Wah Seong Corporation Berhad Annual Report 2017

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2017 FINANCIAL STATEMENTS WAH SEONG CORPORATION BERHAD ANNUAL REPORT 2017 185 46 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) Credit risk (continued) (c) Derivative financial instruments Transactions involving derivative financial instruments are with approved financial institutions and reputable banks. As at the end of the reporting period, the maximum exposure to credit risk arising from derivatives financial assets is represented by the carrying amounts in the statement of financial position. In view of the counterparties being reputable licensed financial institutions, management does not expect any of the counterparties to fail to meet their obligations. (d) Financial guarantees The Company provides unsecured financial guarantees to banks in respect of banking facilities granted to certain subsidiaries. The Company monitors on an ongoing basis the results of the subsidiaries and repayment made by the subsidiaries. The maximum exposure to credit risk amounts to RM311,479,000 (2016: RM167,522,000) representing banking facilities utilised by the subsidiaries as at the end of the financial year. As at 31 December 2017, there was no indication that any subsidiary would default on repayment. Financial guarantees have not been recognised since the fair value on initial recognition was not material as the probability of the subsidiaries defaulting on its banking facilities is remote. (e) Time deposits and cash and bank balances Time deposits and cash and bank balances are placed with approved financial institutions and reputable banks. The likelihood of non-performance by these financial institutions is remote based on their high credit ratings. Market risk Market risk refers to the risk that changes in market prices, such as foreign exchange rates, interest rates and prices will affect the Group’s and the Company’s financial position and cash flows. (a) Foreign currency risk Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group has transactional currency exposures arising from sales and purchases that are denominated in currency other than the functional currencies of the Group entities. The foreign currency in relation to these transactions is mainly denominated in United States Dollar. The Group maintains a natural hedge, whenever possible, by maintaining receivables and payables in matching foreign currencies. Foreign exchange exposures in transactional currencies other than the functional currencies of the operating entities are kept to an acceptable level. The Group also uses forward currency contracts to minimise exposure on currency fluctuations for which receipts or payments are anticipated more than one month after the Group has entered into a firm commitment for a sale or purchase. The forward currency contracts entered are in the same currency as the hedged item. It is the Group’s policy to negotiate the terms of the forward currency contracts to match the terms of the hedged item to maximise its effectiveness.