Page 211 - Annual Report 2020

22 Financial risk management continued
Primary responsibility for the identification and control of financial Transactional exposure in respect of non-functional currency
risks, including authorising and monitoring the use of financial expenditure and revenues Strategic Report
instruments for the above activities and stipulating policy thereon, Certain operating and capital expenditure is incurred in currencies
rests with the Financial Risk Management Committee under authority other than an operation’s functional currency. To a lesser extent,
delegated by the Chief Executive Officer. certain sales revenue is earned in currencies other than the functional
Interest rate risk currency of operations and certain exchange control restrictions
may require that funds be maintained in currencies other than the
The Group is exposed to interest rate risk on its outstanding functional currency of the operation. These currency risks are
borrowings and short-term cash deposits from the possibility that managed as part of the portfolio risk management strategy. The
changes in interest rates will affect future cash flows or the fair Group may enter into forward exchange contracts when required
value of fixed interest rate financial instruments. Interest rate risk under this strategy.
is managed as part of the portfolio risk management strategy.
The majority of the Group’s debt is issued at fixed interest rates. Commodity price risk
The Group has entered into interest rate swaps and cross currency The risk associated with commodity prices is managed as part of the Governance at BHP
interest rate swaps to convert most of its fixed interest rate exposure portfolio risk management strategy. Substantially all of the Group’s
to floating US dollar interest rate exposure. As at 30 June 2020, commodity production is sold on market-based index pricing terms,
87 per cent of the Group’s borrowings were exposed to floating with derivatives used from time to time to achieve a specific outcome.
interest rates inclusive of the effect of swaps (2019: 87 per cent). Financial instruments with commodity price risk comprise forward
The fair value of interest rate swaps and cross currency interest rate commodity and other derivative contracts with a net assets fair value
swaps in hedge relationships used to hedge both interest rate and of US$159 million (2019: US$199 million). Significant commodity price
foreign currency risks are shown in the valuation hierarchy of this note. risk instruments within other derivative balances include derivatives
embedded in physical commodity purchase and sales contracts
The Group has early adopted amendments to IFRS 9 ‘Financial of gas in Trinidad and Tobago with a net assets fair value of
Instruments’ and IFRS 7 ‘Financial Instruments: Disclosures’ in relation US$180 million (2019: US$202 million). These are included within
to Interest Rate Benchmark Reform. There is no impact on the Group’s other derivatives and fair value measurement related to these
hedge accounting as a result of adopting the amendments and for resulted in an expense of US$22 million (2019: expense of Remuneration Report
further information refer to note 38 ‘New and amended accounting US$14 million).
standards and interpretations’. The potential effect on these derivatives’ fair values of using
Based on the net debt position as at 30 June 2020, taking into reasonably possible alternative assumptions in these models, based
account interest rate swaps and cross currency interest rate swaps, on a change in the most significant input, such as commodity prices,
it is estimated that a one percentage point increase in the US LIBOR by 10 per cent with all other factors held constant (including the
interest rate will decrease the Group’s equity and profit after taxation pricing on underlying physical exposures), would increase or
by US$47 million (2019: decrease of US$39 million). This assumes decrease profit after taxation by US$8 million (2019: US$55 million).
the change in interest rates is effective from the beginning of the
financial year and the fixed/floating mix and balances are constant Provisionally priced commodity sales and purchases contracts
over the year. Provisionally priced sales or purchases volumes are those for which Directors’ Report
price finalisation, referenced to the relevant index, is outstanding at
Currency risk the reporting date. Provisional pricing mechanisms within these sales
The US dollar is the predominant functional currency within the and purchases arrangements have the character of a commodity
Group and as a result, currency exposures arise from transactions derivative. Trade receivables or payables under these contracts are
and balances in currencies other than the US dollar. The Group’s carried at fair value through profit and loss using a method categorised
potential currency exposures comprise: as Level 2 based on forecast selling prices in the quotation period.
• translational exposure in respect of non-functional currency The Group’s exposure at 30 June 2020 to the impact of movements
monetary items; in commodity prices upon provisionally invoiced sales and purchases
• transactional exposure in respect of non-functional currency volumes was predominately around copper. 5
expenditure and revenues. The Group had 301 thousand tonnes of copper exposure as at
The Group’s foreign currency risk is managed as part of the portfolio 30 June 2020 (2019: 277 thousand tonnes) that was provisionally
risk management strategy. priced. The final price of these sales and purchases volumes will
be determined during the first half of FY2021. A 10 per cent change
Translational exposure in respect of non-functional currency in the price of copper realised on the provisionally priced sales, with Financial Statements
monetary items all other factors held constant, would increase or decrease profit
Monetary items, including financial assets and liabilities, denominated after taxation by US$134 million (2019: US$114 million).
in currencies other than the functional currency of an operation
are periodically restated to US dollar equivalents and the associated The relationship between commodity prices and foreign currencies
gain or loss is taken to the income statement. The exception is is complex and movements in foreign exchange rates can impact
foreign exchange gains or losses on foreign currency denominated commodity prices.
provisions for closure and rehabilitation at operating sites, which Liquidity risk
are capitalised in property, plant and equipment. Refer to note 19 ‘Net debt’ for details on the Group’s liquidity risk.
The Group has entered into cross currency interest rate swaps and Credit risk Additional information
foreign exchange forwards to convert its significant foreign currency
exposures in respect of monetary items into US dollars. Fluctuations Credit risk is the risk that a counterparty will not meet its obligations
in foreign exchange rates are therefore not expected to have under a financial instrument or customer contract, leading to a
a significant impact on equity and profit after tax. financial loss. The Group is exposed to credit risk from its operating
activities (primarily from customer receivables) and from its financing
The principal non-functional currencies to which the Group is activities, including deposits with banks and financial institutions,
exposed are the Australian dollar, the Euro, the Pound sterling and the other short-term investments, interest rate and currency derivative
Chilean peso; however, 80 per cent (2019: 82 per cent) of the Group’s contracts and other financial instruments.
net financial liabilities are denominated in US dollars. Based on
the Group’s net financial assets and liabilities as at 30 June 2020, Refer to note 8 ‘Trade and other receivables’ and note 19 ‘Net debt’
a weakening of the US dollar against these currencies (one cent for details on the Group credit risk.
strengthening in Australian dollar, one cent strengthening in Euro, Shareholder information
one penny strengthening in Pound sterling and 10 pesos strengthening
in Chilean peso), with all other variables held constant, would
decrease the Group’s equity and profit after taxation by US$12 million
(2019: decrease of US$12 million).

BHP Annual Report 2020 209