Philips 2004 Annual Report Download - page 168

The result deferred in equity will mostly be released to the income statement in 2005 at the
time when the related hedged transactions affect the income statement.
The change in fair value of the hedges of transactions in the case of a 10% appreciation in the
euro versus the US dollar can be further split as follows:
Sensitivity to a 10% increase in the euro versus the US dollar, the Hong Kong
dollar and the Chinese renminbi
Maturity
0-6 months
Maturity
6-12 months
Maturity
A12 months
Change in fair value of forwards 2 26 4
Change in fair value of options 5 5 –
Sensitivity to a 10% increase in the euro versus the pound sterling Maturity Maturity Maturity
0-6 months 6-12 months A12 months
Change in fair value of forwards 22 4 –
During 2004 a loss of EUR 1 million was recorded in the income statement as a result of
ineffectiveness of transaction hedges.
Changes in the fair value of hedges related to translation exposure of investments in foreign
entities financed by debt are recognized in the income statement. The changes in the fair value
of these hedges related to foreign exchange movements are offset in the income statement by
changes in the fair value of the hedged items.
The Company recorded a gain of EUR 50 million in other comprehensive income under
currency translation differences as a result of a net investment hedge of an investment in a
foreign subsidiary. A loss of EUR 6 million was booked to the income statement as a result of
ineffectiveness of the hedge.
Interest rate risk
At year-end 2004, Philips had a ratio of fixed-rate long-term debt to total outstanding debt of
approximately 71%, compared to 69% one year earlier. At year-end, the Company held
EUR 4,349 million in cash and short-term deposits, and EUR 1,330 million of floating debt. The
Company partially hedges the interest-rate risk inherent in the external debt. As of year-end
2004, the Company has three USD interest rate swaps outstanding, on which the Company
pays fixed interest on the equivalent of EUR 126 million. The results on these interest rate
swaps are recognized in the income statement.
Certain past interest rate hedges related to bonds were unwound during 2004. The fair value
adjustments to the bonds will be amortized to the income statement based on the recalculated
effective yield. In 2005, we expect to release a gain of EUR 5 million. No results were released
to the income statement as a result of ineffectiveness of interest rate hedges in 2004.
As of December 31, 2004, the majority of debt consisted of bonds. Of the EUR 3,552 million of
long-term debt, 6% consisted of bonds with a so-called ‘embedded put’ feature, which allows
the investor to ask for redemption of the bonds on one specific date prior to their final maturity
date.
167Philips Annual Report 2004