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Annual Report & Accounts 2016 - Principal risks/Viability statement
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33 4 COUNTRY & CURRENCY RISK Whilst the continuing uncertainty in the global economic outlook inevitably increases the trading and balance sheet risks to which the Group is exposed, the diversified nature of the Group's business means that such risks are not disproportionately different from any other commercial enterprise of a similar scale and international reach. Conditions in the Eurozone remain challenging and reference has already been made in previous statements to the challenging economic backdrop in several European countries, reducing the spending power of customers particularly in Southern European countries, which the Group has attempted to reflect in its financial forecasts. The weaker European economies are also increasing the risk of currency volatility and the potential for significant currency devaluation and business disruption if one or more of these countries exit the euro currency. Accordingly, the Group's treasury processes and policies are designed with the aim of minimising the Group's exposure to the Eurozone economic risk and preserving our ability to operate if such events arise. The functional currency of the Company and a majority of the Company's subsidiaries is the euro. Consequently, those GVC companies that have adopted the euro as their functional currency ensure their financial assets and liabilities in non-euro currencies are equal and that any residual balance is held in euros. With the so-called "GIPSI" countries (Greece, Ireland, Portugal, Spain and Italy), if one or more of these countries exits the euro then the Group may be exposed to a currency devaluation of its financial assets to the extent that the financial assets located in the exiting jurisdiction exceed its financial liabilities. Mitigating factors The Internal Audit function facilitated a review of the enlarged Group's Treasury and Cash Management process in June 2016. The Group adopted a Treasury policy, which dictates that all material transaction and currency liability exposures are hedged with financial derivatives or cash. The Treasury policy also requires that wherever practical and subject to regulatory requirements, the financial assets located in each GIPSI country are limited so they do not exceed the financial liabilities associated with that jurisdiction. 5 IMPACT OF BREXIT On 23 June 2016, a referendum was held to determine whether the United Kingdom remains in the European Union (EU). In light of the decision to leave the EU, in addition to the increase in the volatility of both the global currency and financial markets, it may reduce the Group's ability to operate on an unfettered basis in certain EU markets that have tried to restrict competition in their domestic market from online gaming companies based overseas. The Group, along with other EU based online gaming operators, have previously relied on the ability to challenge such protectionist measures through the EU Court of Justice ("CJEU"). In the event that the UK, and by extension Gibraltar (being a UK protectorate), was to leave the EU, unless the Group was to re-domicile certain of its subsidiaries within the EU, it would no longer be able to rely on such protection. Such a re-domiciliation could give rise to higher taxes payable. Mitigating factors A Brexit task force has been formed, led by the Group Head of Legal, Compliance and Secretariat alongside members of senior executive management. The purpose of the task force is to closely monitor the situation, propose various contingency plans and, subject to Board approval where appropriate, execute them as the UK navigates through the EU exit process, with minimal business interruption and customer impact. VIABILITY STATEMENT In accordance with the obligations of the UK Corporate Governance Code, the Board of GVC is required to provide its assessment within the Annual Report and Accounts of the viability of the Group over an appropriate period of time. Accordingly, the Directors have assessed the viability of the Group over a three year period to December 2019, taking account of the Group's current position and the potential impact of the principal risks as outlined on pages 32 to 33 of this Annual Report. A three-year period was deemed appropriate for this assessment as it best reflects the strategic planning and budgeting process required for the implementation of Group's strategy. The Board has completed a thorough review of threats with the potential to compromise the Group's business model, future performance, solvency, liquidity and its resilience to those risks. Key factors the Board considered within this review included: • Progress of the integration the bwin.party business acquired in February 2016 including the migration of customers on to a single technology platform. • The delivery of the €125m by 2017 annualised synergies resulting from the acquisition by the end of 2017. • The secured nature of the Group's long-term debt facility comprising a €250m term loan and a €70m revolving credit facility. • The diverse nature of the Group's revenue base across both geographical markets and online gaming product segments. • The Group's ability to adapt to regulatory change in regard to online gaming and increase in taxation that may result from such change. Having completed this review, the Board has full confidence that the Company will be able to continue operating and be will be able to meet its liabilities over the three year period to December 2019.