2012 Annual Report - Domino's Pizza

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NOTES TO THE FINANCIAL STATEMENTS CONTINUED 32.5 Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates (refer to note 32.6) and interest rates (refer to note 32.7). The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including: • Interest rate swaps to mitigate risk of rising interest rates. 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 risk from previous period. Hedging activities The Group holds financial instruments to hedge risks relating to underlying transactions. The major exposure to interest rate risk and foreign currency risk arises from long-term borrowings. Details of hedging activities are provided below. The Group designated the Euro loan as a hedge of a net investment in a foreign operation. On 30 November 2011, this hedge was dedesignated. Subsequent to 3 July 2011 and prior to de-designation, $252 thousand arising from spot rate changes in respect of the fair value of the net assets of European operations was recognised in equity for the Consolidated entity and the Company (2011: $1,159 thousand). Subsequent to de-designation and up to reporting date, $881 thousand arising from spot rate changes was recognised directly in the statement of comprehensive income for the Consolidated entity and the Company. For further details refer to note 3.24. 32.6 Foreign currency risk management As DPE Limited’s Australian operations are predominantly conducted in Australian dollars, there is limited foreign currency exchange risk associated with the Australian business. DPE Limited also has operations in New Zealand and Europe. The operations and revenues of these businesses are predominantly transacted in New Zealand dollars and Euros respectively. DPE Limited intends to mitigate its foreign currency translation risk exposure by denominating a portion of its senior debt in Euros. This creates a natural hedge and mitigates the potential for currency movements to negatively impact DPE Limited. DPE Limited also purchases some equipment in a range of currencies, but predominantly USD, and has an exchange rate exposure due to delays between entering into a contract and final payment. DPE Limited will only enter into a hedge position (forward contract) in respect of equipment purchase once it has committed to the purchase. The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters. The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date is as follows: Liabilities Euro loan 13,717 15,035 - - 2012 $’000 2011 $’000 2012 $’000 Assets 2011 $’000 32.6.1 Foreign currency sensitivity analysis The Group is mainly exposed to Euros and New Zealand dollars (NZD). The foreign currency risk exposure recognised from assets and liabilities arises primarily from the short term borrowings denominated in foreign currencies. There is no significant impact on the Consolidated entity’s profit from foreign currency movements associated with these borrowings as they are effectively designated as a hedge of the net investment in foreign operations. For the Group, the foreign currency translation risk associated with the foreign investment results in some volatility to the foreign currency translation reserve. The impact on the foreign currency translation reserve relates to translation of the net assets of the foreign controlled entities including the impact of any hedging transactions. Hedges of net investments in foreign operations In the consolidated financial statements the exposure to foreign currency translation risk is a result of the investment in offshore activities being Europe where any exchange gains and losses on translation of the Euro denominated loan are taken to the net investment hedge reserve (in the foreign currency translation reserve) only to the extent of the gains and losses on the value of the European net assets, including any intercompany loan payable to DPEU. Exchange differences on the excess between the Euro loan and net assets, including any intercompany loan payable to DPEU, if any, are recognised in the income statement. The effectiveness of the hedging relationship is tested using prospective and retrospective effectiveness tests. In a retrospective effectiveness test, the changes in the value of the hedging instrument and the change in the value of the hedged net investment from spot rate changes are calculated. If the calculation is between 80 and 125 per cent, then the hedge is considered effective. Any gains or losses on remeasurement of derivative or non-derivative financial instruments designated as hedges of foreign investments are recognised in the net investment hedge reserve in equity only to the extent that the hedging relationship is effective. The accumulation of the recognised gains or losses recorded in equity is transferred to the income statement when the foreign operation is sold. Any gains or losses of the ineffective portion of the hedge are recognised in the income statement within other revenue or other expenses. During the year there was no hedge ineffectiveness attributable to the net investment hedges. During the year net gains/(losses) after tax of $252 thousand (2011: $1,130 thousand) on the hedging instruments were taken directly to equity in the consolidated balance sheet. 68 ANNUAL REPORT 2012 DOMINO’S PIZZA ENTERPRISES LIMITED
