MKH Annual Report 2020

231 MKH BERHAD 43. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT’D) (iv) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of the Group’s financial instruments will fluctuate because of changes in market interest rates. The Group’s exposure to interest rate risk relates to interest bearing financial assets and financial liabilities. Interest bearing financial assets include finance lease receivables, loan receivables and deposits with licensed banks. Deposits are placed for better yield returns than cash at banks and to satisfy conditions for bank guarantee. The Group’s interest bearing financial liabilities comprise hire purchases, bank overdrafts, revolving credits and term loans. The fixed deposits placed with licensed banks and loan receivables at fixed rate exposes the Group to fair value interest rate risk. The bank overdrafts, revolving credits and term loans totalling RM632,625,791 (2019: RM683,532,538) at floating rate expose the Group to cash flow interest rate risk whilst hire purchases of RM1,147,984 (2019: RM1,231,723) at fixed rate expose the Group to fair value interest rate risk. The Group manages its interest rate exposure by maintaining a prudent mix of fixed and floating rate borrowings. The Group also actively reviews its debts portfolio to ensure favourable rates are obtained, taking into account the investment holding period and nature of assets. As at the reporting date, a change of 50 basis points in interest rates, with all other variables held constant, would decrease/increase the total equity and profit after tax by approximately RM2,404,000 (2019: RM2,597,000), arising mainly as a result of higher/lower interest expense on floating rate loans and borrowings. 44. FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of the following classes of financial assets and liabilities are as follows: (i) Cash and cash equivalents, trade and other receivables and payables The carrying amounts approximate their fair values due to the relatively short-term maturities of these financial assets and liabilities. (ii) Long-term trade receivables and payables, loan receivables and finance lease receivables The fair values of long-term trade receivables and payables, loan receivables and finance lease receivables are estimated using expected future cash flows of contractual instalment payments discounted at current prevailing rates offered for similar types of credit or lending arrangements. Notes to the Financial Statements FOR THE FINANCIAL YEAR ENDED 30 SEPTEMBER 2020