Carphone Warehouse 2013 Annual Report Download - page 77

ANNUAL REPORT 2013 CARPHONE WAREHOUSE GROUP PLC 75
BUSINESS REVIEW GOVERNANCE FINANCIAL STATEMENTS
17 FINANCIAL RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS continued
b) FOREIGN EXCHANGE RISK
TRANSLATIONAL RISK
The Group uses forward currency contracts to hedge balance sheet assets and liabilities. Translational currency risk, primarily arising
onfunding of Virgin Mobile France, is hedged using foreign exchange swaps.
The Group’s foreign exchange position is calculated daily and any positions are closed out unless the exposure is immaterial. The translation
risk on converting overseas currency profits or losses is not hedged and such profits or losses are converted into UK Sterling at average
exchange rates throughout the year. This gives the Group a direct exposure to the Euro in respect of Virgin Mobile France. As explained
innote16, while Best Buy Europe reports in UK Sterling, its results were materially affected by the Euro and, in the year ended 31 March
2012, alsotheUS Dollar. Best Buy Europe may hedge aproportion of its non-Sterling earnings to provide certainty of their value.
At 31 March 2013, the total notional principal amount of outstanding currency contracts was £20.5m (2012: £24.3m).
Currency loans and foreign exchange contracts are sensitive to movements in foreign exchange rates. This sensitivity can be analysed
in comparison to year-end rates (assuming all other variables remain constant) where a 10% movement in the UK Sterling/Euro
exchange rate would have no impact on the income statement or equity (2012: no impact). Changes in the value of currency loans would
not be expected to have an impact on the income statement, as they are matched by the value of foreign exchange contracts, assuming
the hedges remain fully effective.
Best Buy Europe’s policies for translational risk are consistent with those of the Group. Virgin Mobile France has limited translational
riskexposures as its operations are based solely in France.
TRANSACTIONAL RISK AND CASH FLOW HEDGES
The Group is exposed to limited cross-border transactional commitments but, where significant, these are hedged at inception using
forward currency contracts. At 31 March 2013 and 31 March 2012 the Group held no material cash flow hedges.
Best Buy Europe’s operations were exposed to foreign currency transactional risks, primarily through the Best Buy Mobile profit share
arrangement and purchases of stock. Best Buy Europe may use foreign exchange contracts to mitigate against foreign currency
fluctuations arising on these transactions.
c) INTEREST RATE RISK
The Group’s interest rate risk arises primarily on cash, cash equivalents and loans to joint ventures, all of which are at floating rates
ofinterest and which therefore expose the Group to cash flow interest rate risk. These floating rates are linked to LIBOR and other
interest rate bases as appropriate to the instrument and currency. Future cash flows arising from these financial instruments depend
on interest periods agreed at the time of rollover. Group policy permits the use of long-term interest rate derivatives in managing the
risks associated with movements in interest rates although the Group holds none of these products at present.
Cash and borrowings, as well as some foreign exchange products, are sensitive to movements in interest rates. This sensitivity
canbeanalysed through calculating the effect on the income statement of a 1% movement in the interest rate in relation to cash,
cashequivalents and loans to joint ventures. This analysis has been prepared on the assumption that the year-end positions prevail
throughout the year, andtherefore may not be representative of fluctuations in levels of deposits and borrowings. A 1% movement
inthe interest rate would result in a£1.2m (2012: £1.0m) movement in profit before taxation.
d) LIQUIDITY RISK
The Group manages its exposure to liquidity risk by regularly reviewing the long-term and short-term cash flow projections for the business
against the resources available to it. Regular reports are made to the Audit Committee assessing the adequacy of these resources and
reports are routinely circulated to senior management showing the Group’s net funds. Headroom is assessed based onhistorical
experience as well as by assessing current business risks, including foreign exchange movements.
e) CREDIT RISK
The Group’s exposure to credit risk is regularly monitored and the Group’s policy updated as appropriate. Deposits and foreign
exchange transactions are spread amongst a number of institutions, all of which have credit ratings appropriate to the Group’s policies
and exposures.
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 Group’s overall strategy remains unchanged from the year
toMarch 2012. The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the
parent, comprising issued capital, reserves and retained earnings. 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.