i. Foreign currency risk (continued)
As at December 31, 2014, if Hong Kong dollar had weakened/strengthened by 1% against the United States dollar, with all other variables held constant, the Group’s profit after tax for the year would have been decreased/increased by approximately HK$5 million (2013: HK$21 million) and the Company’s profit after tax for the year would have been increased/decreased by approximately HK$4 million (2013: HK$3 million), mainly as a result of foreign exchange gains/losses on translation of United States dollar denominated recognized assets and liabilities which are not hedged by hedging instruments. Meanwhile, the hedging reserve of the Group as at December 31, 2014 would have been decreased/increased by approximately HK$39 million (2013: HK$39 million) and, there would have no impact to the hedging reserve of the Company as at December 31, 2013 and 2014, mainly as a result of foreign exchange losses/gains on the long-term borrowings being hedged by cross currency swap contracts.
As at December 31, 2014, if Hong Kong dollar had weakened/strengthened by 5% against the Chinese Renminbi, with all other variables held constant, the Group’s and the Company’s profit after tax for the year would have been increased/decreased by approximately HK$1 million (2013: an immaterial amount) respectively, mainly as a result of foreign exchange gains/losses on translation of Chinese Renminbi denominated recognized assets and liabilities which are not hedged by hedging instruments.
The sensitivity analysis has been determined assuming that the change in foreign exchange rates had occurred at the end of the reporting period and had been applied to the Group’s and the Company’s exposure to currency risk for recognized assets and liabilities in existence at the date, and that all other variables, in particular interest rates, remain constant.
The stated changes represent management’s assessment of reasonably possible changes in foreign exchange rates over the period until the end of the next annual reporting period. In this respect, it is assumed that the pegged rate between the Hong Kong dollar and the United States dollar would be materially unaffected by any change in the movement in value of the United States dollar against other currencies. The analysis is performed on the same basis for 2013.
ii. Interest rate risk
As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates.
The Group’s interest rate risk arises primarily from short-term and long-term borrowings. Borrowings at variable rates and fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. In addition, from time to time, the Group draws under long-term revolving credit and term facilities which are denominated in Hong Kong dollars and pays interest at floating rate.
The Group has entered into fixed-to-floating cross currency swap contracts to hedge the fair value interest rate risk arising from certain of its fixed rate long-term borrowings.
c. Market risk (continued)
ii. Interest rate risk (continued)
The following table details the interest rate profile of the Group’s and the Company’s borrowings and the Company’s amount due to a subsidiary at the end of the reporting period, after taking into account the effect of cross currency swap contracts designated as cash flow and fair value hedging instruments.
In HK$ million, except for % The Group The Company
2013 2014 2013 2014 Effective interest rate Effective interest rate Effective interest rate Effective interest rate % % % %
Net fixed rate borrowings:
Short-term borrowings with cash flow hedging
instruments – – 5.42 3,877 – – – –
Long-term borrowings with cash flow hedging
instruments 5.42 3,868 – – – – – –
Fixed rate guaranteed notes 3.17 3,961 3.17 3,924 – – – –
7,829 7,801 – –
Variable rate borrowings:
Bank borrowings 1.77 15,856 1.59 27,655 2.06 1,575 1.82 2,724
Long-term borrowings with fair value hedging
instruments 4.70 5,390 4.70 5,861 – – – –
Variable rate balance with a subsidiary: Amount due to a subsidiary with fair value
hedging instruments – – – – 5.97 2,010 5.97 2,167
21,246 33,516 3,585 4,891
Total borrowings 29,075 41,317 3,585 4,891
At December 31, 2014, if interest rates on variable rate borrowings had been increased/decreased by 10 basis points, with all other variables held constant, the Group’s and the Company’s profit after tax for the year would have been decreased/increased by approximately HK$23 million (2013: HK$16 million) and HK$3 million (2013: HK$3 million) respectively, mainly as a result of higher/ lower interest expense on floating rate borrowings.
The sensitivity analysis above has been determined assuming that the change in interest rate had occurred at the end of the reporting period and had been applied to the exposure to interest rate risk for the Group’s and the Company’s floating rate borrowings in existence at that date. The 10 basis points increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the end of the next annual reporting period. The analysis was performed on the same basis for 2013.
37 FINANCIAL INSTRUMENTS
(CONTINUED) c. Market risk (continued)iii. Equity price risk
The Group is exposed to equity price changes arising from equity investments classified as available-for-sale financial assets (see note 24). Other than unquoted equity securities held for strategic purposes, all of these investments are listed on a recognized stock exchange.
To manage its equity price risk, the portfolio is diversified in accordance with the limits set by the Group. Given the insignificant portfolio of listed equity securities held by the Group, management believes that the Group’s equity price risk is minimal.
Performance of the Group’s unquoted investments held for long term strategic purposes is assessed at least semi-annually against performance of their business as well as similar listed entities, based on the limited information available to the Group, together with an assessment of their relevance to the Group’s long term strategic plans.
d. Fair values of financial liabilities measured at amortized cost
All financial instruments are carried at amounts not materially different from their fair values as at December 31, 2013 and 2014 except as follows, with fair value calculated by quoted prices:
In HK$ million The Group
2013 2014
Carrying
amount Fair value
Carrying
amount Fair value
Short-term borrowings (1) (1) (4,823) (4,909)
Long-term borrowings (29,074) (29,893) (36,494) (37,059)
The fair values of short-term and long-term borrowings are the net present value of the estimated future cash flows discounted at the prevailing market rates. The fair values are within level 2 of the fair value hierarchy.
e. Estimation of fair values
The tables below analyze financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
– Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
– 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) (level 2).
– Inputs for asset or liability that are not based on observable market data (level 3).
In HK$ million The Group
2013
Level 1 Level 2 Level 3 Total
Assets
Available-for-sale financial assets
– Listed equity securities 197 – – 197 – Unlisted equity securities – – 509 509 Derivative financial instruments (non-current) – 67 – 67
Total assets 197 67 509 773
Liabilities
Derivative financial instruments (non-current) – (711) – (711)
In HK$ million The Group
2014
Level 1 Level 2 Level 3 Total
Assets
Available-for-sale financial assets
– Listed equity securities 104 – – 104
– Unlisted equity securities – – 650 650
Derivative financial instruments (current) – 49 – 49
Total assets 104 49 650 803
Liabilities
Derivative financial instruments (non-current) – (217) – (217)
In HK$ million The Company
Level 2
2013 2014
Liabilities
Derivative financial instruments (non-current) (306) (117)
The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group included in level 1 is the current bid price. Instruments included in level 1 comprise primarily available-for-sale financial assets listed on the Alternative Investment Market operated by London Stock Exchange plc.