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IMI plc
SECTION 4 – CAPITAL STRUCTURE AND FINANCING COSTS
Continued
4.4
Financial risk management
The Group’s activities expose it to a variety of financial risks: interest rate;
foreign exchange and; base metal price movements in addition to funding and
liquidity risks. The financial instruments used to manage the underlying risks
themselves introduce exposure to credit risk, market risk and, liquidity risk.
This section presents information about the Group’s exposure to each of
these risks; the Group’s objectives, policies and processes for measuring
and managing risks, including each of the above risks; and the Group’s
management of capital.
4.4.1
Overview
The Board has overall responsibility for the establishment and oversight of
the Group’s risk management framework. As described in the Corporate
Governance Report on page 47 the Executive Committee monitors risk and
internal controls and the Audit Committee monitors financial risk, while the other
Board committees also play a part in contributing to the oversight of risk.
The Audit Committee oversees how management monitors compliance with
the Group’s financial risk management policies and procedures and reviews
the adequacy of the risk management framework in relation to the financial
risks faced by the Group. The Group Assurance Department undertakes
both regular and ad-hoc reviews of risk management controls and procedures,
the results of which are reported to the Audit Committee.
The following sections discuss the management of specific financial risk
factors in detail, including credit risk, foreign exchange risk, interest rate risk,
commodity risk and liquidity risk.
4.4.2
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or
counterparty to a financial instrument fails to meet its contractual obligations,
and arises principally from the Group’s receivables from customers, cash
and cash equivalents held by the Group’s banks and other financial assets.
At the end of 2014 these totalled £423.2m (2013: £496.5m).
4.4.2.1
Managing credit risk arising
from customers
The Group’s exposure to credit risk is influenced mainly by the individual
characteristics of each customer. The demographics of the Group’s customer
base, including the default risk of the industry and country in which customers
operate, have less of an influence on credit risk. Our largest single customer
accounted for 3% of our 2014 revenues (2013: 4%).
Geographically there is no unusual concentration of credit risk. The Group’s
contract approval procedure ensures that large contracts are signed off at
executive director level at which time the risk profile of the contract, including
potential credit and foreign exchange risks, is reviewed. Credit risk is minimised
through due diligence on potential customers, appropriate credit limits, cash
flow management and the use of documentary credits where appropriate.
4.4.2.2
Exposure to credit risk in respect
of financial assets
The maximum exposure to credit risk for financial assets is represented by their
carrying value and is analysed below:
Carrying amount
2014
2013
£m
£m
Cash and cash equivalents*
43.8
99.9
Investments
26.9
20.2
Interest rate swaps
-
0.8
Forward exchange contracts
10.5
21.6
81.2
142.5
* Including £28.2m classified as held for sale in 2013.
4.4.2.3
Exposure to credit risk in respect
of trade receivables
Carrying amount
2014
2013
£m
£m
UK
23.7
18.8
Germany
23.5
26.2
Rest of Europe
89.3
105.2
USA
51.2
44.5
Asia Pacific
90.9
65.5
Rest of World
39.4
33.3
318.0
293.5
In 2013 there were a further £60.5m trade receivables, predominantly relating
to US customers, included in assets held for sale.
The maximum exposure to credit risk for trade receivables at the reporting
date by segment was as follows:
Carrying amount
2014
2013
£m
£m
IMI Critical Engineering
170.7
151.2
IMI Precision Engineering
111.2
103.0
IMI Hydronic Engineering
36.1
39.3
318.0
293.5
In 2013 there were a further £60.5m trade receivables, relating to the
Retail Dispense businesses, included in assets held for sale.
