Vtech 2002 Annual Report Download - page 61

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Annual Report 2002 59
Notes to the Financial Statements
21. RESERVES (continued)
Group Company
2002 2001 2002 2001
Note US$ million US$ million US$ million US$ million
Exchange reserve
Brought forward (6.4) (2.5) (1.2) (1.2)
Exchange translation differences (0.2) (3.9) ——
Carried forward (6.6) (6.4) (1.2) (1.2)
Hedging reserve
Brought forward
— as previously reported ————
— effect of adopting IAS 39 0.3 ———
— as restated 0.3 ———
Transfer to income statement (0.3) ———
Fair value losses arising during the year (0.4) ———
Carried forward (0.4) ———
Reserves of the company available for distribution to shareholders amounted to US$36.6 million (2001: US$35.3 million).
22. FINANCIAL INSTRUMENTS
The Group enters into forward foreign exchange contracts and interest rate swaps to hedge certain exposures on fluctuations on foreign
currency exchange rates and interest rate respectively. The Group does not use derivative financial instruments for speculative purposes.
Credit risk
Financial assets which potentially subject the Group to credit risk consist principally of cash, short-term deposits and trade receivables. The
Group’s cash equivalents and short-term deposits are placed with major financial institutions. Trade receivables are presented net of the
allowance for doubtful receivables. Credit risk with respect to trade receivables 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. In addition, credit risks are mitigated by the use of insurance plans.
The Group manages these risks by monitoring credit ratings and limiting the aggregate risk to any individual counterparty.
Foreign exchange risk
The Group enters into foreign exchange contracts in order to manage its exposure to fluctuations in foreign currency exchange rates on
specific transactions. Foreign exchange contracts are matched with anticipated future cash flows in foreign currencies, primarily from sales.
Interest rate risk
The Group’s income and operating cash flows are affected by the change in market interest rates in relation to its interest-bearing loans. The
Group uses interest rate swaps as cash flow hedges of future interest payments to convert certain borrowings from floating rates to fixed
rates.
Fair values
The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign
exchange contracts is determined using forward exchange market rates at the balance sheet date.
Derivative financial instruments
Prior to 1st April 2001, the Group did not recognize in its financial statements the change in fair value of derivative financial instruments. On
the adoption of IAS 39 at 1st April 2001, forward foreign exchange contracts and interest rate swaps contracts were designated as cash flow
hedges and remeasured to fair values.