Carphone Warehouse 2016 Annual Report Download - page 138

Notes to the Group financial statements
136
26 Financial risk management and derivative financial instruments continued
e) Credit risk
Credit risk is the risk of financial loss to the Group if a counterparty fails to meet its contractual obligations, and arises principally
from the Group’s receivables from consumers. The Group’s exposure to credit risk is regularly monitored and the Group’s policy
is updated as appropriate.
The majority of the Group’s trade receivables are balances due from MNOs, which are generally major multi-national enterprises
with whom the Group has well-established relationships and are consequently not considered to add significantly to the Group’s
credit risk exposure. In addition credit risk is also inherently associated with the MNO end consumers. Details of the sensitivity
analysis of a change in credit risk associated with the MNO consumer is detailed below (consumer default rates). Exposure to
credit risk associated with the MNO consumer is managed through extensive consumer credit checking process prior to
connection with the network. The large volume of MNO consumers reduces the Group’s exposure to concentration of credit risk.
The Group's trade receivables also include balances due from equipment manufacturers, dealers and Connected World Services
consumers, business to business consumers and consumer credit receivables. Where it is considered appropriate, the Group
obtains credit insurance on accounts receivable. Provision is made for any receivables that are considered to be irrecoverable.
Details of trade receivables which are past due but not impaired are provided in note 14.
The credit risks on cash and cash equivalents and derivative financial instruments are closely monitored and credit ratings are
used in determining maximum counterparty credit risk.
The Group’s funding is reliant on its £800 million bank facilities, which are provided by nine banks; these institutions are
considered to be adequately capitalised to continue to meet their obligations under the facility.
The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the
Group's maximum exposure to credit risk.
f) Capital risk
The Group manages its capital to ensure that entities within the Group will be able to continue as going concerns, whilst
maximising the return to shareholders through a suitable mix of debt and equity. The capital structure of the Group consists of
cash and cash equivalents, loans and other borrowings and equity attributable to equity holders of the Company, comprising
issued capital, reserves and accumulated profits. Except in relation to minimum capital requirements in its insurance business,
the Group is not subject to any externally imposed capital requirements. The Group monitors its capital structure on an ongoing
basis, including assessing the risks associated with each class of capital.
g) Derivatives
Derivative financial instruments comprise forward foreign exchange contracts, foreign exchange swaps and interest rate swaps.
The Group has designated financial instruments under IAS 39 as follows:
Cash flow hedges
At 30 April 2016 the Group had forward and swap foreign exchange contracts in place with a notional value of £1,909 million
(2015: £1,487 million) and a fair value of £17 million (2014/15: £6 million) that were designated and effective as cash flow hedges.
These contracts are expected to cover exposures ranging from one month to one year. The fair value of derivative foreign
exchange contracts and foreign exchange swaps not designated as cash flow hedges was £6 million (2014/15: £nil).
Interest rate swaps
The Group held interest rate swaps with a notional value of £255 million (2015: £280 million) and a fair value of £1 million
(2014/15: £nil) whereby the Group receives a floating rate of interest based on LIBOR and pays a fixed interest rate. This contract
matures in April 2017.
00_DC 2016 Annual Report.pdf 136 11/07/2016 18:34