RISK MANAGEMENT DISCLOSURES

Transcription

1 RISK MANAGEMENT DISCLOSURES

2 Objective The main objectives are: Providing disclosures that enable users to evaluate the significance of financial instruments relating to an entity's financial position and performance. Disclosing the nature and extent of risks appearing from the financial instruments to which an entity is exposed, and how those risks have been managed or to be managed. 2

3 Scope The standard in overall sense applies to all risks arising from all financial instruments, including those instruments that are not recognized onbalance sheet. For example, loan commitments are not within the scope of Financial Instruments: but their Recognition and Measurement are within the scope of IFRS 7/IPSAS 30. Contracts to buy or sell a non-financial item that are within the scope (as derivative financial instruments) are also within the scope of IFRS 7/IPSAS 30. 3

4 Statement of Financial Position Financial assets at fair value through profit or loss. Held-to maturity investments. Loans and receivables. Available-for-sale financial assets. Financial liabilities at fair value through profit or loss Financial liabilities measured at amortized cost 4

5 Financial assets at fair value through profit or loss These include financial assets that the bank either holds for trading purposes or has otherwise elected to classify into this category. A financial asset is held for trading if the bank acquired it for the purpose of selling it in the near future, or it is part of a portfolio of financial assets subject to trading. 5

6 Held-to maturity investments These include investments in debt instruments that the company will not sell before their maturity date, irrespective of changes in market prices or the company's financial position or performance of the Company. 6

7 Loans and receivables These include financial assets with fixed or determinable payments that do not have a quoted price in an active market. A bank can classify accounts receivables and loans to customers under this category. 7

8 Available-for-sale financial assets This category includes financial assets that do not fall into any of the other categories, or those assets that the bank has elected to classify into this category. For example- a company could classify some of its investments in debt and equity instruments as available-for-sale financial assets. 8

9 inancial liabilities at fair value hrough profit or loss Financial liabilities at fair value through profit or loss include financial liabilities that the bank either has incurred for trading purposes or has otherwise elected to classify into this category. For example- An issued debt instrument that the bank intends to repurchase soon - to make a gain from short-term movements in interest rates 9

10 Financial liabilities measured at amortized cost Financial liabilities measured at amortized cost is the default category for financial liabilities that do not meet the definition of financial liabilities at fair value through profit or loss. For example- accounts payables, loan notes payable, issued debt instruments, and deposits from customers, etc. 10

11 inancial liabilities at fair value hrough profit or loss Financial liabilities at fair value through profit or loss include financial liabilities that the bank either has incurred for trading purposes or has otherwise elected to classify into this category. For example- An issued debt instrument that the bank intends to repurchase soon - to make a gain from short-term movements in interest rates 11

12 Qualitative Risk Disclosures The qualitative disclosures should include a narrative description of the risks the bank is exposed to and how they arise. The policies and processes for managing the risks would typically include: The structure and organization of the risk management function The scope and nature of the risk reporting and measurement systems 12

13 Qualitative Risk Disclosures (Contd) The policies and procedures for hedging or mitigating risks, including the taking of collateral Processes for monitoring the continuing effectiveness of hedges and other risk mitigating devices Policies and procedures for avoiding excessive concentrations of risk. 13

14 Quantitative Risk Disclosures Credit Risk Credit Concentrations Maximum Credit Exposures Financial Assets that are neither past due nor impaired Financial Assets that either past due or impaired Liquidity Risk Market Risk 14

15 Liquidity Risk Factors mentioned in the Implementation Guidance that the entity might consider in describing how manages its liquidity risks include whether the bank (entity): expects some liabilities may be paid later than the earliest contractual due date has undrawn loan commitments that are not expected to be drawn holds financial assets for which there is a liquid market and are, therefore, readily saleable to meet liquidity needs has committed borrowing facilities which it could use to help provide liquidity 15

16 Market Risk Market risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices and includes interest rate risk, foreign currency risk and other price risks, such as equity and commodity risk. A separate sensitivity analysis for each type of market risk to which the bank is exposed at the reporting date, based on changes in the risk variable that are considered reasonably possible at that date 16

17 Financial Risk Management Example of notes to the financial statements: Entity A s activities expose it to a variety of financial risks including credit risk, liquidity risk, effects of changes in foreign currency and interest rate risk. The Entity s overall risk management programme focuses on unpredictability of changes in the business environment and seeks to minimise the potential adverse effect of such risks on its performance by setting acceptable levels of risk. Risk management is carried out by the management under policies approved by the board of directors. Management identifies, evaluates and where appropriate, hedges financial risks. The board provides written principles for overall risk management. 17

