notes to the financial statements - Food Empire Holdings Limited

Food Empire Holdings Limited Annual Report 2012
CORPORATE GOVERNANCE (cont’d)
SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED 31 DECEMBER 2012 (SGX-ST LISTING MANUAL REQUIREMENTS) (cont’d)
(iii)
Risk Management Policies and Processes (cont’d)
Foreign Exchange Exposure
The Group is subject to foreign exchange risk arising mainly from those sales, purchases and operating costs by operating units
denominated in currencies other than the operating units’ functional currency. Approximately 1.7% of the Group’s sales are
denominated in currencies other than the functional currency of the operating units making the sales. The Group adopts natural
hedging to protect itself against volatile foreign exchange rate movements. The Group has a natural hedge of 86.2% as 86.2% of
the purchases and major operating expenses are denominated in the functional currency of the operating units.
Political and Regulatory Consideration
The Group’s sales are generated mainly from developing markets such as Russia, Eastern Europe and Central Asia, where political,
social, economic and regulatory uncertainties may have a direct impact on sales. For example, changes in policies by the respective
government authorities of these regions may have an impact through (i) changes in laws and regulations; (ii) change in custom and
import tariff; (iii) restrictions on currency conversions and remittances; and (iv) stability of the banking system.
The Group has representative offices in its major markets and is constantly updated on developments in government policy and
regulation, allowing it to respond promptly to any policy changes that might affect sales.
Credit Risk of Customers
In the normal course of its business, the Group extends credit terms to its customers, primarily to those located in developing
countries. In the event of any significant devaluation or depreciation of the currencies of these markets or if any major customer
encounters financial difficulties, the Group would be exposed to the risk of non-collectability of some of its trade receivables.
The Group has a credit policy in place and exposure to credit risk is monitored on an on-going basis. Management believes that
concentration of credit risk is limited due to the on-going evaluation of all customers.
Fluctuation in Raw Material Prices
Instant coffee powder, creamer, sugar and packaging materials are the main raw materials used for the Group’s products. Due to
the competitive nature of the instant beverage industry, the Group may not be able to pass on increases in raw material prices to its
customers. Therefore any major increase in raw material prices may adversely affect profitability. There is no regulated commodity
market for trading of these raw materials. The Group monitors the movements of raw materials prices closely and keeps in regular
contact with its major suppliers. The Group’s policy is to source from multiple suppliers where possible, so as to reduce dependency
on any single source of supply.
The Group has embarked on a number of upstream green-field projects to mitigate some of the uncertainties in commodities prices
in the longer term.
Intellectual Property Risks
Third parties may unlawfully copy and use the Group’s intellectual property. Policing such unauthorised use is difficult and the law
on intellectual property rights and protection in some countries may not be as developed as others. Unauthorised use of trademarks,
service marks, copyrights, trade secrets and other intellectual property may damage the brand and the name recognition of the
Group and its credibility. The Group relies on trademark laws to protect its marks in countries that it operates in. The Group has filed
for registration of trademarks in countries where its products are marketed and distributed. The Group will take a strong stand on
infringement and will take legal action to protect its intellectual property against counterfeit products and those who have unlawfully
made use of its registered trademarks.
41