FGV Annual Report 2012

37 F i n a n c i a l S t a t e m e n t s 2 0 1 2 P e n y a t a K e w a n g a n 4 FINANCIAL RISK MANAGEMENT (a) Financial risk management policies The Group is exposed to market risk, credit risk and liquidity risk arising from its business activities. The Group’s overall risk management strategy seeks to minimise adverse effects from the unpredictability of financial markets on the Group’s financial performance. The Group uses relevant financial instruments to hedge the risk of such commercial exposure. Such financial instruments are not mainly held for trade or speculative purposes. The Board of Directors has overall responsibility for the oversight of financial risk management which include risk identification, operational or strategic, and the subsequent action plans to manage these risks. Management is responsible for identifying, monitoring and managing the Group’s risk exposures. Market risk (i) Foreign currency risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US Dollar (“USD”) and the Canadian Dollar (“CAD”). Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. The Group manages its currency exposure through currency forward contracts. A 10% strengthening/weakening of the USD and CAD against the Malaysian Ringgit (“RM”) at the date of statement of financial position would have an impact to Group’s profit after tax approximately of RM23,138,000 higher/lower (2011: RM40,465,000 higher/lower), mainly as a result of foreign exchange gains/losses on translation of foreign currency denominated trade receivables, financial assets at fair value through profit or loss and foreign exchange losses/gains on translation of foreign currency denominated borrowings. Similarly, the impact on to Group’s equity would have been approximately RM123,530,000 higher/lower (2011: RM43,636,000 higher/lower) (including foreign exchange reserves impact of RM100,392,000 higher/lower (2011: RM3,171,000 higher/lower)) due to movement in foreign currency reserve as a result of translation of net investment in foreign subsidiaries. The analysis assumes that all other variables remain constant. (ii) Commodity price risk The Group is exposed to commodity price risk since the price of oil palm fresh fruit bunches, crude palm oil (“CPO”) and sugar prices are subject to fluctuations due to unpredictable factors such as weather, change of global demand, global production, crude oil prices and global production of similar and completive crops. Revenue of the Group is therefore subject to price fluctuations in the commodity market. The Group uses palm oil futures contracts and sugar futures contracts to mitigate a portion of such risks. As at 31 December 2012, a sensitivity analysis has been performed based on the Group’s exposure to commodity prices as at settlement date for the Group’s LLA liability and commodity derivative portfolios. A 10% increase in certain commodity price indexes and a RM100 increase in CPO prices assumed in calculating the LLA liability, with all other variables being held constant, would increase or decrease the Group’s profit after tax, by type of commodity and financial liability, by approximately: 2012 2011 RM’000 RM’000 Palm oil (1,483) – Sugar 971 (3,849) LLA liability (37,000) – (37,512) (3,849) A 10% decrease in certain commodity price indexes and a RM100 decrease in CPO prices assumed in calculating the LLA liability, with all other variables being held constant, would increase or decrease the Group’s profit after tax, by type of commodity and financial liability, by approximately: 2012 2011 RM’000 RM’000 Palm oil 1,483 – Sugar (971) 3,849 LLA liability 37,000 – 37,512 3,849