Risk management and financial risk.

University Degree Business and Administrative studies

1. Risk management and financial risk.

1.1. Risk management.

In Village Roadshow Limited, the risk management consists of strategic, operational, and financial risks that are connected to each strategic business unit. However, in order to mitigate and deal with these risks within the company, there is existed the formal risk management methodology that was first introduced in 1998 and accepted by Audit Committee. Regularly, formal risk evaluations have being done twice a year, in June and December. Village Roadshow is in the progress of completing the Business Impact Analysis and Risk Assessment of its Business Continuity Management project which commenced in 2002. Additionally, the self-regulating Occupational Health and Safety Compliance Reviews are also carried out and reported in the annual report amongst the major business units. Furthermore, the independent Internal Audit Division is frequently participating in all significant areas of business risks to make sure that the entity’s internal control framework maintains adequately and effectively.

1.2. Financial risk.

Village Roadshow’s financial structure comprises a number covenants to banks, obliging a structured level of supervising and administration to guarantee compliance. The entity’s Treasury Risk Policy expresses the identification, measurement and management of foreign exchange exposure, interest rate risk, credit risk, liquidity levels and monitoring of economic and financial conditions.

1.2.1. Foreign exchange risk.

Village Roadshow Limited is one of the international corporations. So this company normally have traded in foreign currencies in some circumstances. There are two ways that the Village Roadshow is usually used, named conversion of transactions and translation of overseas accounts. Therefore, they create foreign exchange risk for the company because one of the following reasons:

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1.2.1. Foreign exchange risk.

- All transactions in foreign currencies of Village Roadshow happening during one fiscal year are converted to Australian dollar at the exchange rate at the date of the transaction. - The amounts of money paid to and by Village Roadshow that are outstanding at balance date and are denominated in foreign currencies have been converted to Australian dollar using exchange rate at the end of the financial year.

- The foreign operations accounts are translated using the current exchange rate method and any exchange rate differences are carried out directly to the foreign currency translation reserve.

According to transferring foreign currencies, gains or losses occurring from foreign currency transactions and balances by conversion would be taken to account in profit or loss for the period in which they occur.

1.2.2. Interest rate risk

The Village Roadshow interest rate risk arises from the interest bearing financial assets and financial liabilities with a fixed interest rate or floating interest rate. The company defines interest rate risk by:

- Organizing the settings of the group financial debts that are divided into an interest rate swap and an interest rate cap are subject to a fixed interest rate maturing in more than five years; and

- Ensuring the floating interest rate is used for the debt that is covered by an interest rate cap in which it is less than the floating market interest rate cap.

1.2.3. Credit risk

The Village Roadshow’s credit risk has been found in each class of recognised financial asset. In accordance with derivative financial instruments, credit risk arises from the potential counterparties’ failure to meet their obligations under the assigned contracts or arrangements. The company’s credit risk exposure in relation to these is expressed as:

- Interest rate swap contracts: restricted to the net fair value of the swap agreements at balance date, being a liability of $49.8 million in 2003 (compared with 2002: $2.1 million). The significant decline in this net fair value liability subsequent to balance date also refers to credit risk.

- Concentrations of credit risk: concentrations of credit risk on trade accounts receivable arise in the following areas:

PERCENTAGE OF TOTAL CONSOLIDATED TRADE DEBTORS TOTAL BALANCE 2003

The Village Roadshow limits concentrations of credit risk in relation to trade accounts receivable by undertaking transactions with a large numb of customers within the specified areas. The majority of customers within the production segment are concentrated in Japan, United Kingdom, Germany and France. The customers in the remaining segments are mainly concentrated in Australia

- Credit risk in trade receivables is managed in the following ways:

Payment terms are normally 30 days;
A risk assessment process is spent over A$50,000 for all customers.

1.2.4. Liquidity risk

Liquidity risk includes the risk that, as a result of operational liquidity requirements the firm:

will not have sufficient funds to settle a transaction on the due date;
will be forced to sell financial assets at a value which is less than what they are worth; or
may be unable to settle or recover a financial asset at all.

To help reduce these risks the firm:

has a liquidity policy which targets a minimum and average level of cash and cash equivalents to be maintained;
has readily accessible standby facilities and other funding arrangements in place; and
use instruments that are tradable in highly liquid markets.

2. Regulation.

Village Roadshow Limited involves in many areas that need to be adjusted and controlled by different laws and legislations. First of all, in its field of media and film production as well as entertainment, the company has to follow the Australian Competition and Consumer Commission (ACCC). Under this legislation, it could enable for radio and television licences to be controlled by one company. The company does prohibit becoming the owner of two television licences or more than two radio licences in any one television or radio market, according to the Broadcasting Services Act 1992 permits an owner to control two radio licences in the one area. Furthermore, the governs the Radio communications Act 1992, which provides for the regulation the radio-frequency scale. Not only dealing with domestic regulations but Village Roadshow Limited is also under the oversea media ownership regulations in the United States, and the United Kingdom.

More importantly, Village Roadshow Limited is one of the listed companies under the Australian Stock Exchange (ASX). Therefore, the company has to be compliant with the Corporation Act 2001. It means that the company must disclose all information that are related to historical, present, and future activities as well as annual financial report to the public.