NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2023 NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2023 41 FINANCIAL INSTRUMENTS (CONT’D) (iii) Market risk (cont’d) Managing interest rate benchmark reform and associated risks Overview A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as ‘interest rate benchmark reform’). The Group had exposures to USD LIBOR and SGD SOR on its financial instruments that have been replaced or reformed as part of these market-wide initiatives. In 2023, the Group has undertaken amendments to its financial instruments with contractual terms indexed to USD LIBOR or SGD SOR such that they incorporate the new benchmark rates. Non-derivative financial liabilities Historically, the Group’s IBOR exposures to non-derivative financial liabilities included secured and unsecured borrowings indexed to USD LIBOR and SGD SOR. The Group has modified its non-derivative financial liabilities indexed to USD LIBOR and SGD SOR to reference SOFR and SORA during the year ended 31 December 2023 and 31 December 2022 respectively. Derivatives The Group holds interest rate swaps and cross currency swaps for risk management purposes. The interest rate swaps have floating legs that are indexed to SORA and SONIA. The Group’s derivative instrument are governed by contracts based on the International Swaps and Derivatives Association (ISDA)’s master agreements. Fair value sensitivity analysis for fixed rate instruments The Group has fixed rate debt instruments measured at FVTPL. A change in interest rates at the reporting date would not have a material impact on the Group. Cash flow sensitivity analysis for variable rate instruments An increase of 100 basis points (bp) in interest rates on the variable rate instruments held by the Group and the Company at the reporting date would have decreased profit or loss (before any tax effect) by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant and does not take into account the effect of qualifying borrowing costs allowed for capitalisation. Group Company 31 December 2023 31 December 2022 31 December 2023 31 December 2022 $’000 $’000 $’000 $’000 100 bp increase Reduction in profit before tax (55,041) (48,872) (14,075) (19,778) A 100 bp decrease in interest rates at the reporting date would have had an equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant. 41 FINANCIAL INSTRUMENTS (CONT’D) (iii) Market risk (cont’d) Foreign currency risk The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in currencies other than the respective functional currencies of the Group’s entities. The currencies giving rise to this risk are primarily the United States Dollar, Singapore Dollar, Hong Kong Dollar, Australian Dollar, Sterling Pound, Renminbi, Japanese Yen, Euro, Thai Baht and New Zealand Dollar. The Group has a decentralised approach to the management of foreign currency risk. The Group manages its foreign currency exposure by adopting a natural hedge policy of matching receipts and payments, and asset purchases and borrowings, in the currency of the relevant entity, where possible. Entities in the Group may have different approaches to the identification and management of this risk. Entities in the Group may borrow in currencies other than their functional currencies to fund investments that are denominated in their borrowing currencies. In respect of other monetary assets and liabilities denominated in foreign currencies, the Group’s policy is to ensure that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. Where feasible, the Group may put in place certain financial derivative instruments including forward exchange contracts and cross currency swaps to minimise the Group’s exposure to movements in exchange rates on firm commitments and specific transactions. The Group assesses whether the derivative designated in each hedging relationship is expected to be and has been effective in offsetting changes in cash flows of the hedged item using the hypothetical derivative method. In these hedge relationships, the main sources of ineffectiveness are: • The effect of the counterparty and the Group’s own credit risk on the fair value of the swaps and forward foreign exchange contracts, which is not reflected in the change in the fair value of the hedged cash flows attributable to the change in exchange rates; and • Changes in the timing of the hedged transactions. FINANCIALS FINANCIALS ANNUAL REPORT 2023 CITY DEVELOPMENTS LIMITED 229 228
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