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Axiata Group Berhad | Annual Report 2016
FINANCIAL STATEMENTS
232
NOTES TO THE FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2016
39. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED)
(b) credit risk – risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.
(c) liquidity risk (funding risk) – risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial
instruments.
The Group’s and the Company’s overall financial risk management programme focuses on the unpredictability of financial markets and seeks
to minimise potential adverse effects on the financial performance of the Group and the Company. Financial risk management is carried out
through risk reviews, internal control systems, insurance programmes and adherence to the Group’s and the Company’s financial risk management
policies. The Board of Directors regularly reviews these risks and approves the treasury policies, which covers the management of these risks.
Hedging transactions are determined in the light of commercial commitments. Derivative financial instruments are mainly used to hedge underlying
commercial exposures.
(a) Market risks
(i) Foreign currency exchange risk
Group
The foreign exchange risk of the Group predominately arises from borrowings denominated in foreign currencies. The main currency
exposure from borrowings denominated in foreign currency is USD. The Group has cross currency swaps and call spread options that
are primarily used to hedge selected foreign currency borrowings to reduce the foreign currency exposures on these borrowings.
The Group has certain investment in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency
exposure arising from the net assets of the Group’s foreign operation is managed primarily through borrowings denominated in the
relevant foreign currency and also the use of cross currency swap.
As at 31 December 2016, if USD has strengthen/weakened by 5% against IDR, BDT, SLR and RM with all other variables held constant,
this will result in foreign exchange losses/gains to the profit or loss of RM328.5 million for the Group on translation of USD denominated
non-hedged borrowings.
Company
The foreign exchange risk of the Company predominately arises from advances to subsidiaries treated as quasi investment and non-
hedged borrowings denominated in USD.
As at 31 December 2016, if USD has strengthen/weakened by 5% against RM with all other variables held constant, this will result in
foreign exchange gains/losses to the profit or loss of RM580.4 million for the Company, on translation of USD denominated advances to
subsidiaries treated as quasi investment and non-hedged borrowings.
(ii) Cash flow and fair value interest rate risk
The Group and the Company have deposits, cash and bank balances including deposits placed with creditworthy licensed banks and
financial institutions. The Group and the Company manage its interest rate risk by actively monitoring the yield curve trend and interest
rate movement for the various deposits, cash and bank balances.
The Group’s borrowings comprise borrowings from financial institutions, Sukuks and Notes. The Group's interest rate risk objective
is to manage an acceptable level of rate fluctuation on the interest expense. In order to achieve this objective, the Group targets a
composition of fixed and floating borrowings based on assessment of its existing exposure and desirable interest rate profile. To obtain
this composition, the Group uses hedging instruments such as interest rate swap contracts and cross currency interest rate swaps.
Group
As at 31 December 2016, if interest rate on different foreign currencies denominated floating interest rates non-hedged borrowings had
been lower/higher by 5% with all other variables held constant, this will result in a lower/higher interest expense of the Group amounting
to RM22.9 million.