Annual Report and Accounts 2006 - DCC plc

66notes to the financial statements1. Summary of significant accounting policies - continuedShare capitalTreasury sharesWhere the Company purchases the Company’s equity share capital, the consideration paid is deducted from totalshareholders’ equity and classified as treasury shares until they are cancelled. Where such shares are subsequently soldor reissued, any consideration received is included in total shareholders’ equity.DividendsDividends on Ordinary Shares are recognised as a liability in the Group’s financial statements in the period in which theyare approved by the shareholders of the Company. Dividends declared after the balance sheet date are disclosed in thedividends note.2. Financial risk managementFinancial risk factorsThe Group uses derivative financial instruments (principally interest rate, currency and cross currency interest rate swapsand forward foreign exchange and commodity contracts) to hedge certain risk exposures, as detailed below, arising fromoperational, financing and investment activities. The Group does not trade in financial instruments nor does it enter intoany leveraged derivative transactions.Financial risk management within the Group is governed by policies and guidelines reviewed and approved annually by theBoard of Directors. These policies and guidelines primarily cover foreign exchange risk, commodity price risk, credit risk,liquidity risk and interest rate risk. Monitoring of compliance with the policies and guidelines is managed by the EnterpriseRisk Management function.(i) Market riskForeign exchange riskThe Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures,primarily with respect to sterling and the US dollar. Foreign exchange risk arises from future commercial transactions,recognised assets and liabilities and net investments in foreign operations.Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in acurrency that is not the entity’s functional currency. Divisional and subsidiary management, in conjunction with GroupTreasury, manage foreign currency exposures within approved policies and guidelines using forward currency contracts.The Group generally hedges between 50% and 90% of transactions in each major currency for the subsequent 2 months.The Group also hedges approximately 50% of anticipated transactions in certain subsidiaries generally for periods up to 6months with such transactions qualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes.The Group has investments in sterling operations which are highly cash generative. The Group seeks to manage theresultant foreign currency translation risk through borrowings denominated in or swapped (utilising currency swaps orcross currency interest rate swaps) into sterling, although this is more than offset by the strong cumulative cash flowfrom the Group’s sterling operations.Price riskThe Group is exposed to commodity price risk in its LPG and oil distribution businesses. The Group generally hedgesapproximately 50% of its anticipated LPG commodity price exposure for the subsequent month with such transactionsqualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes.Certain customers occasionally require fixed price oil supply contracts generally for periods less than six months. In suchcircumstances, the Group enters into matching forward commodity contracts, not designated as hedges under IAS 39.The Group is not exposed to equity securities price risk.(ii) Credit riskThe Group has no significant concentrations of credit risk. The Group primarily sells to business customers and haspolicies in place to ensure that customers have an appropriate credit history. Sales, principally comprising home heatingfuels, to non-business customers are made in cash, by direct debit or via major credit cards. Derivative counterparties andcash transactions are limited to high credit quality financial institutions. The Group has policies that limit the amount ofcredit exposure to any financial institution.