Philips 2004 Annual Report Download - page 167

forwards/options and the hedge tenor varies per business and is a function of the ability to
forecast cashflows and the way in which the businesses can adapt to changed levels of foreign
exchange rates. Generally, the maximum tenor of these hedges is less than 18 months.
The Company does not hedge the exposure arising from translation exposure of net income in
foreign entities.
Translation exposure of equity invested in consolidated foreign entities financed by equity is
partially hedged. If a hedge is entered into, it is accounted for as a net investment hedge.
Intercompany loans of the Company to its subsidiaries are generally provided in the functional
currency of the borrowing entity. The currency of the external funding of the Company is
matched with the required financing of subsidiaries either directly by external foreign currency
loans, or by using foreign exchange swaps. In this way the translation exposure of investments in
foreign entities financed by debt is hedged.
Philips does not currently hedge the foreign exchange exposure arising from unconsolidated
equity investments.
The Company uses foreign exchange derivatives to manage its currency risk. The inherent risk
related to the use of these derivatives is outlined below.
The US dollar and some US dollar-related currencies (i.e. the Chinese renminbi and the Hong
Kong dollar) account for a high percentage of the foreign exchange derivatives of the Company.
Apart from that, the Company has significant derivatives outstanding related to the pound
sterling. An instantaneous 10% increase of the euro against the US dollar and the pound sterling
from their levels at December 31, 2004, with all other variables held constant, would result in
the following estimated increases in the fair value of the Company’s financial derivatives.
Sensitivity to a 10% increase in
the euro versus the US dollar,
the Hong Kong dollar and the
Chinese renminbi
Sensitivity to a 10% increase of
the euro versus the pound
sterling
Derivatives related to transactions 42 26
Derivatives related to translation exposure in foreign
entities financed by debt 167 –
Derivatives related to translation exposure in foreign
entities financed by equity 45 –
Derivatives related to external debt – –
Total 254 26
A 10% move in the euro versus other individual currencies has an impact of less than
approximately EUR 15 million on the value of derivatives.
The derivatives related to transactions are, for hedge accounting purposes, split into hedges of
accounts receivable/payable and forecasted sales and purchases. Changes in the value of foreign
currency accounts receivable/payable as well as the changes in the fair value of the hedges of
accounts receivable/payable are reported in the income statement. Forecasted transactions are
not yet recorded in the accounts of the Company. Therefore the hedges related to these
forecasted transactions are recorded as cash flow hedges. The results from such hedges are
deferred in equity. Currently, a profit of EUR 45 million before taxes is deferred in equity as a
result of these hedges.
166 Philips Annual Report 2004
Financial statements of the Philips Group