....................................................................................................................................5
Reference list..............................................................................................................................8

3FINANCIAL INSTRUMENT ANALYSIS
Answer to Question A
Woolworths uses a variety of financial instruments in its business. The maturity of its
loan was due in 2020. It involves short term loans of money market and bank loans which are
unsecured and constitute the current borrowings. It also includes non-current borrowings like
finance leases and has borrowing cost that is unamortized (Ramirez 2015). It has cross
currency swaps that include syndicated bank loan. The improvement of the stock loss helped
to improve the gross profit of the company. The company made higher investments and
employed more funds. The hedging policy does not apply to the individuals. The differences
in foreign exchanges were used to hedge the risks. It has a hedging reserve which comprises
the accumulated net change in the cash flow instrument of hedging of the incomplete
transactions. The hedging instruments have also been used to hedge the exposures of foreign
exchange rate and interest rates. The outstanding forward exchange contracts have hedged
average exchange rates (Conlon, Cotter and Gençay 2016). The interest rate swaps are used
to hedge the weighted average interest rate. The company also maintains a cash flow hedge
reserve which includes interest rate swaps, foreign exchange options and contracts as well as
cross currency interest rate swaps (Fauceglia, Shingal and Wermelinger 2014). The part of
gain or loss that is effective on the financial instrument gets recognized and accumulated
separately in the hedge reserve included with equity. The ineffective section gets designated
and recognized in the consolidated Profit and Loss statement immediately. The profit or loss
that has been removed from the equity relating to the interest rate is recognized under
financing costs.
Answer to Question B
The company also engages itself in Off Balance Sheet instruments. It is committed
towards its operating lease agreements which are non-cancellable and payable in future. It has

4FINANCIAL INSTRUMENT ANALYSIS
classified its leases as per AASB 16 Leases on the basis of its nature and not recognized in its
consolidated financial statements (Joubert, Garvie and Parle 2017). They have a recognition
of Right of Use asset and a related lease liability. The value does not include the low value
and short term leases. It had a huge amount of undiscounted operating lease commitments
which were non-cancellable. The payments of operating lease are identified as expense on
straight lime method. The incentives received on operating lease are recognized initially as
liability and later as expense on straight line basis.

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Appendix

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Reference list
Conlon, T., Cotter, J. and Gençay, R., 2016. Commodity futures hedging, risk aversion and
the hedging horizon. The European Journal of Finance, 22(15), pp.1534-1560.
Fauceglia, D., Shingal, A. and Wermelinger, M., 2014. Natural hedging of exchange rate risk:
the role of imported input prices. Swiss Journal of Economics and Statistics, 150(4), pp.261-
296.
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Ramirez, J., 2015. Accounting for derivatives: Advanced hedging under IFRS 9. John Wiley
& Sons.