Lenovo 2016 Annual Report Download - page 185

183
2015/16 Annual Report Lenovo Group Limited
3 FINANCIAL RISK MANAGEMENT (continued)
(a) Financial risk factors (continued)
(ii) Cash flow interest rate risk
The Group’s interest rate risk mainly arises from short-term and long-term borrowings denominated in
United States dollar. It is the Group’s policy to mitigate interest rate risk through the use of appropriate
interest rate hedging instruments. Generally, the Group manages its cash flow interest rate risk by using
floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting
borrowings from floating rates to fixed rates. Under the interest rate swaps, the Group agrees with other
parties to exchange, at specified intervals (primarily quarterly), the difference between fixed contract
rates and floating-rate interest amounts calculated by reference to the agreed notional amounts.
The Group operates various customer financing programs. The Group is exposed to fluctuation of
interest rates of all the currencies covered by those programs.
(iii) Credit risk
Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, derivative
financial instruments and deposits with banks and financial institutions, as well as credit exposures to
customers, including outstanding receivables and committed transactions.
For banks and other financial institutions, the Group controls its credit risk through monitoring their
credit rating and setting approved counterparty credit limits that are regularly reviewed.
The Group has no significant concentration of customer credit risk. The Group has a credit policy in place
and exposures to these credit risks are monitored on an ongoing basis.
No credit limits were exceeded by any customers during the reporting period, and management does
not expect any significant losses from non-performance by these counterparties.
(iv) Liquidity risk
Cash flow forecasting of the Group is performed by Group Treasury. It monitors rolling forecasts of
the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while
maintaining sufficient headroom on its undrawn committed borrowing facilities (Note 27) at all times
so that the Group does not breach borrowing limits or covenants (where applicable) on any of its
borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant
compliance, compliance with internal balance sheet ratio targets and, if applicable external regulatory or
legal requirements, for example, currency restrictions.
Surplus cash held by the operating entities over and above balances required for working capital
management are transferred to Group Treasury. Group Treasury invests surplus cash in interest bearing
current accounts, time deposits, money market deposits and marketable securities, choosing instruments
with appropriate maturities or sufficient liquidity to provide sufficient headroom as determined by
the above-mentioned forecasts, At the balance sheet date, the Group held money market funds of
US$153,159,000 (2015: US$744,233,000) (Note 24).