(c) Credit risk
The Group is exposed to credit-related losses in the event of non-performance by counterparties to nancial instruments. In terms of substance, and consistent with the related balance sheet presentation, the Group considers it has two types of credit risk; operational and nancial. Operational credit risk relates to non-performance by customers in respect of trade receivables and by suppliers in respect of other receivables. Financial credit risk relates to non-performance by banks and similar institutions in respect of cash and deposits, facilities and nancial contracts, including forward foreign currency contracts and cross currency interest rate swaps.
As tier-one suppliers to aerospace, automotive and land systems original equipment manufacturers the Group may have substantial amounts outstanding with a single customer at any one time. The credit pro les of such original equipment manufacturers are available from credit rating agencies. The failure of any such customer to honour its debts could materially impact the Group’s results. However, there are many advantages in these relationships. In Land Systems there are a greater proportion of amounts receivable from small and medium sized customers. Credit risk and customer relationships are managed at a number of levels within the Group. At a subsidiary level documented credit control reviews are required to be held at least every month. The scope of these reviews includes amounts overdue and credit limits. At a divisional level debtor ratios, overdue accounts and overall performance are reviewed regularly. Provisions for doubtful debts are determined at these levels based upon the customer’s ability to pay and other factors in the Group’s relationship with the customer. At 31 December the largest ve trade receivables as a proportion of total trade receivables analysed by major segment is as follows:
GKN Aerospace GKN Driveline GKN Powder Metallurgy GKN Land Systems The amount of trade receivables outstanding at the year end does not represent the maximum exposure to operational credit risk due to the normal patterns of supply and payment over the course of a year. Based on management information collected as at month ends the maximum level of trade receivables at any one point during the year was £1,240 million (2014: £1,199 million).
Credit risk is mitigated by the Group’s policy of only selecting counterparties with a strong investment grade long term credit rating, normally at least A- or equivalent, and assigning nancial limits to individual counterparties. The maximum exposure with a single bank for deposits is £30 million (2014: £35 million), however, the Group is not exposed to mark to market risk for forward foreign currency contracts at 31 December 2015 as all counterparties were in a liability position (2014: nil).
(d) Capital risk management
The Group de nes capital as total equity. The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and bene ts for other stakeholders and to maintain a capital structure which optimises the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.
GKN plc Annual Report and Accounts