AVESCOGROUPPLC ANNUAL REPORT 2009 37
www.avesco.com
dollar and the Euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign
operations. Management has set up policies to manage foreign exchange risk.
The Group has investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the
net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies.
In general the Group does not hedge the foreign currency risk arising from sales by an operation denominated in a currency other than its functional
currency. In the majority of cases, substantial deposits on such sales are received at the time of the order and the remaining balances are, to a large
extent, matched by same currency costs. The exceptions to this policy are generally related to the purchase of property, plant and equipment or other
large one-off transactions where the currency risk is usually hedged.
The following table details the Group’s sensitivity to a change in sterling against the respective foreign currencies. The sensitivities below represent
management’s assessment of the possible changes in foreign exchange rates. The sensitivity analysis of the Group’s exposure to foreign currency risk at
the reporting date has been determined based on the assumption that the change is effective throughout the financial year. The analysis assumes that
all other variables, including interest rates, remain constant. A positive number indicates an increase in profit after taxation and equity where sterling
weakens against the respective currency. A strengthening of sterling would have the equal but opposite effect on the basis that all other variables
remain constant.
Income and equity sensitivity
2009 2008
Sensitivity £000s £000s
US Dollars 10% (142) 37
Euro 10% (269) (95)
The exposure to movements in exchange rates arises due to outstanding non functional currency receivables and payables at the year end.
(ii) Cash flow and fair value interest rate risk
The Group has interest bearing assets and liabilities. Interest bearing assets relate predominantly to cash held at bank. Interest bearing liabilities relate
to the Group’s overdraft facilities and loan facility with its bankers and interest payable on finance lease arrangements. Management monitors
expectations of future interest rates but keeps the majority of its interest bearing financial liabilities carrying a variable rate of interest. This is regarded as
providing a partial hedge against the economic business cycle and takes into consideration the cash flow from operations.
It is the Group’s policy to undertake capital expenditures initially using overdraft and cash facilities and then to finance these purchases in arrears using
hire purchase facilities. This approach leads to competitive interest rates being secured and administration costs being reduced.
In order to measure risk, floating rate borrowings and the expected interest cost is forecast on a monthly basis and compared to budget using
management’s expectations of possible changes in interest rates. The effect on both income and equity based on exposure to borrowings at the
balance sheet date for a 1% increase in interest rates is a decrease of £241,000 (2008: decrease of £105,000), before tax. A 1% fall in interest rates give
the same but opposite effect.
(iii) Price risk
In general it is not the Group’s policy to hold equity securities other than treasury shares. As at 30 September 2009 and 30 September 2008 the Group
did not hold any equity securities.
b) Credit risk
Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and
financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions.
If customers are independently rated, these ratings are considered. Otherwise, if there is no independent rating, risk control assesses the credit quality of the
customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in
accordance with limits set by the board. The utilisation of credit limits is regularly monitored. Group management monitor the ageing of receivables which
are more than one month overdue and debtor days on a regular basis.
Bank deposits are held across the Group at various financial institutions.
As at 30 September 2009 the Group had net trade receivables outstanding of £11,684,000 (2008: £15,498,000). Further details of amounts overdue and
impairments can be found in note 21.
c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit
facilities. Due to the dynamic nature of the underlying businesses, Group treasury maintains flexibility in funding by maintaining availability under committed
loans and overdraft facilities.
Management monitors rolling forecasts of the Group’s liquidity position (comprising undrawn borrowing facility and cash and cash equivalents) on the basis
of expected cash flow. The table below analyses the Group’s financial liabilities based on the remaining period at the balance sheet to the contractual
maturity date. The amounts in the table below are contractual, undiscounted cash flows.
Less than Between 1 Between 2 Over 5
1 year and 2 years and 5 years years
Group £000s £000s £000s £000s
At 30 September 2009
Borrowings and loans (note 25) 6,637 4,246 14,702 8
Trade and other payables 15,183 ---
At 30 September 2008
Borrowings and loans (note 25) 5,853 3,752 15,086 -
Trade and other payables 21,166 - - -
Note that the balances for trade and other payables above exclude social security and other taxes as these are not classified as financial liabilities.
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