163 / 198
For the year ended 31 May 2016
161
BLUE LABEL INTEGRATED ANNUAL REPORT 2016
NOTES TO THE COMPANY ANNUAL FINANCIAL STATEMENTS
continued
2.
Financial risks
continued
Cash flow and fair value interest rate risk
The Company’s cash flow interest rate risk arises from loans receivable and cash and cash equivalents. The Company
is not exposed to fair value interest rate risk as the Company does not have any fixed interest-bearing instruments
carried at fair value nor any interest-bearing borrowings.
As part of the process of managing the Company’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 Company is exposed to foreign currency risk from transactions. Transaction exposure arises due to the Company
granting loans to affiliated companies in foreign currencies.
The Company manages its exposure to foreign currency risk by ensuring that the net foreign currency exposure
remains within acceptable levels. Hedging instruments are used in certain instances to reduce risks arising from
foreign currency fluctuations. The Company did not enter into any forward exchange contracts during the period
under review.
IFRS 7 –
Sensitivity Analysis
The Company 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 2016, 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; and
•
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.
Under these assumptions, a 1% increase or decrease in market interest rates at 31 May 2016 would increase or
decrease profit before tax by R1.2 million (2015: R22 830).