Annual Report 2012 - IOI Group

NOTES TO THEFINANCIAL STATEMENTS42. FINANCIAL INSTRUMENTS (Continued)42.1 Foreign currency riskThe Group operates internationally and is exposed to various currencies, mainly US Dollar (“USD”), Euro (“EUR”), SingaporeDollar (“SGD”) and Japanese Yen (“JPY”). Foreign currency denominated assets and liabilities together with expected cashflows from committed purchases and sales give rise to foreign currency exposures.The Group’s foreign currency risk management objective is to minimise foreign currency exposure that gives rise to economicimpact, both at transaction and reporting period translation levels.42.1.1 Risk management approachThe Group maintains a natural hedge, whenever possible, by borrowing in the currency of the country, in which theproperty or investment is located or by borrowing in currencies that match the future revenue stream to begenerated from its investments.Foreign currency exposures in transactional currencies other than functional currencies of the operating entities arekept to an acceptable level. Material foreign currency transaction exposures are hedged with derivative financialinstruments such as forward foreign exchange contracts and options on a back-to-back basis.The downstream segment’s forward contractual commitments intended to be physically settled are fully hedged of itscurrency risk on a back-to-back basis with currency forward contracts. Where the netting of forward sales againstforward purchases with matching currency risk characteristics is possible, these would first be netted before hedging thenet currency exposure with forward contracts. Currency risk on forward contractual commitments with clear intentionfor net-cash settlement (i.e. paper trading) are not considered for hedging until the exercising of the net settlement.The hedging methods that the Group adopts in managing its currency risk depend on the principal forms of foreigncurrency exposure, as discussed below:i. Structural foreign currency exposure from its net investment in foreign operations (subsidiaries, associates,and joint ventures)BackgroundThe Group’s foreign operations of various functional currencies when translated into its parent’s reporting currencybased on closing rates (for assets and liabilities) and average transaction rates (for income and expenses) at eachconsolidation, gives rise to foreign currency translation gain or loss that will be recognised in other comprehensiveincome. Intragroup transactions with foreign operations involving monetary financial instruments will also result inforeign currency translation gain or loss that cannot be eliminated on consolidation, but has to be recognisedeither in profit or loss or in other comprehensive income. However, non-monetary financial items translated athistorical exchange rates will not give rise to foreign currency risk. Resulting from its net investment in foreignoperations, the Group’s current and future profit stream in various foreign currencies will also be exposed toforeign currency risk.Hedging methodWhere feasible the Group would match its foreign currency borrowing with the functional currency of its foreignoperations. Nevertheless, the Group considers such foreign currencies’ overall fiscal position and borrowing costsbefore deciding on the currency major to be carried as debt in its book. In this regard, the Group has major foreigncurrency borrowings denominated in USD, EUR, SGD and JPY, which do not necessarily match all the functionalcurrencies of its foreign operations. Where appropriate, exposures from mismatch in foreign currency borrowingsare hedged with Cross Currency Swap.214IOI CORPORATION BERHADAnnual Report 2012