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INDOFOOD AGRI RESOURCES LTD
ANNUAL REPORT 2014
NOTES TO THE FINANCIAL STATEMENTS
For the financial year ended 31 December 2014
34. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT’D)
(c)
Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of the Group’s financial instrument will
fluctuate because of changes in market prices. The Group is exposed to commodity price risk due to certain factors,
such as weather, government policy, level of demand and supply in the market and the global economic environment.
Such exposure mainly arises from its purchase of CPO where the profit margin on sale of its finished products
may be affected if the cost of CPO (which is the main raw material used in the refinery plants to manufacture
cooking oils and fats products) increases and the Group is unable to pass such cost increases to its customers. In
addition, the Group is also subject to fluctuations in the selling price of its manufactured CNO and the purchase
price of copra (being the raw material used in the manufacture of CNO).
During 2014 and 2013, it is, and has been, the Group’s policy that no hedging in financial instruments shall be
undertaken.
The Group’s policy is to minimise the risks of its raw material costs arising from the fluctuations in the commodity
prices by increasing self
-
sufficiency in CPO for the refinery operations (through the purchase of CPO from the
Group’s own plantations).
(d)
Credit risk
Credit risk is the risk of loss that may arise on outstanding financial instruments should a counterparty default
on its obligations.
The Group has credit risk arising from the credit granted to its customers and plasma farmers and placement of
current accounts and deposits in the banks.
Other than as disclosed below, the Group has no concentration of credit risk.
Cash and cash equivalents
Credit risk arising from placements of current accounts and deposits is managed in accordance with the Group’s
policy. Investments of surplus funds are limited for each bank and reviewed annually by the board of directors.
Such limits are set to minimize the concentration of credit risk and therefore mitigate financial loss through
potential failure of the banks.
Trade receivables
The Group has policies in place to ensure that sales of products are made only to creditworthy customers with
proven track record or good credit history. It is the Group’s policy that all customers who wish to trade on credit
terms are subject to credit verification procedures. For export sales, the Group requires cash against the presentation
of documents of title. For domestic sales, the Group may grant its customers credit terms from 7 to 42 days from
the issuance of invoice. The Group has policies that the limit amount of credit exposure to any particular customer,
such as, requiring sub
-
distributors to provide bank guarantees. In addition, receivable balances are monitored on
an ongoing basis to reduce the Group’s exposure to bad debts.
When a customer fails to make payment within the credit terms granted, the Group will contact the customer to
act on the overdue receivables. If the customer does not settle the overdue receivable within a reasonable time,
the Group will proceed to commence legal proceedings. Depending on the Group’s assessment, specific provisions
may be made if the debt is deemed uncollectible. To mitigate credit risk, the Group will cease the supply of all
products to customers in the event of late payment and/or default.
