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<strong>KNM</strong> GROUP BERHAD I Annual Report 2012111Notes to the Financial Statements (cont’d)28. Financial instruments (Cont’d)28.6 Foreign currency riskThe Group operates in 20 countries and is exposed to various currencies that gives rise to foreignexchange (FX) risk from the translation of its foreign investments and from FX transactions on its salesand purchases denominated in foreign currency. The Group’s main foreign currency exposure is inUSD and EUR and MYR. MYR exposure is attributed to certain of the Company’s subsidiaries locatedin Malaysia but adopting their functional currency in USD and EUR respectively. The Group’s foreigncurrency risk management objective is to minimise transactional FOREX exposure that gives rise toeconomic impact.Policies and Processesi) Transactional forward obligations or rights denominated in foreign currency.Transactional FX risk arises mainly from contracted projects’ future monetary obligation and rightsdenominated in currency other than the transaction originating currency. These highly probablefuture cash flows in foreign currency are first netted based on matching FX risk characteristics fornatural hedge, with any net balance exposure being further hedge off with FX Forward Contracts.It is the Group’s policy to attain best full hedge in transactional FX risk.ii)Net investment in Foreign Operations.The Group does consider matching foreign currency borrowing with the functional currency of itsforeign operations in mitigating FX translation gain/loss that are recognised in a separate componentof equity. However, this decision is driven by feasibility factors such as the ability to time the futurecash flows, availability of foreign currency debt funding, and the foreign currencies’ fiscal positionand borrowing cost.Where circumstances permit, FX hedges on the abovementioned would be designated for hedgeaccounting either as cash-flow hedges, fair value hedges, or net-investment hedges.The table below sets out the Group’s significant financial assets’ and liabilities’ FX exposure based onthe notional or contractual amount for USD, Euro and MYR.Denominated inGroup USD Euro RM31 December 2012 RM’000 RM’000 RM’000Trade receivables 23,929 28,259 2,230Cash at bank balances 542 1,927 5,631Trade payables (15,386) (15,228) (34,154)Other payables and accruals (58) – (20,181)Bill Payables (51,583) (26,839) (9,736)Forward exchange contracts 42 (739) (11)Net exposure in the statement offinancial position (42,514) (12,620) (56,221)31 December 2011Trade receivables 21,887 23,409 2,725Cash at bank balances 11,608 13,987 10,182Trade payables (3,399) (1,459) (27,759)Other payables and accruals (535) – (378)Bill Payables (46,767) (14,802) (26,459)Forward exchange contracts 6,317 (15,880) (764)Net exposure in the statement offinancial position (10,889) 5,255 (42,453)
112<strong>KNM</strong> GROUP BERHAD I Annual Report 2012Notes to the Financial Statements (cont’d)28. Financial instruments (Cont’d)28.6 Foreign currency risk (cont’d)Denominated inGroup USD Euro RM1 January 2011 RM’000 RM’000 RM’000Trade receivables 12,779 6,170 15,289Deposit with licensed bank 12,649 – –Cash at bank balances 4,945 12,259 2,061Trade payables (4,101) (7,692) (6,423)Other payables and accruals (856) (1,122) (4,134)Bill Payables (15,674) (2,838) (1,391)Forward exchange contracts (6,295) 64 –Net exposure in the statement offinancial position 3,447 6,841 5,402Currency risk sensitivity analysisForeign currency risk mainly arises from Group entities which have US Dollar and Euro functionalcurrency. The exposure to currency risk of Group entities which do not have a US Dollar and Eurofunctional currency is not material and hence, sensitivity analysis is not presented.A 5 percent strengthening of Malaysian Ringgit against the US Dollar and Euro at the end of the reportingperiod would have increased equity and post-tax profit or loss by the amounts shown below. This analysisassumes that all other variables, in particular interest rates, remain constant.EquityProfit or loss2012 2011 2012 2011RM’000 RM’000 RM’000 RM’000USD 21,862 22,353 (1,594) (408)EURO 55,312 53,746 (473) 197RM – – (2,108) (1,592)A 5 percent weakening of Malaysian Ringgit against the US Dollar and Euro at the end of the reportingperiod would have had equal but opposite effect on the above currencies to the amounts shown above,on the basis that all other variables remained constant.28.7 Interest rate riskThe Group’s interest rate risk arises from its interest bearing financial instruments that could impact fairvalue and future cash-flows due to fluctuation in market interest rates. The Group’s objective on interestrate risk management is to achieve a balance in re-pricing risk and the optimisation of pricing whilstensuring sufficient liquidity to meet funding needs.Policies and ProcessesInterest bearing financial assets are mainly temporary surpluses or funds held for liquidity purposes andare placed on short-term or on demand basis. Interest bearing financial liabilities are mixture of shortterm trade/ credit facilities with re-pricing exposure, and long-term loans with fixed pricing. The Groupconstantly reviews its portfolio of interest bearing financial liabilities with the view to mitigate as muchas possible its re-pricing risk taking into account the nature and requirement of its businesses, andavailability from issuers of such financial liabilities.
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