Full Annual Report 2006 - Singapore Technologies Engineering

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193 Notes to the Financial Statements 31 DECEMBER 2006 (Currency – Singapore dollars unless otherwise stated) 47. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) Interest rate risk The Group has cash balances placed with reputable banks, financial institutions and a related corporation. The Group manages its interest rate risks on its interest income by placing the cash balances in varying maturities and interest rate terms. The Group’s debt includes bank borrowings and lease commitments. The Group seeks to minimise its interest exposure through options to refinance the debt instruments and/or enter into interest rate swaps, where appropriate, over the duration of its borrowings. Information relating to the Group’s interest rate exposure is also disclosed in the notes on the Group’s borrowings, investments and loan receivables, where applicable. Foreign exchange risk The Group’s foreign exchange risk arises both from its subsidiaries operating in foreign countries, which generate revenue and incur costs denominated in foreign currencies and from those operations of its local subsidiaries which are in foreign currencies. The Group enters into forward currency contracts to hedge against its foreign exchange risk resulting from anticipated sale and purchase transactions denominated in foreign currencies, primarily in US dollars and Euro. Market risk The Group has investments in quoted equity shares and bonds, and has placed funds with fund management companies. The market value of these investments will fluctuate with market conditions. To mitigate market risk, the Group’s funds placed with fund managers are guaranteed 95% to 100% of their principal values at the end of the fund management period. Also, before a fund manager is given funds for management, its financial strength is carefully considered. Liquidity risk To manage liquidity risk, the Group monitors its net operating cash flows and maintains an adequate level of cash and cash equivalents and secured committed funding facilities from financial institutions. In assessing the adequacy of these facilities, management reviews its working capital requirements. Credit risk Credit risk, or the risk of counterparties defaulting, is managed through the application of credit approvals, credit limits and monitoring procedures. Where appropriate, the Company or its subsidiaries obtain collaterals from customers or arrange master netting agreements. Cash terms, advance payments, and letters of credit or bank guarantees are required for customers of lower credit standing. Counterparties to financial instruments consist of prime financial institutions and related corporations, as disclosed in Notes 10 and 16. As at 31 December 2006, there were no significant concentrations of credit risk, except for 37% (2005: 43%) of trade debts relating to three major customers of the respective subsidiaries. 48. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm’s length transaction, other than in a forced or liquidation sale. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate.
THE WINNING SPIRIT ST Engineering AR 2006 194 Notes to the Financial Statements 31 DECEMBER 2006 (Currency – Singapore dollars unless otherwise stated) 48. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The following methods and assumptions are used to estimate the fair value of each class of financial instruments: Bank balances, other liquid funds and short-term receivables The carrying amounts approximate fair values due to the relatively short-term maturity of these instruments. Quoted and unquoted investments The fair values of quoted investments are estimated based on quoted market prices for these investments. For unquoted investments, it is not practicable to determine the fair values because of the lack of quoted market prices and the assumptions used in valuation models to value these investments cannot be reasonably determined. However, for unquoted investment in related and non-related corporations as stated in Note 10, the fair value is determined by reference to valuation provided by related and non-related corporations and fund managers. Loans receivable The fair values of loans receivable are estimated based on the expected cash flows discounted to present value, except as disclosed in Note 12. Short-term borrowings and other current payables The carrying amounts approximate fair values because of the short period to maturity of these instruments. Forward currency contracts As at 31 December 2006, the Group has the following forward currency contracts amounting to $135,485,000 (2005: $100,000,000) designated as hedges of confirmed sales in foreign currencies, firm purchase commitments in foreign currencies and accounts receivable in foreign currencies. 2006 2005 CONTRACTUAL/ CONTRACTUAL/ NOTIONAL ESTIMATED NOTIONAL ESTIMATED NOTE AMOUNT FAIR VALUE AMOUNT FAIR VALUE $’000 $’000 $’000 $’000 Cash flow hedges Forward currency contracts: – to hedge confirmed sales in foreign currencies (i) 4,918 15 2,419 149 – to hedge firm purchase commitments in foreign currencies (i) 18,081 143 17,043 (319) Fair value hedges Forward currency contracts: – to hedge confirmed sales in foreign currencies (i) 98,571 1,599 60,263 465 – to hedge accounts receivable in foreign currencies (i) 13,915 153 20,275 (146) (i) The maturity dates of the forward currency contracts approximate the timing of the expected cash flow of their respective hedged items, which are on varying periods up to 13 months from the financial year end. As at 31 December 2006, the Group has the following outstanding forward currency contracts amounting to $5,834,000 (2005: $11,962,000) which are not designated as hedges of confirmed sales in foreign currencies and firm purchase commitments in foreign currencies. Forward currency contracts – purchase 1,489 28 9,792 (108) – sale 4,345 57 2,170 24
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THE WINNING SPIRIT ANNUAL REPORT 20
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THE WINNING SPIRIT ST Engineering A
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57 Operating Financial Review GROUP
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LAND SYSTEMS SECTOR MARINE SECTOR C
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67 Aerospace FLYING HIGH WITH TOTAL
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105 Balance Sheets AS AT 31 DECEMBE
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Full Annual Report 2006 - Singapore Technologies Engineering

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