Vision - Alibaba

108 Annual Report 2007
Notes to the Financial Statements
3 FINANCIAL RISK MANAGEMENT (Continued)
(a) Foreign currency exchange risk
Foreign currency exchange risk arises from future commercial transactions, recognized assets
and liabilities and net investments in foreign operations. Although the Group operates businesses
in different countries, substantially all of the revenue-generating and expense related transactions
are denominated in RMB which is the functional currency of the Company and most of the Group’s
subsidiaries. RMB is not freely convertible into other foreign currencies. All foreign currency exchange
transactions in China must be effected through either the People’s Bank of China (“PBOC”), or other
institutions authorized by the PBOC to buy and sell foreign currencies. Following the completion of the
Global Offering in November 2007, the Group holds a signifi cant portion of cash and cash equivalents
in currencies other than RMB. Such foreign currency-denominated cash and cash equivalents are
exposed to fl uctuations in the value of RMB against the currencies in which these cash and cash
equivalents are denominated. Any signifi cant appreciation of RMB against these foreign currencies
may result in signifi cant exchange loss which would be recorded in the income statement.
Sensitivity analysis
As of December 31, 2007, if RMB had strengthened/weakened 5% against United States dollars, Hong
Kong dollars and Australian dollars with all other variables held constant, profi t for the year would
have been RMB83,187,000 (2006: RMB513,000) lower/higher, mainly as a result of foreign exchange
losses/gains on translation of Hong Kong dollars and Australian dollars denominated cash and cash
equivalents. Profi t attributable to equity owners of the Company is more sensitive to movement in
RMB/Hong Kong dollars and RMB/Australian dollars in 2007 than 2006 because of the increased
amount of Hong Kong dollars and Australian dollars denominated cash and cash equivalents being
held by the Group.
Other than exchange differences arising from translation of results and fi nancial positions of certain
Group companies from functional currencies to the presentation currency, which are dealt with as a
movement in exchange reserve, a change of 5% in exchange rate of each foreign currency against
RMB does not affect any components of equity.
(b) Interest rate risk
The Group has no interest-bearing borrowings. The Group’s exposure to changes in interest rates is
mainly attributable to its interest-bearing assets including term deposits with original maturities of over
three months and cash and cash equivalents.
Sensitivity analysis
As of December 31, 2007, if the interest rate increased/decreased by 50 basis-point with all other
variables held constant, profi t attributable to equity owners of the Company would have been
RMB26,333,000 (2006: RMB7,428,000) higher/lower, mainly as a result of higher/lower interest income
on bank balances.