Notes to the Financial Statements For the financial year ended 31 December 2024 31 FAIR VALUE OF ASSETS AND LIABILITIES (continued) (c) Level 3 fair value measurements (continued) (iii) Valuation processes applied by the Group The significant non-financial asset of the Group categorised within Level 3 of the fair value hierarchy is investment properties. The fair values of investment properties are mostly determined by external, independent property valuers, who have the appropriate and recognised professional qualifications and recent experience in the location and category of property being valued. The property valuers provide the fair values of the Group’s investment property portfolio annually. The valuation and its financial impact are discussed with the management in accordance with the Group’s reporting policies. 32 FINANCIAL RISK MANAGEMENT (a) Financial risk management objectives and policies The Group is exposed to market risk (including interest rate, foreign currency and price risks), credit risk and liquidity risk arising from its business. The Group’s risk management approach seeks to minimise the potential material adverse effects from these exposures. The Group uses financial instruments such as interest rate swaps, foreign exchange forwards and cross currency swaps as well as foreign currency borrowings to hedge certain financial risk exposures. The management has overall responsibility for the compliance and oversight of the Group’s risk management framework. The Board has established a Risk Committee to strengthen its risk management processes and framework. The Risk Committee is assisted by an independent unit called the Group Risk Management (GRM), which generates an Integrated Risk Report on a regular basis that aims to report and update the Risk Committee of the Group’s risk profile. A group-wide Risk and Control Self-Assessment (RCSA) is conducted annually by all business units to identify key material risks (including financial risks), mitigating measures and any opportunities to leverage on. (b) Market risk Market risk is the risk that changes in market prices, such as interest rates and foreign exchange rates will have on the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. 170 CapitaLand Investment Limited Notes to the Financial Statements For the financial year ended 31 December 2024 32 FINANCIAL RISK MANAGEMENT (continued) (b) Market risk (continued) (i) Interest rate risk The Group’s exposure to market risk for changes in the interest rate environment relates mainly to its investment in financial products and debt obligations. The investments in financial products are short term in nature and they are not held for trading or speculative purposes. The financial products mainly comprise fixed deposits which yield better returns than cash at bank. The Group manages its interest rate exposure by maintaining a prudent mix of fixed and floating rate borrowings. The Group strives to ensure that between 60% and 70% of its interest rate risk exposure is at a fixed rate. The Group also actively reviews its debt portfolio, taking into account the investment holding period and nature of its assets. The Group uses hedging instruments such as interest rate swaps and cross currency swaps to minimise its exposure to interest rate volatility and classifies these interest rate swaps and cross currency swaps as cash flow hedge. As at 31 December 2024, the Group has interest rate swaps classified as cash flow hedges with notional contractual amount of $2,658 million (2023: $3,702 million) and for which the Group pays fixed interest rates and receives variable rates equal to the Singapore Overnight Rate Average (SORA), US Secured Overnight Financing Rate (SOFR) and Australia Bank Bill Swap Bid Rate (BBSY) on the notional amount. As at 31 December 2024, the Group has cross currency interest rate swaps classified as cash flow hedges with notional contractual amount of $645 million (2023: $682 million) and for which the Group pays fixed interest rates (from Chinese Reminbi and Singapore Dollars) and receives variable rates (for US Dollars, Japanese Yen and Singapore Dollars) on the notional amount. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional or par amounts. The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in cash flows of the hedged item using the critical terms method. When all critical terms match, the economic relationship is considered 100% effective. Hedge ineffectiveness may occur due to changes in the critical terms of either the interest rate swaps or borrowings. The carrying amount of interest rate swaps as at 31 December 2024 was net liabilities of $4 million (2023: net assets of $18 million) comprising derivative assets of $4 million (2023: $39 million) and derivative liabilities of $10 million (2023: $21 million). Sensitivity analysis For variable rate financial liabilities, it is estimated that an increase of 100 basis points in interest rate at the reporting date would lead to a reduction in the Group’s profit before tax (and revenue reserve) by approximately $20 million (2023: $44 million). A decrease in 100 basis points in interest rate would have an equal but opposite effect. This analysis assumes that all other variables, in particular foreign currency rates, remain constant, and has not taken into account the effects of qualifying borrowing costs allowed for capitalisation, the associated tax effects and share of non-controlling interests. 171 Annual Report 2024
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