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Notes to the Financial Statements (cont’d) For the financial year ended 31 December 2011 38. Financial risk management objectives and policies (cont’d) (a) Interest rate risk (cont’d) The table below demonstrates the sensitivity to a possible reasonable change in interest rates with all other variables held constant, of the Group’s profit net of tax through the impact on interest income from bank deposits and interest expense on floating rate borrowings: Increase/Decrease in basis point Effect on profit net of tax RM’000 31 December 2011 - Malaysian Ringgit +25 (409) -25 409 - United States Dollar +25 (225) -25 225 31 December 2010 - Malaysian Ringgit +25 (926) -25 926 - United States Dollar +25 (342) -25 342 (b) Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group has exposure to fluctuations in foreign exchange rates in both the investment in foreign entities and business transactions. The Group has foreign exchange risk exposure mainly in United States Dollar, Australian Dollar and Indonesian Rupiah. The Group’s policy is to manage its exposure to foreign exchange risk on investment in foreign entities by using term loan with the same foreign currency to hedge such investments where appropriate. Due to concentration of its purchases and sales in United States Dollar, there is a natural hedge and the exposure to United States Dollar foreign exchange risk for business transactions is minimised. The Group also uses forward foreign exchange contracts to hedge its exposure to foreign exchange risk. As at reporting date, approximately: (i) 97% (2010: 93%) of the Group’s trade and other receivables as well as 82% (2010: 70%) of the Group’s trade and other payables are denominated in foreign currencies, mainly in United States Dollar, Indonesia Rupiah, Singapore Dollar and Australia Dollar. (ii) 30% (2010: 60%) of the Group’s cash and bank deposits are denominated in foreign currencies, mainly in United States Dollar, Indonesia Rupiah and Australia Dollar. (iii) 33% (2010: 27%) of the Group’s borrowings are denominated in United States Dollar. At 31 December 2011, the Group held forward currency contracts designated as hedges of expected future sales to customers in United States Dollar for which the Group has firm commitments. The forward currency contracts are being used to hedge the foreign currency risk of the highly probable forecasted transactions. The terms of the forward currency contracts have been negotiated to match the terms of the commitments. There were no highly probable transactions for which hedge accounting had previously been used, which are no longer expected to occur. The ineffectiveness recognised in profit or loss for the current year was RM300,000 (2010: RM212,000) (see Note 34(i)). MALAYSIA SMELTING CORPORATION (43072-A) • ANNUAL REPORT 2011 155
Notes to the Financial Statements (cont’d) For the financial year ended 31 December 2011 38. Financial risk management objectives and policies (cont’d) 156 (b) Foreign currency risk (cont’d) The cash flow hedges of the expected future sales were assessed to be highly effective and a net unrealised loss of RM119,000 (2010: net unrealized gain of RM950,000) with a deferred tax asset of RM30,000 (2010: deferred tax liability of RM238,000) relating to the hedging instruments is included in other comprehensive income (see Note 34(i)). The amounts retained in other comprehensive income at 31 December 2011 are expected to mature and affect profit or loss by a loss of RM89,000 (2010: gain of RM712,000) (see Note 31) in 2012. The following table demonstrates the sensitivity of the Group’s profit net of tax and equity at the reporting date to a possible reasonable change in the United States Dollar (“USD”), Indonesia Rupiah (“IDR”) and Australia Dollar (“AUD”). Building on Success: Developing Resources for the Future 2011 2010 Profit net of Profit net of tax Equity tax Equity RM’000 RM’000 RM’000 RM’000 USD strengthened 5% (3,896) (1,881) 2,167 4,760 weakened 5% 3,718 1,801 (740) (4,758) AUD strengthened 5% 18 – 34 192 weakened 5% (18) – (34) (189) IDR strengthened 5% (401) (400) (408) (408) weakened 5% 443 442 450 450 (c) Liquidity risk Liquidity risk is the risk that the Group or the Company will encounter difficulty in meeting financial obligations due to shortage of funds. The Group’s and the Company’s exposure to liquidity risk arises primarily from mismatches of the maturities of financial assets and liabilities. The Group manages its debt maturity profile, operating cash flows and the availability of funding so as to ensure that all refinancing, repayment and funding needs are met. As part of its overall prudent liquidity risk management, the Group maintains sufficient levels of cash or cash convertible investments to meet its working capital requirements. In addition, the Group strives to maintain available banking facilities of a reasonable level to its overall debt position. As far as possible, the Group raises committed funding from financial institutions and prudently balances its portfolio with some short term funding so as to achieve overall cost effectiveness. Analysis of financial instruments by remaining contractual maturities The table below summarises the maturity profile of the Group’s and the Company’s financial assets and liabilities at the end of the reporting period based on contractual undiscounted repayment obligations.
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ANNUAL REPORT 2011 Building on Succ
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viSion To be a successful world-cla
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Corporate Profile Malaysia Smelting
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