127 / 248
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS
CONTINUED
For the year ended 31 May 2015
125
BLUE LABEL INTEGRATED ANNUAL REPORT 2015
3.
FINANCIAL RISKS continued
Cash flow and fair value interest rate risk
The Group’s cash flow interest rate risk arises from loans receivable, cash and cash equivalents and
borrowings carrying interest at variable rates. The Group is not exposed to fair value interest rate risk
as the Group does not have any fixed interest-bearing instruments carried at fair value.
As part of the process of managing the Group’s exposure to interest rate risk, interest rate
characteristics of new borrowings and the refinancing of existing borrowings are positioned according
to expected movements in interest rates.
Foreign currency risk
The Group is exposed to foreign currency risk from transactions and translation. Transaction exposure
arises because affiliated companies undertake transactions in currencies other than their functional
currency. Translation exposure arises where affiliated companies have a functional currency other than
the rand.
The Group manages its exposure to foreign currency risk by ensuring that the net foreign currency
exposure remains within acceptable levels. Hedging instruments may be used in certain instances to
reduce risks arising from foreign currency fluctuations.
IFRS 7 –
Sensitivity Analysis
The Group has used a sensitivity analysis technique that measures the estimated change to the
statement of comprehensive income of either an instantaneous increase or decrease of 1% (100 basis
points) in market interest rates or a 10% strengthening or weakening of the rand against all other
currencies, from the rates applicable at 31 May 2015, for each class of financial instrument with all
other variables remaining constant. This analysis is for illustrative purposes only, as in practice market
rates rarely change in isolation.
Interest rate sensitivity
The interest rate sensitivity analysis is based on the following assumptions:
•
•
Changes in market interest rates affect the interest income or expense of variable interest financial
instruments;
•
•
Changes in market interest rates only affect interest income or expense in relation to financial
instruments with fixed interest rates if these are recognised at fair value; and
•
•
Under these assumptions, a 1% increase or decrease in market interest rates at 31 May 2015
would increase or decrease profit before tax by R8.5 million (2014: R13.6 million).