18 Financial Risk Management Example of notes to the financial statements: The Entity has policies in place to ensure that credit sales are only extended to customers with an appropriate credit history. There has been no change to the Entity s exposure to market risks or the manner in which it manages and measures risk. 18

19 Market Risk (i) Foreign exchange risk The Entity is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. Monetary assets and liabilities held in foreign currencies are closely monitored to ensure that they are not materially affected by adverse foreign currency fluctuations. The carrying amounts of the Entity s foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period are as follows; 19

20 Market Risk (Contd.) (i) Foreign exchange risk Liabilities Assets Currency 30-Jun 30-Jun 30-Jun 30-Jun Sh 000 Sh 000 Sh 000 Sh 000 US Dollars 5,000,000 3,000, ,000 76,000 ======= ======== ======= ======= At 30 June 2015, if the Shilling had weakened/strengthened by 5% against the US dollar with all other variables held constant, the impact on profit/(loss) before taxation for the year would have been Sh. 180,000,000 (2014: Sh 160,000,000) higher/lower, mainly as a result of translation of US dollar borrowings and bank balances. 20

21 Market Risk (Contd.) Interest rate risk The Entity is exposed to interest rate risk as it borrows funds both at fixed and floating interest rates. The risk is managed by the board through close monitoring. An increase/decrease of 5 percentage points on average borrowing rates during the year would have resulted in an increase/decrease in profit/(loss) before taxation of Sh. 10,628,700 (2014: Sh. 8,614,900). 21

22 Market Risk (Contd.) Price risk The Entity is exposed to equity securities price risk because of investments in quoted shares classified at fair value through profit or loss. The Entity diversifies its portfolio for the purposes of minimising exposure in this area. All quoted shares held by the Entity are traded on the Nairobi Securities Exchange (NSE). At 30 June 2015, an increase/decrease of 5 percent on prices of the securities held would have resulted in an increase/decrease in profit/(loss) before taxation by Sh.8,967,600 (2014:- Sh 7,355,700). 22

23 Credit Risk Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in financial loss to the Entity. The Entity has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from default. The Entity s exposure and the credit rating of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. 23

24 Credit Risk Credit exposure is controlled by setting counterparty limits that are reviewed and approved by management at regular intervals spreading to one year at most. Trade receivables consist of a large number of customers, spread across diverse geographical areas. 24

25 Credit Risk (Contd.) On an ongoing basis, a credit evaluation is performed on the financial condition of the customers. The credit risk on bank balances and short term deposits is limited because the counterparties are banks with high credit ratings assigned by the banking regulatory authority. The carrying amount of financial assets recorded in the financial statements that represents the Entity s maximum exposure to credit risk obtained is as follows: 25

26 Credit Risk (Contd.) 30-June-15 Fully performing Past due Impaired Total Sh 000 Sh 000 Sh 000 Sh 000 Due from related companies 188, ,768 Trade receivables 208, , , ,543 Bank balances 10, , , , , ,297 ======= ====== ====== ======= 26

27 Credit Risk (Contd.) 30-June-14 Fully performing Past due Impaired Total Sh 000 Sh 000 Sh 000 Sh 000 Due from related companies 285, ,204 Trade receivables 199, , , ,162 Bank balances 20, , , , , ,501 ======= ====== ====== ======= 27

28 Credit Risk (Contd.) The analysis of the age of receivables that are past due but not impaired for the Entity is as shown below; Age in Days Shs 000 Shs days 77,987 56, days 24,657 26, days 34,154 22, , ,000 ======= ======= 28

29 Credit Risk (Contd.) As at the end of the reporting period, no collateral (2014- nil) was being held as a means of mitigating the risk of financial loss from default. The customers under the fully performing category are paying their debts as they continue trading. The default rate is low. Part of the debt that is past due is not impaired and continues to be paid. The finance department is actively following up this debt. The debt that is impaired has been fully provided for. However, the finance department is pursuing various measures to recover the impaired debt. 29

30 Liquidity Risk The ultimate responsibility for liquidity risk management rests with the board of directors, which has developed and put in place an appropriate liquidity risk management framework for the management of the Entity s short, medium and longterm funding and liquidity management requirements. The Entity manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. 30

31 Liquidity Risk (Contd.) The table below analyses the Entity s financial liabilities that will be settled on a net basis into relevant maturity Groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts, as the impact of discounting is not significant. 31

32 Liquidity Risk (Contd.) At 30 June month Total months 12months months Sh 000 Sh 000 Sh 000 Sh 000 Sh 000 Trade payables 30,987 44, ,976 Borrowings (line of credit) 480,765 1,629,104 1,329,876 Borrowings (finance lease) , ,719 3,439,745 24,945 Bank overdraft ,987-45, ,552 1,674,760 1,838,084 4,025,396 ======= ======== ======== ====== ======== 32

