NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2022 NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2022 42 FINANCIAL INSTRUMENTS (CONT’D) (iii) Market risk (cont’d) Non-derivative financial liabilities The Group’s IBOR exposures to non-derivative financial liabilities as at 31 December 2022 were secured and unsecured borrowings indexed to USD LIBOR and SGD SOR. The Group is in the process of communicating with counterparties to progressively transition non-derivative financial liabilities which are indexed to the affected interest rate benchmarks to alternative risk-free rates. Derivatives The Group holds interest rate swaps and cross currency swaps for risk management purposes. As at 31 December 2022, the Group has no unreformed interest rate swaps and cross currency swaps contracts. Total amounts of unreformed contracts, including those with an appropriate fallback clause The Group monitors the progress of transition from IBORs to new benchmark rates by reviewing the total amounts of contracts that have yet to transition to an alternative benchmark rate and the amounts of such contracts that include an appropriate fallback clause. The Group considers that a contract is not yet transitioned to an alternative benchmark rate when interest under the contract is indexed to a benchmark rate that is still subject to interest rate benchmark reform, even if it includes a fallback clause that deals with the cessation of the existing IBOR (referred to as an ‘unreformed contract’). The following table shows the total amounts of unreformed contracts and those with appropriate fallback language at 31 December 2022. The amounts of financial assets and financial liabilities are shown at their carrying amounts and derivatives are shown at their nominal amounts. 42 FINANCIAL INSTRUMENTS (CONT’D) (iii) Market risk Market risk is the risk that changes in market prices such as interest rates, foreign exchange rates and equity prices, will affect 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 exposure within acceptable parameters, while optimising the return on risk. Interest rate risk The Group’s exposure to interest rate risk relates primarily to its interest-bearing financial assets and debt obligations. The Group adopts a policy of managing its interest rate exposure by maintaining a debt portfolio with both fixed and floating interest rates. Derivative financial instruments are used to manage interest rate risk, to the extent that the perceived cost of variable rate borrowings is considered to outweigh the benefits of their flexibility, and the Group actively monitors the need and timing for such derivatives. 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. If a hedging relationship is directly affected by uncertainty arising from interest rate benchmark reform, then the Group applies Phase 1 amendments and assumes for this purpose that the benchmark interest rate is not altered as a result of interest rate benchmark reform. 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 hypothetical derivative method. Hedging relationships that are impacted by interest rate benchmark reform may experience ineffectiveness because of the uncertainty about when and how replacement may occur for the relevant hedged item and hedging instrument due to the interest rate benchmark reform transition. For further details, see ‘Managing interest rate benchmark reform and associated risks’ below. 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 will be replaced or reformed as part of these market-wide initiatives. These benchmark rates will lose representativeness or discontinue and be replaced with alternative interest rates benchmarks in US and Singapore with effect from 1 July 2023. In 2022, 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. As at 31 December 2022, the Group’s remaining IBOR exposure is indexed to USD LIBOR and SGD SOR. Management monitors and manages the Group’s transition to alternative rates. Management evaluates the extent to which contracts reference IBOR cash flows, whether such contracts will need to be amended as a result of interest rate benchmark reform and how to manage communication about interest rate benchmark reform with counterparties. CITY DEVELOPMENTS LIMITED ANNUAL REPORT 2022 FINANCIALS 228 229
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