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Escher Group Holdings plc
Annual report 2011
32
for the year ended 31 December 2011
Notes to the consolidated financial statements
continued
3. Financial risk management
continued
Financial risk factors continued
(a) Market rate risk continued
Cash flow and fair value interest rate risk continued
As at reporting date, the Group had the following cash and cash equivalents (note 15), borrowing (note 18), and interest rate
swap contracts outstanding (note 19):
2011
2010
Group
Weighted
average
interest
rate
%
Balance
US$’000
Weighted
average
interest
rate
%
Balance
US$’000
Cash and cash equivalents
0.26
3,439
0.27
779
Bank borrowings
4.50
(8,424)
3.33
(19,936)
Debenture loan
13.58
(3,324)
16.00
(5,000)
Interest rate swaps (notional principal amount)
2.10
15,000
2.10
15,000
Net (exposure) to interest rate risk
6,691
(9,157)
2011
2010
Company
Weighted
average
interest
rate
%
Balance
US$’000
Weighted
average
interest
rate
%
Balance
US$’000
Cash and cash equivalents
0.26
2,456
0.27
13
Loan from subsidiaries
— (3,786)
—
(1,115)
Net exposure to interest rate risk
(1,330)
(1,102)
Interest rate sensitivity analysis
Based on the financial instruments held at the balance sheet date, if interest rates had been 100 basis points (bps) higher/lower
and all other variables were held constant, the Group profit/(loss) after tax for the year would have been higher or lower by
the amounts set out in the table below:
Increase by 100 bps
Decrease by 100 bps
Group – after tax
2011
US$’000
2010
US$’000
2011
US$’000
2010
US$’000
(Loss)/profit for the year
(180)
(40)
180
40
A sensitivity of 100 bps has been selected as this is considered reasonable given the current level of both short-term
and long-term interest rates.
Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with
respect to the US Dollar and Euro. Foreign exchange transaction risk arises when future commercial transactions or recognised
assets or liabilities are denominated in a currency that is not the entity’s functional currency.
The Group has investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The effects
of currency fluctuations on the translation of net assets values into US Dollars are reflected in the Group’s consolidated
equity position.
At 31 December 2011, if the US Dollar had weakened/strengthened by 10% against the Euro with all other variables held constant,
post-tax profit for the year would have been US$11,000 (2010: US$35,000) higher/lower, mainly as a result of foreign exchange
gains/losses on translation of Euro denominated income and expenses.
The Group does not utilise foreign exchange hedging over these forecast exposures. The Group attempts where possible to avail
of natural hedging. New contracts are either quoted in Euro or US Dollar depending on the currency cost funding requirement.
Interest on borrowings is denominated in the currency of the borrowing entity. Generally, borrowings are denominated
in currencies that match the cash flows generated by the underlying operations of the Group, being US Dollar. This provides
an economic hedge without derivatives being entered into and therefore hedge accounting is not applied in these circumstances.
In respect of other monetary assets and liabilities denominated in foreign currencies, the Group’s policy is to ensure that its
net exposure is kept to an acceptable level by reviewing foreign currencies on a regular basis.
The Group’s investments in foreign denominated subsidiaries are not hedged.