FY 2012 Annual Report - Orascom Development

F-71 Orascom Development 2012 Annual Report F-72
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
2012 2011 2012 2011 2012 2011
Profit or loss 7,760,113 6,937,068 2,752,375 3,075,846 6,301,744 4,253,738
Equity 55,887 52,135 - - - -
The Group's sensitivity to foreign currency has changed in accordance with the changes in 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 2012, 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.
At 31 December 2012, no ineffectiveness has been recognised in profit or loss arising from the Group’s hedging activities.
40.7 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 2012, 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 28.3).
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.
40.7.1 Interest rate sensitivity analysis
The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and nonderivative
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
ended 31 December 2012 would decrease / increase by CHF 2.5 million (2011: decrease / increase by CHF 2.6 million). This is mainly
attributable to the Group’s exposure to interest rates on its variable rate borrowings.
40.8 Other price risks
The Group is exposed to equity price risks arising from equity investments. Equity investments are held for strategic rather than
trading purposes. The Group does not actively trade these investments.
40.9 Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The Group credit risk arises from transactions with counterparties, mainly individual customers and corporations. The Group has
adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a
means of mitigating the risk of financial loss from defaults.
The Group’s exposure to credit risk is, to a great extent, influenced by the individual characteristics of each customer. Risk control
assesses the credit quality of the customer, taking into account its financial position, past experience, other publicly available
financial information, its own trading records and other factors, where appropriate, as a means of mitigating the risk of financial
loss from defaults. The Group’s exposure is continuously monitored and the aggregate value of transactions concluded is spread
amongst approved counterparties.
Trade receivables consist of a large number of customers, spread across various industries and geographical areas. The Group
does not have any significant credit risk exposure to any single counterparty or any Group of counterparties having similar
characteristics. The Group defines counterparties as having similar characteristics if they are related entities. The credit risk on
sales of real estate is limited because the Group controls this risk through the property itself by registering the unit in the name of
the customer only after receiving the entire amount due from the customer.
Counterparty risk is also minimized by ensuring that 80% of derivative financial instruments, money market investments and
current account deposits are placed with financial institutions whose credit standings are above Aa1 and 20% above BB+.
The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the
Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained.
40.10 Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has established an appropriate
liquidity risk management framework for the management of the Group’s short-, medium- and long-term funding and liquidity
management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve
borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial
assets and liabilities. Regarding management’s plans to manage liquidity shortages and related uncertainty please refer to note
43.1.
As of 31 December 2012, total un-drawn facilities, that the Group has at its disposal in order to further reduce liquidity risk, are
CHF 23.7 million (31 December 2011: CHF 6 million).
Last instalment date Average contracted Notional principal amount Fair value assets (liabilities)
Fixed interest rate CHF CHF
2012 2011 2012 2011 2012 2011
30-Jun-14 3.50% 3.50% 34,856,237 35,827,969 (562,337) (1,264,931)
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.
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