FY 2010 Annual Report - Part II - Orascom Development

Orascom Development Holding (Consolidated Financial Statement)
The following table details the Group’s sensitivity to a 5%
increase and decrease in CHF against the relevant foreign
currencies. The (5%) is the sensitivity rate used when reporting
foreign currency risk internally to key management and represents
management’s assessment of the reasonably possible change in
foreign exchange rates. The sensitivity analysis includes only
outstanding foreign currency denominated monetary items and
adjusts their translation at the period end for a 5% change in
foreign currency rates.
The sensitivity analysis includes outstanding borrowings, impact of
the changes in the fair value of derivative instruments designated
as cash flow hedges and receivables in foreign currencies and,
where appropriate, loans to foreign operations within the Group
where the denomination of the loan is in a currency other than
the functional currency of the lender or the borrower.
A positive number below indicates an increase in profit or equity where the CHF strengths 5% against the relevant currency. For a 5%
weakening of the CHF against the relevant currency, there would be a comparable impact on the profit or equity, and the balances
below would be negative.
CHF Currency USD Impact Currency EUR Impact Currency EGP Impact
2010 2009 2010 2009 2010 2009
Profit or loss 5,159,285 2,598,122 3,246,542 2,420,036 3,928,944 194,150
Equity 56,166 77,832 - - - -
The Group's sensitivity to foreign currency has increased during
the current year mainly due to higher EGP, USD and AED
borrowings.
Forward foreign exchange contracts
It is the policy of the Group to enter into forward foreign
exchange contracts to cover specific foreign currency receipts
within 25% to 30% of the exposure generated. At 31 December
2010, the Group has no outstanding forward foreign currency
exchange contracts. However, the Group entered during the
current year into several forward foreign currency exchange
contracts to hedge part of the Group’s receivables denominated
in EUR and USD resulting in a net gain of CHF 560,000.
At 31 December 2010, no ineffectiveness has been recognised in
profit or loss arising from the Group’s hedging activities.
39.7 Interest rate risk management
The Group is exposed to interest rate risk because entities in the
Group borrow funds at both fixed and floating interest rates. The
risk is managed by the Group by maintaining an appropriate mix
between fixed and floating rate borrowings, and by the use of
interest rate swap contracts. Hedging activities are evaluated
regularly to align with interest rate views and defined risk appetite,
ensuring the most cost-effective hedging strategies are applied.
The Group's exposures to interest rates on financial assets and
financial liabilities are detailed in the liquidity risk management
section of this note.
At 31 December 2010, the Group held one interest rate swap
contract (IRS) under which the Group agrees to exchange the
difference between fixed and floating rate interest amounts
calculated on the agreed notional principal amount. The notional
amount of the IRS contract is based on the outstanding amount of
one of the long-term borrowings. The group was engaged in this
contract on September 2008 and it will expire on June 2014.
As the interest rate swap exchanges floating rate interest amounts
for fixed rate interest amounts it is designated as a cash flow
hedge in order to reduce the Group’s cash flow exposure
resulting from variable interest rates on borrowings. The interest
rate swap and the interest payments on the borrowing occur
simultaneously and the amount accumulated in equity is
reclassified in profit or loss over the period that the floating rate
interest payments on debt affect profit or loss.
The Group receives the fair value of the swap from the
counterparty bank at the end of each reporting period and is
disclosed below. The average interest rate is based on the
outstanding balances at the end of the reporting period.
Management has assessed that the cash flow hedge is 100%
effective and therefore the entire change in fair value of the
interest rate swap is recognised in other comprehensive income
and accumulated in equity (note 27.3).
The following table details the notional principal amount and
remaining terms of the interest rate swap contract outstanding at
the end of the reporting period.
Last instalment date
Average contracted Notional principal amount Fair value assets (liabilities)
Fixed interest rate CHF CHF
2010 2009 2010 2009 2010 2009
30-Jun-14 3.50% 3.50% 35,595,410 50,726,330 2,141,187 2,905,229
The interest rate swap settles on a half-yearly basis. The floating rate on the interest rate swaps is based on LIBOR for 6 months. The
Group settles the difference between the fixed and floating interest rate on a net basis.
39.8 Interest rate sensitivity analysis
The sensitivity analyses below have been determined based on the
exposure to interest rates for both derivatives and non-derivative
instruments at the end of the reporting period. For floating rate
liabilities, the analysis is prepared assuming the amount of liability
outstanding at the end of reporting period was outstanding for the
whole year. A ‘100 basis point’ (1%) increase or decrease is used
when reporting interest rate risk internally to key management
personnel and represents management’s assessment of the
reasonably possible change in interest rates.
If interest rates had been 100 basis points higher / lower and all
other variables were held constant, the Group’s profit for the year
F-63