40
AVESCO GROUP PLC ANNUAL REPORT 2011
www.avesco.com
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED 30 SEPTEMBER 2011
The following table details the Group’s sensitivity to a change in sterling against the respective foreign currencies, based upon the assets and liabilities held at the reporting date. The sensitivities below represent management’s assessment of the possible changes in foreign exchange rates. 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 2011
2010 Sensitivity
Income sensitivity US Dollars Euro
Hong Kong dollars Chinese Renminbi
Equity sensitivity US Dollars Euro
Hong Kong dollars Chinese Renminbi
10% 10% 10% 10%
10% 10% 10% 10%
£000s
274 (23)
(148) (161)
518 474 409 (61)
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 £171,000 (2010: decrease of £188,000), before tax. A 1% fall in interest rates give the same but opposite effect. Given current interest rates management consider a 1% change in interest rates to be an appropriate approximation of risk in interest sensitivity.
(iii) Price risk In general it is not the Group’s policy to hold equity securities other than treasury shares. As at 30 September 2011 and 30 September 2010 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 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 2011 the Group had net trade receivables outstanding of £16,717,000 (2010: £13,633,000). Further details of amounts overdue and impairments can be found in note 20.
The Company is exposed to credit risk on amounts owed by related undertakings. The performance of all subsidiary undertakings of the Group are monitored at Group level, including frequent projections of future performance to ensure funding to related undertakings provide a suitable return and remain recoverable. Where losses are forecast actions are taken to mitigate the loss and maximise the recoverability of receivables. See note 35 for further details on the Company’s transactions with its subsidiaries.
c) Liquidity risk Prudent liquidity risk management involves 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.
£000s 52 (115)
(208) 56
559 641 330 (20)
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