37. FINANCIAL INSTRUMENTS (continued) (c) Fair value information (continued) The fair values of long term receivables and payables are estimated by discounting the expected future cash flows at weighted average cost of capital, which is similar to the market incremental lending rate offered by financial institution and hence, the carrying amounts of the financial instruments are reasonable approximation of fair value. Fair value of the borrowings, long term receivables and payables of the Group and of the Company are categorised as Level 2 in the fair value hierarchy. There is no transfer between levels in the hierarchy during the financial year. 38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The financial risk management objectives of the Group are to optimise value creation for shareholders whilst minimising the potential adverse impact arising from fluctuations in foreign currency exchange and interest rates and the unpredictability of the financial markets. The Group is exposed mainly to foreign currency risk, interest rate risk, liquidity and cash flow risks and credit risk. Information on the management of the related exposures is detailed below: (i) Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group is exposed to foreign exchange rate risk on sales and purchases and amount owing to a shareholder that are denominated in a currency other than the respective functional currencies of Group entities. The currencies giving rise to this risk are primarily United States Dollar (“USD”) and Hong Kong Dollar (“HKD”). The Group and the Company also hold cash and bank balances denominated in foreign currencies for working capital purposes. Information regarding the currency exposure profile of cash and bank balances is disclosed in Note 20 to the financial statements. The Group does not hedge these exposures by purchasing or selling forward currency contracts at present. However, the management keeps this policy under review. In respect of its overseas subsidiaries, the Group maintains a natural hedge, where possible, by borrowing in the currency of the country in which the subsidiary is located or by borrowing in currencies that match the future revenue stream to be generated from its subsidiaries. Sensitivity analysis for foreign currency risk The following table demonstrates the sensitivity of the Group’s and of the Company’s profit/(loss) after tax to a reasonably possible change in the USD and HKD exchange rates against the Ringgit Malaysia (“RM”) respectively, with all other variables held constant. 10% is the sensitivity rate used when reporting foreign currency risk exposures internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates. NOTES TO THE FINANCIAL STATEMENTS P R G H O L D I N G S B E R H A D A N N U A L R E P O R T 2 0 2 1 182 31 December 2021 (cont’d)
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