Annual Report 2016 - page 144

New World Development Company Limited
130
Financial Section
4 Financial Risk Management and Fair Value Estimation
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, interest rate risk
and price risk), credit risk and liquidity risk.
The Group has centralised treasury function for all of its subsidiaries except for listed subsidiaries which arrange their
financial and treasury affairs on a stand-alone basis and in a manner consistent with the overall policies of the Group.
(a) Market risk
(i)
Foreign exchange risk
The Group’s operations is mainly in Hong Kong and Mainland China. Entities within the Group are exposed to
foreign exchange risk from future commercial transactions and monetary assets and liabilities that are
denominated in a currency that is not the entity’s functional currency.
The Group currently does not have a foreign currency hedging policy. It manages its foreign currency risk by
closely monitoring the movement of the foreign currency rates and will consider entering into forward foreign
exchange contracts to reduce the exposure should the need arises.
At 30 June 2016, the Group’s entities with functional currency of Hong Kong dollar had aggregate United States
dollar net monetary liabilities of HK$25,301.7 million (2015: HK$7,428.9 million). Under the Linked Exchange Rate
System in Hong Kong, Hong Kong dollar is pegged to the United States dollar, management therefore considers
that there are no significant foreign exchange risk with respect to the United States dollar.
At 30 June 2016, the Group’s entities with functional currency of Hong Kong dollar had aggregate Renminbi net
monetary assets of HK$1,841.3 million (2015: HK$8,783.6 million). If Hong Kong dollar had strengthened/
weakened by 5% (2015: 5%) against Renminbi with all other variables unchanged, the Group’s profit before
taxation would have been HK$92.1 million (2015: HK$439.2 million) lower/higher.
At 30 June 2016, the Group’s entities with functional currency of Renminbi had aggregate United States dollar
net monetary assets of HK$743.1 million (2015: net monetary liabilities of HK$6,670.9 million). If Renminbi had
strengthened/weakened by 5% (2015: 5%) against United States dollar with all other variables unchanged, the
Group’s profit before taxation would have been HK$37.2 million lower/higher (2015: HK$333.5 million higher/
lower).
At 30 June 2016, the Group’s entities with functional currency of Renminbi had aggregate Hong Kong dollar net
monetary liabilities of HK$391.3 million (2015: HK$12,859.8 million). If Renminbi had strengthened/weakened by
5% (2015: 5%) against Hong Kong dollar with all other variables unchanged, the Group’s profit before taxation
would have been HK$19.6 million (2015: HK$643.0 million) higher/lower.
This sensitivity analysis ignores any offsetting foreign exchange factors and has been determined assuming that
the change in foreign exchange rates had occurred at the end of the reporting period. The stated change
represents management’s assessment of reasonably possible changes in foreign exchange rates over the
period from the end of the reporting period until the end of next reporting period. There are no other significant
monetary balances held by group companies at 30 June 2016 and 2015 that are denominated in a non-functional
currency. Currency risks as defined by HKFRS 7 arise on account of monetary assets and liabilities being
denominated in a currency that is not the functional currency, differences resulting from the translation of
financial statements into the Group’s presentation currency are not taken into consideration.
(ii) Interest rate risk
The Group is exposed to interest rate risk through the impact of rate changes on interest bearing assets and
liabilities. Cash flow interest rate risk is the risk that changes in market interest rates will impact cash flows
arising from variable rate financial instruments. The Group’s interest bearing assets mainly include deposits at
bank and amounts due from joint ventures and associated companies. The Group’s floating rate borrowings will
be affected by fluctuation of prevailing market interest rates and will expose the Group to cash flow interest
rate risk. The Group’s borrowings issued at fixed rates exposed the Group to fair value interest rate risk.
To mitigate the risk, the Group has maintained fixed and floating rate debts. To match with underlying risk faced
by the Group, the level of fixed rate debt for the Group is decided after taking into consideration the potential
impact of higher interest rates on profit or loss, interest cover and the cash flow cycles of the Group’s
businesses and investments.
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