Annual Report - AWB Limited

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Notes to and forming part of the financial statements for the year ended 30 September 2008 <strong>AWB</strong> LIMITED31. Financial Risk Management Objectives and Policies (continued)Foreign Currency Exchange RiskForeign currency risk (or foreign exchange risk) arises on financial instruments that are denominated in a foreign currency, i.e. in a currency otherthan the functional currency in which they are measured. Currency risk does not arise from financial instruments that are non-monetary items.There are two types of currency risk - transaction risk and translation risk. Transaction risk arises when the Group enters into transactions thatwill be settled in the future in foreign currency. Translation risk is the risk that arises when the Group has assets and liabilities denominated in aforeign currency, whose carrying amounts will fluctuate with movements in foreign currency exchange rates.Group ExposureThe Group’s shareholders’ equity, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity ofthe Group’s sales and the countries in which it operates. Transaction risk arises from various activities of the Group. Such activities include themajority of physical as well as hedging contracts of wheat and other grains being denominated in USD whilst shipping contracts are also pricedin USD. Offshore subsidiaries will at various points in time pay dividends to the parent which will create transaction risk as the dividends will bedenominated in the subsidiaries’ transactional currency which is generally USD. From time to time, the Group will have small foreign currencytransactions which relate to purchases of supplies in foreign currencies.The functional currency of the Group’s Australian operations is AUD. The functional currencies of the Group’s international subsidiaries ispredominantly USD as the majority of revenues, operating costs and debt are denominated in USD. Therefore translation risk arises when theinternational subsidiaries’ accounts are translated into AUD for reporting purposes.Group Treasury will at times enter into derivative foreign exchange products such as currency options, cross currency contracts (spot and forwards)and currency swaps for proprietary purposes within the Board delegated limits. Such transactions create foreign exchange risk for the Group.Management of ExposureGroup Treasury actively manages the foreign exchange risk for the Group by monitoring the foreign exchange markets and where appropriateentering into hedges. Hedging instruments include cross currency contracts (spot and forward), currency swaps and currency options.It is the Group’s policy to hedge the majority of transactional exposures to foreign currencies arising from forward sale and purchase commoditycontracts. These commodity contracts are entered into by the Group to manage against commodity price risk that arises as a result of commodityprices being denominated and at expiry, being settled in foreign currencies. Business units are required to identify their transactional exposuresand notify Group Treasury which will then enter into the appropriate hedge.Translation exposures arising from translating offshore subsidiaries into AUD for reporting purposes are not hedged. However, should anoffshore subsidiary pay a dividend to the parent, the foreign currency transaction will be hedged at the point in time the dividend is declared.Foreign currency exposure/sensitivity analysis as at balance dateA 1 cent movement in the US dollar against the Australian dollar would have a $0.8 million impact on post tax profit/(loss) on net monetaryassets/(liabilities) excluding hedging of future commodity purchases and sales.As at balance date, the Group’s foreign currency exposure before taking into account foreign currency derivatives that have been entered into aseconomic hedges to hedge future foreign currency receipts that will arise from settlement of forward purchase and sale commodity contracts isas follows (note - all sensitivity amounts are tax effected, the parent entity does not directly have exposure to foreign exchange):www.awb.com.au 103
<strong>AWB</strong> LIMITED Notes to and forming part of the financial statements for the year ended 30 September 200831. Financial Risk Management Objectives and Policies (continued)ConsolidatedAUD functional currencyUSD EUR CADA$’000 A$’000 A$’00030 September 2008Net exposure of financial assets and liabilities to foreign currency before the effect of economichedges on forward purchase and sale contracts 1 (2,497) 696 (1,739)Sensitivity - movements in functional currency: 2Appreciate 10% 315 184 1,019Depreciate 10% (384) (224) (1,251)Exposure to USD donominated borrowings via cross currency swap (89,700)Exposure to USD denominated inventory 89,700Net exposure -Appreciate 10% 5,708Depreciate 10% (6,977)USD borrowings (via AUD borrowings swapped to USD) have been used for funding the purchase of USD denominated inventory. Whileinventory is not a financial asset it has been included above to show the net position of these transactions to the Group. The sensitivity arisesdue to the swap being marked to market and the inventory being held as historic cost. The inventory is held by a USD functional currency entity.30 September 2007Net exposure of financial assets and liabilities to foreign currency before the effect of economichedges on forward purchase and sale contracts 1 (3,069) (22,039) 1,621Sensitivity - movements in functional currency: 2Appreciate 10% (451) 3,137 (89)Depreciate 10% 551 (3,444) 90USD functional currencyINR functional currencyEUR BRL USD AUDA$’000 A$’000 A$’000 A$’00030 September 2008Net exposure of financial assets and liabilities to foreign currencybefore the effect of economic hedges on forward purchase andsale contracts 1 5,858 3,120 99 -Sensitivity - movements in functional currency: 2Appreciate 10% (916) (199) (6) -Depreciate 10% 1,102 243 8 -30 September 2007Net exposure of financial assets and liabilities to foreign currencybefore the effect of economic hedges on forward purchase andsale contracts 1 13,061 (9,995) (13,239) (6,300)Sensitivity - movements in functional currency: 2Appreciate 10% 736 (1,998) 2,041 401Depreciate 10% (547) 2,844 (2,229) (490)1 Net exposures include the effect (notional value) of foreign currency related derivatives, which do not relate to forward purchases and salesof commodities.2 The sensitivity includes the effect of a 10% movement on non-derivative financial assets and liabilities net of the sensitivity on the fair valueof derivatives (as defined in footnote 1). For this reason profit and loss sensitivity results for some currencies are significant when comparedto the underlying exposure.104 www.awb.com.au
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6 www.awb.com.auFrom Peter Polson,C
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From Gordon Davis,Managing Director
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AWB todayOur client base extends to
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Landmark Rural ServicesRural Servic
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Financial Services (EBITDA)2004 44.
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Commodity ManagementCommodity Manag
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CorporateCredit ratingsAWB maintain
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People and communityPeopleThe busin
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22 www.awb.com.auManagement team
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24 www.awb.com.au
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Governance at AWBAWB’s Board and
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process was conducted within the co
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Information is regularly communicat
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Recommendation 9.3 - Clearly distin
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AWB Limited BoardPeter Polson Non-e
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36 www.awb.com.au
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AWB LIMITED Directors’ reportYour
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AWB LIMITED Directors’ reportDire
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AWB LIMITED Directors’ reportNon-
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AWB LIMITED Directors’ reportFixe
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AWB LIMITED Directors’ reportTabl
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AWB LIMITED Directors’ reportKMP
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AWB LIMITED Directors’ reportKey
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