The following table details the value of the instrument designated and the impact on the hedge reserve. LIABILITIES EQUITY 2012 $’000 2011 $’000 2012 $’000 2011 $’000 Euro loan 13,717 15,035 - - Designated hedge of Euro loan - - 2,296 2,140 13,717 15,035 2,296 2,140 The following details the Group’s sensitivity to a 10% increase and decrease in the Australian Dollar against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items. Adjustments have only been made for transactions outstanding at period end using a 10% change in foreign currency rates. A positive number indicates an increase in profit or loss and other equity where the Australian Dollar strengthens against the respective currency. 2012 $’000 EUROS IMPACT 2011 $’000 NEW ZEALAND DOLLARS IMPACT Profit or (loss) If there was a 10% increase in exchange rates with all other variables held constant - - - - If there was a 10% decrease in exchange rates with all other variables held constant - - - - Other equity If there was a 10% increase in exchange rates with all other variables held constant 1,247 1,379 (i) - - If there was a 10% decrease in exchange rates with all other variables held constant (1,524) (1,686) (i) - - 2012 $’000 2011 $’000 (i) This is mainly as a result of changes in fair value of borrowings designated as net investment of foreign operation hedges. The Group’s sensitivity to foreign currency remains consistent during the current period. 32.6.2 Forward foreign exchange contracts It is the policy of the Group to enter into forward foreign exchange contracts to cover specific foreign currency payments and receipts. The forward foreign exchange contract is only entered into once the Group has committed to the purchase transaction. There were no forward foreign exchange contracts outstanding as at reporting date (2011: nil). 32.7 Interest rate risk management The Group is exposed to interest rate risk as it borrows funds at floating interest rates. The Group holds an interest rate swap contract to manage interest rate exposure. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite ensuring optimal hedging strategies are applied, by either positioning the balance sheet or protecting interest expense through different interest rate cycles. 32.7.1 Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and nonderivative instruments at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates. At reporting date, if interest rates had been 100 basis points higher or lower and all other variables were held constant, the Group’s: • Net profit would increase by $768 thousand and increase by $12 thousand (2011: decrease by $112 thousand and increase by $184 thousand). This is mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings. • Other equity reserves would increase by $65 thousand and decrease by $49 thousand (2011: increase by $65 thousand and decrease by $49 thousand) mainly as a result of the changes in the fair value of the interest rate swap. 32.7.2 Interest rate swap contracts Under the interest rates swap contract, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on an agreed notional principal amount. This contract enables the Group to mitigate the risk of changing interest rates on debt held. The average interest rate is based on the outstanding balance at the start of the financial year. ANNUAL REPORT 2012 DOMINO’S PIZZA ENTERPRISES LIMITED 69
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Theatre Of Food ANNUAL REPORT 2012
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RECORD GROWTH IN EUROPE - TOTAL NET
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CHAIRMAN’S message Embracing tech
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Financial PERFORMANCE Investing in
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Digital Australia and New Zealand O
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New stores new designs Australia an
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The Future We remain focused and de
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Healthier CHOICES A rally to health
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Healthier ingredients Domino’s pr
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Theatre Of Food For THE LOve of FOO
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Connecting Through technology Techn
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FRANCE AND BELGIUM To interact with
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Domino’s Pizza Enterprises Ltd 8t
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KEY FINANCIAL INDICATORS 2006 2007
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CORPORATE GOVERNANCE STATEMENT CONT
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DIRECTORS’ REPORT The directors o
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DIRECTORS’ REPORT CONTINUED Share
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DIRECTORS’ REPORT CONTINUED REMUN
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DIRECTORS’ REPORT CONTINUED REMUN
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Page 48 and 49: AUDITOR’S INDEPENDENCE DECLARATIO
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Page 55 and 56: CONSOLIDATED STATEMENT OF FINANCIAL
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Page 69 and 70: 4. CRITICAL ACCOUNTING JUDGEMENTS A
Page 71 and 72: 6.3 Segment assets and liabilities
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Page 75 and 76: 10.4 Deferred tax balances 2012 OPE
Page 77 and 78: 11. PROFIT FOR THE YEAR FROM CONTIN
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Page 81 and 82: Ageing of loans to franchisees Amou
Page 83 and 84: 18. PROPERTY, PLANT AND EQUIPMENT 2
Page 85 and 86: Key assumptions The key assumptions
Page 87 and 88: 22. TRADE AND OTHER PAYABLES Trade
Page 89 and 90: 26. OTHER LIABILITIES 2012 $’000
Page 91 and 92: 29. RESERVES Foreign currency trans
Page 93: 32.1.1 Gearing ratio Debt (i) 14,04
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Page 105 and 106: Executive share options of Domino
Page 107 and 108: 36. ACQUISITION OF BUSINESSES NAME
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Page 111 and 112: 43. PARENT ENTITY INFORMATION 43.1
Page 113 and 114: TWENTY LARGEST HOLDERS OF QUOTED EQ
Page 115 and 116: CORPORATE DIRECTORY DIRECTORS Ross
Page 117 and 118: ANNUAL REPORT 2012 DOMINO’S PIZZA
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2012 Annual Report - Domino's Pizza

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