Vtech 2013 Annual Report Download - page 67

65
VTech Holdings Ltd Annual Report 2013
(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. As at 31 March
2013, the notional principal amounts of these outstanding forward
foreign exchange contracts were US$7.9 million (2012: US$13.9
million) with net positive fair value of US$0.1 million (2012: US$Nil)
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 2013, the
notional principal amounts of the outstanding forward foreign
exchange contracts for hedging highly probable forecast
transactions were US$197.7 million (2012: US$152.0 million) with
net positive fair value of US$2.4 million (2012: positive US$1.4
million) recognised as derivative financial instruments.
All of the forward foreign exchange contracts have maturities of
less than one year after the balance sheet date.
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.
(ii) Sensitivity analysis
A sensitivity analysis was performed at 31 March 2013 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 and AUD 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 2012
and 31 March 2013.
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 2012.
17 Reserves (Continued)
(c) Nature and purpose of reserves
The application of share premium account is governed by the
Companies Act 1981 of Bermuda.
The properties revaluation reserve has been set up and is dealt
with in accordance with the accounting policies adopted for land
and buildings in note (H).
The exchange reserve mainly comprises exchange differences
arising from the translation of the financial statements of foreign
operations.
The capital reserve comprises the fair value of the actual or
estimated number of unexercised share options granted to
employees of the company recognised in accordance with the
accounting policy adopted for share-based payments in note (S).
The hedging reserve comprises the effective portion of the
cumulative net change in fair value of hedging instruments used in
cash flow hedges pending subsequent recognition of the hedged
cash flows.
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 32.8%
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”).