Notes

Overview

Cyfrowy Polsat S.A. Group has exposure to the following risks from its use of financial instruments:

• credit risk,
• liquidity risk,
• market risk:
  • (i) currency risk,
  • (ii) interest rate risk.

The Group’s risk management policies are designed to reduce the impact of any adverse conditions on the Group’s results.

The Management Board has overall responsibility for the oversight and management of the risks that the Group is subjected to in its activities. Therefore, the Management Board has established an overall risk management framework as well as specific risk management policies with respect to market and credit risks.

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are also included throughout these consolidated financial statements.

Bank loans, bonds, cash, foreign exchange call options, interest rate swaps, cross-currency interest rate swaps and short-term bank deposits are the main financial instruments used by the Group, with the intention of securing the financing for the Group’s activities. The Group also holds other financial instruments such as trade receivables and payables, payables relating to purchase of programming rights and payables relating to purchases of tangible and intangible assets which arise in the course of its business activities.

Financial assets

Carrying amount

Financial liabilities

Carrying amount

Credit risk

Credit risk is defined as the risk that counterparties of the Group will not be able to meet their contractual obligations. Exposure to credit risk is related to three main areas:

• the creditworthiness of the customers with whom physical sale transactions are undertaken,
• the creditworthiness of the financial institutions (banks/brokers) with whom, or through whom, hedging or other derivative transactions are undertaken,
• the creditworthiness of the entities in which investments are made, or whose securities are purchased.

The Group’s exposure to credit risk is associated primarily with trade receivables. The Parent’s customer base includes a large number of individual subscribers who are dispersed geographically over the entire country, and who are required to prepay their subscription fees. Receivables from subscribers are continuously monitored and recovery actions are taken, including blocking of the signal transferred to subscribers or termination of services to a MVNO client and Internet customer.

Telewizja Polsat and their subsidiaries provide services with deferred payment which may cause the risk of delays. Assessment of the creditworthiness of the counterparties is regularly carried out and in principle the company does not require security in relation to the financial assets.

The Group pursues a credit policy under which credit risk exposure is constantly monitored.

Due to diversification of risk in terms both of the nature of individual entities as well as of their geographical location as well as to cooperation with highly-rated financial institutions, and also taking into consideration the fair value of liabilities arising from derivative transactions, the Group is not materially exposed to credit risk as a result of derivative transactions entered into.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk as at the reporting date was as follows:

Maximum exposure to credit risk

Carrying amount

The concentration of credit risk for trade and other receivables is presented in the tables below:

Carrying amount

Carrying amount

Note: for each year 5 largest debtors are presented, not necessarily the same in both periods.

The ageing of trade and other receivables at the reporting date was:

Credit quality of such not overdue receivables that are not impaired is very good.

Liquidity risk

The Group’s objective in liquidity management is to ensure that it always has sufficient funds to meet its liabilities when due. Any surplus cash is invested mainly into bank deposits.

The Group prepares, on an ongoing basis, analyses and forecasts of its cash requirements based on projected cash flows.

The following are the contractual maturities of the Group’s financial liabilities.

31 December 2012

*Pursuant to the agreements settlements shall be on a net basis.

31 December 2011

* Pursuant to the agreements settlements shall be on a net basis.

Market risk

The Group has an active approach to managing its market risk exposure. The objectives of market risk management are:

• to limit fluctuations in profit/loss before tax,
• to increase the probability of meeting budget assumptions,
• to maintain the healthy financial condition, and
• to support the process of undertaking strategic decisions relating to investing activity, with attention to sources of capital for this activity.

All the market risk management objectives should be considered as a whole, while their realisation is dependant primarily upon the internal situation and market conditions.

The Group applies an integrated approach to market risk management. This means a comprehensive approach to the whole spectrum of identified market risks, rather than to each of them individually. The Company applies a consistent and step-by-step approach to market risk management. The primary technique for market risk management is the use in the Group of hedging strategies involving derivatives. Apart from this, natural hedging is also used to the extent available.

All of the potential hedging strategies and the selection of those preferred reflect the following factors:, the nature of identified market risk exposures of the Group, the suitability of instruments to be applied and the cost of hedging, current and forecasted market conditions. In order to mitigate market risk, derivatives are primarily used. The Group transacts only those derivatives for which it has the ability to assess their value internally, using standard pricing models appropriate for a particular type of derivative, and also these which can be traded without significant loss of value with a counterparty other than the one with whom the transaction was initially entered into. In evaluating the market value of a given instrument, the Group relies on information obtained from particular market leading banks, brokers and information services.

It is permitted to use the following types of instruments:

• Swaps,
• Forwards and futures,
• Options.

Currency risk

One of the main risks that the Group is exposed to is currency risk resulting from fluctuations in exchange rate of the Polish zloty against other currencies. Revenues generated by the Group are denominated primarily in the Polish zloty, while a significant portion of operating costs and capital expenditures are incurred in foreign currencies. The Group’s currency risk is associated mainly to royalties to TV and radio broadcasters (USD and EUR), transponder capacity leases (EUR), fees for conditional access system (EUR) and purchases of reception equipment and accessories for reception equipment (USD and EUR). Since 2011 the level of currency risk exposure has increased because of new financing denominated in EUR obtained to purchase Telewizja Polsat Sp. z o.o. After this purchase currency risk exposure is also associated to purchases of foreign programming licences.

In respect of licence fees and transponder capacity leases, the Group partly reduces its currency risk exposure by means of an economic hedge as it denominates receivables from signal broadcast and marketing services in foreign currencies.

The Group does not hold any assets held for trading denominated in foreign currencies.

The Group’s exposure to foreign currency was as follows based on currency amounts:

31 December 2012

31 December 2011

The following foreign exchange rates were applied in the presented periods:

For the purposes of the exchange rate sensitivity analysis as at 31 December 2012 and 31 December 2011, exchange rate volatility in the +/- 5% range was assumed as probable. This analysis assumes that all other variables, in particular interest rates, remain constant. The sensitivity analysis below is performed on the same basis for 2011.

Had Polish zloty weakened 5% against the basket of currencies as at 31 December 2012 and 31 December 2011, the Group’s net profit would have decreased by PLN 56,770 and decreased by PLN 61,093, respectively and other comprehensive income would have increased by PLN 5,541 in 2012 and increased by PLN 7,177 in 2011. Had the Polish zloty strengthened 5%, the Group’s net profit would have correspondingly increased by PLN 56,770 and increased by PLN 61,093. Other comprehensive income would have decreased by PLN 5,523 in 2012 and decreased by PLN 7,171 in 2011, assuming that all other variables remain constant. Estimated future revenue and costs denominated in foreign currencies are not taken into consideration.

Interest rate risk

Changes in market interest rates have no direct effect on the Group’s revenues, however, they do have an effect on net cash from operating activities due to interest earned on overnight bank deposits and current accounts, and on net cash from financing activities due to interest charged on bank loans.

The Group regularly analyses its level of interest rate risk exposure, including refinancing and risk minimising scenarios. Based on these analyses, the Group estimates the effects of changes in interest rates on its profit and loss.

In order to reduce interest rate risk exposure resulting from interest payments on floating rate senior facility, the Company stipulated interest rate swaps (see note 30).

At the reporting date, the interest rate risk profile of interest-bearing financial instruments was:

Carrying amount

Cash flow sensitivity analysis for variable rate instruments (pre-tax effect):

* – include sensitivity in fair value changes of hedging instruments (interest rate swaps) due to changes in interest rates.

The Group applies cash flow hedge model under IAS 39 for interest rate exposure from floating rate interest payments in PLN on senior facility hedged by interest rate swap.tr