Philips 2005 Annual Report Download - page 108

Philips Annual Report 2005108
Apart from that, the Company also has signifi cant
derivatives outstanding related to the pound sterling.
An instantaneous 10% increase in the value of the euro
against the US dollar, Taiwanese dollar and pound sterling
and an instantaneous 10% increase in the value of the
US dollar against the Taiwanese dollar, from their levels at
December 31, 2005, with all other variables held constant,
would result in the following estimated increases in the
fair value of the Company’s fi nancial derivatives.
EUR
vs
USD
EUR
vs
GBP
EUR
vs
TWD
USD
vs
TWD
Derivatives related to
transactions 40 25 − 7
Derivatives related to
translation exposure in
foreign entities fi nanced
by debt 168 − − −
Derivatives related to
translation exposure in
foreign entities fi nanced
by equity 68 − 222 −
Derivatives related to
external debt/cash − − − (222 )
Total 276 25 222 (215 )
In December 2005 Royal Philips Electronics purchased
the remaining shares in TSMC held by a Taiwanese Philips
subsidiary. This led to a signifi cant holding of US dollars
by this Taiwanese subsidiary. The cash was hedged to
the functional currency of the Taiwanese group company
(Taiwanese dollars). The Taiwanese dollar hedge against
the euro relates to an undistributed dividend from this
Taiwanese subsidiary and is accounted for by the
Company as a net investment hedge.
The largest impact of a 10% change in the value of the
euro against other individual currencies is for the Japanese
yen which has an impact of less than 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 under cost of sales. Forecasted transactions are
not recorded in the accounts of the Company. Therefore
the hedges related to these forecasted transactions are
recorded as cash fl ow hedges. The results from such hedges
are deferred in equity. Currently, a loss of EUR 45 million
before taxes is deferred in equity as a result of these
hedges. The result deferred in equity will mostly be
released to income from operations within the income
statement in 2006 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 and the pound sterling can be further broken
down as follows:
sensitivity to a 10% increase in the
euro versus the US dollar
maturity 0-12
months
maturity > 12
months
Change in fair value of forwards 20 16
Change in fair value of options 4 −
sensitivity to a 10% increase in the
euro versus the pound sterling
maturity 0-12
months
maturity > 12
months
Change in fair value of forwards 25 −
During 2005 a net loss of less than 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 fi nanced 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 loss of EUR 164 million in
other comprehensive income under currency translation
differences as a result of net investment hedges of
investments in foreign subsidiaries. A loss of EUR 1 million
was recognized in the income statement as a result of
ineffectiveness of these hedges.
Interest rate risk
At year-end 2005, Philips had a ratio of fi xed-rate long-
term debt to total outstanding debt of approximately 69%,
compared to 71% one year earlier. At year-end, the
Company held EUR 5,293 million in cash and short-term
deposits, and EUR 1,390 million of fl oating debt. The
Company partially hedges the interest-rate risk inherent
in the external debt. As of year-end 2005, the Company
Management discussion and analysis