notes to the financial statements
for the financial year ended 31 December 2014 (Continued)
51 FINANCIAL RISKMANAGEMENT OBJECTIVES AND POLICIES (CONTINUED)
Credit risk (continued)
(d) Financial guarantees (continued)
The maximum exposure to credit risk amounts to RM100,432,511 (2013: RM149,494,592) representing banking facilities utilised by the subsidiaries as at the
end of the financial year.
As at 31 December 2014, there was no indication that any subsidiary would default on repayment.
Financial guarantees have not been recognised since the fair value on initial recognition was not material as the probability of the subsidiaries defaulting on its
banking facilities is remote.
(e)
Time deposits and cash and bank balances
Time deposits and cash and bank balances are placed with approved financial institutions and reputable banks. The likelihood of non-performance by these
financial institutions is remote based on their high credit ratings.
Market risk
Market risk refers to the risk that changes in market prices, such as foreign exchange rates, interest rates and prices will affect the Group’s and the Company’s financial
position and cash flows.
(a)
Foreign currency risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The Group has transactional currency exposures arising from sales and purchases that are denominated in a currency other than the functional currencies of
the Group entities. The foreign currencies in relation to these transactions are mainly denominated in United States Dollar and Norwegian Kroner.
The Group maintains a natural hedge, whenever possible, by maintaining receivables and payables in matching foreign currencies. Foreign exchange exposures
in transactional currencies other than the functional currencies of the operating entities are kept to an acceptable level.
The Group also uses forward currency contracts to minimise exposure on currency fluctuations for which receipts or payments are anticipated more than
one month after the Group has entered into a firm commitment for a sale or purchase. The forward currency contracts entered are in the same currency as
the hedged item. It is the Group’s policy to negotiate the terms of the forward currency contracts to match the terms of the hedged item to maximise its
effectiveness.
The Group is mainly exposed to fluctuation in the United States Dollar exchange rate against the respective functional currencies of the Group entities. The
Group considers a 5% strengthening or weakening of the United States Dollar and Norwegian Kroner as a possible change.
A 5% strengthening or weakening of the United States Dollar would result in pre-tax profit being approximately RM1,494,000 (2013: RM6,206,600) lower
or higher for the Group. A 5% strengthening or weakening of the Norwegian Kroner would result in pre-tax profit being approximately RM1,042,000 (2013:
RM3,481,700) higher or lower for the Group. A 5% strengthening or weakening of the United States Dollar would result in pre-tax profit being approximately
RM1,318,000 (2013: RM2,552,000) higher or lower for the Company.
The Group considers that the foreign currency risk attributable to currencies other than the United States Dollar and Norwegian Kroner to be insignificant.
166
Wah Seong Corporation Berhad • Annual Report 2014
