UEM EDGENTA BERHAD ANNUAL REPORT 2021 1 2 3 4 5 6 7 291 290 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FINANCIAL STATEMENTS 39. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTD.) (c) 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 has currency exposures arising from sales or purchases that are denominated in a currency other than the Ringgit Malaysia (“RM”). The foreign currencies in which these transactions are denominated are mainly Singapore Dollar (“SGD”) and Taiwan Dollar (“TWD”). As a result of the significant investments in Singapore and Taiwan, the Group’s statement of financial position is affected by the movements in the respective functional currencies of the investees against the RM. The Group maintains a natural hedge, whenever possible, by borrowing in the currency of the country in which the investments are located or by borrowing in currencies that match the future revenue stream to be generated from its investments. As and when the Group undertakes significant transactions denominated in foreign currencies, with continuing exposure over the applicable periods of settlement, the Group evaluates its exposure and the necessity to hedge such exposure, as well as the availability and cost of such hedging instruments. Sensitivity analysis for foreign currency risk The following table demonstrates the sensitivity of the Group’s profit net of tax to a reasonably possible change in the SGD and TWD exchange rates against the RM, with all other variables held constant. Group 2021 RM’000 Profit net of tax 2020 RM’000 Profit net of tax SGD/RM - strengthened 2% (2020: 1%) 798 709 - weakened 2% (2020: 1%) (798) (709) TWD/RM - strengthened 11% (2020: 7%) 1,976 1,104 - weakened 11% (2020: 7%) (1,976) (1,104) 39. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTD.) (d) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of the Group’s and the Company’s financial instruments will fluctuate because of changes in market interest rates. As the Group has no significant interest-bearing financial assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest-bearing financial assets are mainly short term in nature and have been mostly placed in fixed deposits or occasionally, in short term commercial papers. The Group’s interest rate risk arises primarily from interest-bearing borrowings. Borrowings at floating rates expose the Group to cash flow interest rate risk. Borrowings obtained at fixed rates expose the Group to fair value interest rate risk. The Group’s policy is to manage interest cost using a mix of fixed and floating rate debts. Sensitivity analysis for interest rate risk A sensitivity analysis had been performed to determine the sensitivity of the Group’s profit net of tax to a reasonably possible change in the interest rate at the reporting date. This analysis assumes that all other variables, in particular foreign currency rate, remain constant. Based on the analysis, there is no material impact to the Group’s profit net of tax.
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