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Notes to the Financial Statements
Washington H. Soul Pattinson and Company Limited
Annual Report 2016
96
Risk Management
NOTE 20
FINANCIAL RISK MANAGEMENT
20
a) Market Risk
i. Foreign exchange risk
(continued)
The Group’s exposure to foreign currency risk at the reporting date was as follows:
2016
2015
USD $’000
USD $’000
US Dollar exposure
Cash and cash equivalents
9,135
3,867
Trade receivables
13,501
11,383
Forward exchange contracts – sell foreign currency (cash flow hedge)
20,000
137,000
Trade payables
389
11
Sensitivity analysis
Based on the trade receivables, cash held and trade payables at 31 July 2016, had the Australian dollar weakened/
strengthened by 10% against the US dollar with all other variables held constant, the Group’s post-tax profit
for the year would have increased/(decreased) by $2.300 million/($1.882 million) (2015: $1.638 million/($1.380
million)), mainly as a result of foreign exchange gains/(losses) on translation of US dollar receivables and cash
balances as detailed in the above table. The Group’s equity as at reporting date would have increased/(decreased)
by the same amounts.
Based on the forward exchange contracts held at 31 July 2016, had the Australian dollar weakened/strengthened
by 10% against the US dollar with all other variables held constant, the Group’s equity would have increased/
(decreased) by $2.961 million/($2.419 million) (2015: $21.075 million/($17.208 million)). There is no effect on
post-tax profits.
ii. Price Risk
The Group is an investment company and is exposed to equity securities price risk. The majority of the Group’s
investments are publicly traded on the Australian Securities Exchange.
Investments held for the long-term are classified in the statement of financial position as ‘long term equity
investments’. As the market value of individual companies fluctuate, the fair value of the portfolio changes with
the movement being recognised directly to equity. Where an investment’s value falls below its cost, management
may consider the investment to be impaired. An impairment expense is recognised in the income statement.
Investments held for the short to medium term are classified in the statement of financial position as trading
equities. As the market value of individual companies fluctuate, the fair value of this portfolio changes with the
movement being recognised through the income statement.
Investments in associates are not carried at fair value in the statement of financial position but are instead equity
accounted. The initial investment is increased/(decreased) by the Group’s share of the associate’s profits/(losses) as
recognised in the income statement, movements in their reserves (other comprehensive income) and decreased
by dividends received. For listed associates the market value is taken into consideration when assessing the
recoverable value of an equity accounted associate.
Sensitivity analysis
The following table summarises the financial impacts of a hypothetical 5% decrease in the market value of those
investments (trading equities and long term equity investments) that are carried at fair value as at reporting
date. Where this decrease results in an individual security being valued below its cost, the reduction below cost
may be recognised in the income statement where Directors consider the investment to be impaired. For long
term equity investments, a 5% increase in market values would have no impact on the income statement as all
increases are recognised directly in equity.