33 Liquidity Risk (Contd.) 1 month 1 3 months 4 12 months 12 months Total Trade payables 25,476 33, , ,363 Borrowings (line of credit) 593,581 1,429,766 1,356,486-3,379,833 Borrowings (finance lease) 1,418 2,836 31,707-35,961 Bank overdraft ,874-82, ,475 1,466,337 2,036,219-4,123,031 ======= ======= ======= === ======= = 33

34 Fair value of financial assets and liabilities Determination of fair value and fair values hierarchy IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Group s market assumptions. These two types of inputs have created the following fair value hierarchy: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges. Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). 34

35 Fair value of financial assets and liabilities (Contd.) Level 3 inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Group considers relevant and observable market prices in its valuations where possible. The following table shows an analysis of financial and nonfinancial instruments recorded at fair value by level of the fair value hierarchy: 35

36 Fair value of financial assets and liabilities (Contd.) At 30 June 2015 Level 1 Level 2 Level 3 Total Sh 000 Sh 000 Sh 000 Sh 000 Financial Assets Quoted equity investments 152, ,876 Non- financial Assets Investment property - 649, ,718 Land and buildings - 665, ,000 At 30 June ,876 1,314,718-1,467,594 ======== ======== ======= ======== Financial Assets Quoted equity investments 147, ,114 Non- financial Assets Investment property - 546, ,895 Land and buildings - 665, , ,114 1,211,895-1,359,009 ======== ======== ======== ======== 36

37 Fair value of financial assets and liabilities (Contd.) a) Financial instruments measured at fair value There were no transfers between levels 1, 2 and 3 during the year. b) Financial instruments not measured at fair value Disclosures of fair values of financial instruments not measured at fair value have not been made because the carrying amounts are a reasonable approximation of their fair values. 37

38 Capital Risk Management An Entity Shall Disclose the following: 1. Qualitative information about its objectives, policies and processes for managing capital, including: A description of what it manages as capital; When an entity is subject to externally imposed capital requirements, the nature of those requirements and how those requirements are incorporated into the management of capital; and How it is meeting its objectives for managing capital. 38

39 Capital Risk Management An Entity Shall Disclose the following: 2. Summary quantitative data about what it manages as capital. Some entities regard some financial liabilities (eg some forms of subordinated debt) as part of capital. Other entities regard capital as excluding some components of equity (eg components arising from cash flow hedges). 3. Any changes in (a) and (b) from the previous period. 39

40 Capital Risk Management An Entity Shall Disclose the following: 4.Whether during the period it complied with any externally imposed capital requirements to which it is subject. 5.When the entity has not complied with such externally imposed capital requirements, the consequences of such non-compliance. 40

41 Capital Risk Management An entity need to disclose how they manage their Capital to remain as a going concern and maximize the shareholders returns. Whether there is any change in strategy adopted by the entity for Capital Management. How often is the Capital Structure reviewed to consider the cost of capital and risks associated with each class of capital. 41

42 Capital Risk Management Gearing Ratio need to be determined === Net Debt to Equity Ratio where Equity includes all capital and reserves of the entity that are managed as capital. 42

43 Capital Risk Management - Examples The entity manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimization of the debt and equity balances. The capital structure of the entity consists of debt, which includes the borrowings, finance leases, cash and cash equivalents and equity attributable to equity holders, comprising issued capital, other reserves and retained earnings. 43

44 Capital Risk Management - Examples The Entity monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by equity. Net debt is calculated as total borrowings less cash and cash equivalents. 44

45 Capital Risk Management - Examples Share capital 7,724 7,724 Share premium 33,515 33,515 Revaluation surplus 411, ,391 Revenue deficit -18, ,763 Translation reserves 1,587 43,533 Shareholders funds/ (deficit) 435, ,600 Borrowings: Line of credit 3,269,097 3,948,348 Bank overdraft 82,874 50,398 Finance lease obligations 146,698 96,144 Total borrowings 3,498,669 4,094,890 Less: cash and cash equivalents -20,225-40,325 Net debt 3,478,444 4,054,565 Gearing 12.50% Over 100% ======= ======== 45

46 Capital Risk Management - Examples Debt ratio, an alternative gearing ratio calculated as net debt divided by total assets is as shown below Net debt 3,478,444 4,054,565 Total assets 4,808,289 4,959,465 Gearing Debt ratio 75% 82% ======== ======== 46

47 Deloitte Q&A 47

48 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.