Annual Report & Accounts 2012 - Euromoney Institutional Investor ...

Euromoney Institutional Investor PLC Annual Report and Accounts 2012
www.euromoneyplc.com
Notes to the Consolidated
Financial Statements continued
19 Financial instruments and risk management continued
Market risk exposures are measured using sensitivity analysis.
There has been no change to the group’s exposure to market risks or the manner in which it manages and measures the risks during the year.
ii) Foreign exchange rate risk
The group’s principal foreign exchange exposure is to US dollar. The group generates approximately two-thirds of its revenues in US dollars, including
approximately 30% of the revenues in its UK-based businesses, and approximately 60% of its operating profits are US dollar-denominated. The group
is therefore exposed to foreign exchange risk on the US dollar revenues in its UK businesses, the translation of results of foreign subsidiaries and
external loans as well as loans to foreign operations within the group where the denomination of the loan is not in the functional currency of the
lender/borrower.
The carrying amounts of the group’s US dollar-denominated monetary assets and monetary liabilities at the reporting date are as follows:
Assets
Liabilities
2012
£000
2011
£000
2012
£000
2011
£000
US dollar 58,770 84,074 (5,956) (7,967)
Subsidiaries normally do not hedge transactions in foreign currencies into the functional currency of their own operations. However, at a group level,
a series of US dollar and Euro forward contracts are put in place to sell forward surplus US dollars and Euros so as to hedge 80% of the group’s UK
based US dollar and Euro revenues for the coming 12 months and 50% of the group’s UK based US dollar and Euro revenues for the subsequent six
months. The timing and value of these forward contracts is based on management’s estimate of its future US dollar and Euro revenues over an 18 month
period and is regularly reviewed and revised with any changes in estimates resulting in either additional forward contracts being taken out or existing
contracts’ maturity dates being moved forward or back. If management materially underestimate the group’s future US dollar and Euro denominated
revenues, this would lead to too few forward contracts being in place and the group being more exposed to swings in US dollar and Euro to sterling
exchange rates. An overestimate of the group’s US dollar and Euro denominated revenues would lead to associated costs in unwinding the excess
forward contracts. The group also has a significant operation in Canada whose revenues are mainly in US dollars. At a group level a series of US dollar
forward contracts is put in place up to 18 months forward to hedge the operation’s Canadian cost base. In addition, each subsidiary is encouraged to
invoice sales in its local functional currency where possible.
Forward exchange contracts are gross settled at maturity.
The following table details the group’s sensitivity to a 10% increase and decrease in sterling against US dollar. A 10% sensitivity has been determined
by the board as the sensitivity rate appropriate when reporting an estimated foreign currency risk internally and represents management’s assessment
of a reasonably possible change in foreign exchange rates at the reporting date.
The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a
10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the group where
the denomination of the loan is not in the functional currency of the lender/borrower. Where sterling strengthens 10% against the relevant currency
a positive number below indicates an increase in profit and equity. For a 10% weakening of sterling against the relevant currency, there would be an
equal and opposite impact on the profit and other equity, and the balances below would be negative.
Impact of 10% strengthening of sterling against US dollar
2012
£000
2011
£000
Change in profit for the year in income statement (646) (954)
Change in equity 6,606 6,666
94