Vtech 2015 Annual Report Download - page 68

VTech Holdings Limited Annual Report 2015
Notes to the Financial Statements
66
18 Financial Risk Management and Fair Values
Exposure to credit, liquidity, interest rate and currency risks
arises in the normal course of the Group’s business. The Group’s
exposure to these risks and the financial risk management policies
and practices used by the Group to manage these risks are
described below.
(a) Credit risk
Financial assets which potentially subject the Group to credit risk
consist principally of cash, short-term deposits and trade debtors.
The Group’s deposits and cash are placed with major financial
institutions with sound credit ratings. Trade debtors are presented
net of the allowance for doubtful debts. Credit risk with respect
to trade debtors is limited due to the large number of customers
comprising the Group’s customer base and their dispersion across
different industries and geographical areas. Accordingly, the Group
has no significant concentration of credit risk. The Group’s five
largest customers, in aggregate accounted for approximately 31.5%
of the Group’s revenue during the year.
The Group manages these risks by monitoring credit ratings
and limiting the aggregate risk to any individual counterparty.
In addition, credit risk is mitigated by the use of credit
insurance plans.
(b) Currency risk
The Group is exposed to foreign currency risk primarily through
sales and purchases that are denominated in currencies other than
the functional currency of the operations to which they relate. As
the Hong Kong Dollar (“HKD”) is pegged to United States Dollar
(“USD”), the Group does not expect any significant movements in
the HKD/USD exchange rate. The currencies giving rise to foreign
currency risk are primarily denominated in Euro (“EUR”), Pounds
Sterling (“GBP”), Canadian dollars (“CAD”), Japanese Yen (“JPY”),
Australian dollars (“AUD”) and Renminbi (“RMB”).
(i) Exposure to currency risk
The Group enters into forward foreign exchange contracts in
order to manage its exposure to fluctuations in foreign currency
exchange rates on recognised assets and liabilities and hedge
the currency risk in respect of highly probable forecast sales
transactions. Forward foreign exchange contracts are matched
with anticipated future cash flows. As at 31 March 2015, the
notional principal amounts of these outstanding forward foreign
exchange contracts were US$137.0 million (2014: US$120.9 million)
with net positive fair value of US$5.4 million (2014: negative US$1.5
million) recognised as derivative financial instruments.
In addition, the Group uses forward foreign exchange contracts to
hedge the exchange rate fluctuation for the purchase of RMB in
respect of highly probable forecast transactions for the Group’s PRC
operations. Forward foreign exchange contracts are matched with
anticipated future cash flows. As at 31 March 2015, the notional
principal amounts of these outstanding forward foreign exchange
contracts for hedging highly probable forecast transactions were
US$328.7 million (2014: US$294.8 million) with net positive fair
value of US$0.1 million (2014: negative US$2.8 million) recognised
as derivative financial instruments.
The Group does not anticipate any material adverse effect on its
financial position resulting from its involvement in these financial
instruments, nor does it anticipate non-performance by any of
its counterparties.
The Group enters into derivative transactions under International
Swaps and Derivatives Association (ISDA) master agreements
providing offsetting mechanism under certain circumstances.
At 31 March 2015, the Group has not offset any of the financial
instruments as no parties have exercised their rights to offset the
recognised amounts in the financial statements.
(ii) Sensitivity analysis
A sensitivity analysis was performed at 31 March 2015 to measure
the instantaneous change in the Group’s profit after tax and total
equity that would arise if foreign exchange rates to which the
Group has significant exposure at the balance sheet date had
changed at that date, assuming all other risk variables remained
constant. In this respect, it is assumed that the pegged rate
between HKD and USD would be materially unaffected by any
changes in movement in value of the USD against other currencies.
Management estimated that a 5% appreciation/depreciation of
EUR, GBP, CAD, JPY, AUD and RMB against USD would not have
a material effect on the Group’s profit after taxation and equity
attributable to shareholders for the years ended 31 March 2014
and 31 March 2015.
The sensitivity analysis performed represents an aggregation of the
instantaneous effects on each of the Group entities’ profit after tax
and total equity measured in the respective functional currencies.
The sensitivity analysis assumes that the change in foreign
exchange rates had been applied to re-measure those recognised
assets or liabilities held by the Group which expose the Group to
foreign currency risk at the balance sheet date, including inter-
company payables and receivables within the Group which are
denominated in a currency other than the functional currencies
of the lender or the borrower. The analysis excludes differences
that would result from the translation of the financial statements
of foreign operations into the Group’s presentation currency. The
analysis is performed on the same basis for 2014.
(c) Interest rate risk
At 31 March 2014 and 31 March 2015, the Group had no
bank borrowings.
The Group is exposed to interest rate risk through the impact of
interest rates changes on income-earning financial assets. The
following table indicates their effective interest rates at the balance
sheet date and the periods in which they reprice or the maturity
dates, if earlier.
Deposits and Cash
2015 2014
Effective
interest
rate
Within
one year
Effective
interest
rate
Within
one year
US$ million US$ million
Variable rate 0.31% 199.8 0.27% 157.9
Fixed rate 1.90% 94.4 1.16% 165.0
Interest rate sensitivity
At the respective balance sheet dates, if interest rates had been
increased by 25 basis points and all other variables were held
constant, the Group’s profit after tax and total equity would
increase by approximately US$0.4 million and US$0.4 million for
the years ended 31 March 2014 and 31 March 2015, respectively.
This is mainly attributable to the Group’s exposure to interest
rate changes on its variable rate income-earning financial assets
including floating rate deposits and cash.