annual report - Pumpkin Patch investor relations

PUMPKIN PATCH LIMITED & SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS 31 JULY 2010
PUMPKIN PATCH LIMITED & SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS 31 JULY 2010
25 FINANCIAL RISK MANAGEMENT
The GroupÕs activities expose it to a variety of financial risks: market risk (including currency
risk and interest rate risk), credit risk and liquidity risk. The GroupÕs overall risk management
programme focuses on the unpredictability of financial markets and seeks to minimise
potential adverse effects on the financial performance of the Group. The Group uses
derivative financial instruments such as foreign exchange contracts and options and interest
rate swaps to manage certain risk exposures. Derivatives are exclusively used for economic
hedging purposes (ie not as trading or other speculative instruments), however not all
derivative financial instruments qualify for hedge accounting.
Risk management is carried out based on policies approved by the Board of Directors. The
Group treasury policy provides written principles for overall risk management, as well as
policies covering specific areas, such as foreign exchange risk. The Parent is not directly
exposed to any significant financial risk.
(iii) Summarised sensitivity analysis
The following table summarises the sensitivity of the GroupÕs financial assets and financial
liabilities to interest rate risk and foreign exchange risk.
A sensitivity of 10% for foreign exchange risk has been selected. Despite the recent volatility
in the currency markets over the past 12 months, an overall sensitivity of 10% is considered
to be reasonable based upon the exchange rate volatility observed on a historic basis for
the preceding five year period and market expectation for potential future movements.
A sensitivity of 1% has been selected for interest rate risk. The 1% sensitivity is based on
reasonably possible changes over a financial year, using the observed range of historical
data for the preceding five year period.
Amounts are shown net of income tax. All variables other than applicable interest rates and
exchange rates are held constant.
(A) MARKET RISK
(i) Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from
various currency exposures, primarily with respect to the United States dollar, the British
pound and Australian dollar.
The purpose of the GroupÕs foreign currency risk management activities is to protect the
Group from exchange rate volatility with respect to the New Zealand dollar net cash
movements resulting from the sale of products in foreign currencies to foreign customers and
the purchase of products and raw materials in foreign currencies from foreign suppliers.
The Group enters into foreign currency option contracts and forward foreign currency
contracts within policy parameters to manage risk associated with anticipated sales or
costs denominated principally in United States dollars, British pounds and the Australian
dollar. The terms of the foreign currency option contracts and the forward foreign currency
contracts do not exceed three years. These anticipated sales or costs qualify as highly
probable forecasts for hedge accounting purposes.
Refer to note 10 which shows the forward foreign exchange contracts and options held
by the Group as derivative financial instruments at balance date. A sensitivity analysis of
foreign exchange rate risk on the GroupÕs financial assets and liabilities is provided in the
table below.
(ii) Cash flow and fair value interest rate risk
The GroupÕs main interest rate risk arises from floating rate borrowings drawn down under
bank debt facilities. When deemed appropriate, the Group manages floating interest rate
risk by using floating to fixed interest rate swaps. Interest rate swaps have the economic
effect of converting borrowings from floating to fixed rates.
Refer to note 10 for notional principal amounts and valuations of interest rate swaps
outstanding at balance date. A sensitivity analysis of interest rate risk on the GroupÕs
financial assets and liabilities is provided in the table below. Refer to Note 16 for further
details of the GroupÕs borrowings.
20
years
young
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