Philips 2006 Annual Report Download - page 92

Philips Annual Report 200692
of Philips’ businesses. Imperfections in the disclosures
could create uncertainty regarding the reliability of the
data presented. Compliance procedures are adopted by
management to ensure that the resource use is consistent
with laws, regulations and policies and that resources are
safeguarded against waste, loss and misuse. Ineffective
compliance procedures relating to the safeguarding of assets
could have an undesirable effect on the fi nancial results.
Details of fi nancial risks
This section provides further details of the fi nancial
risks, which are categorized along the lines of the
corporate processes.
Treasury
Philips is, as mentioned before, exposed to several types
of fi nancial risk. This section will further analyze fi nancial
risks that relate to treasury activities. Philips does not
purchase or hold fi nancial derivative instruments for
speculative purposes.
Currency risk
Currency fl uctuations may impact Philips’ fi nancial results.
Philips has a limited structural currency mismatch between
costs and revenues, as a proportion of its production,
administration and research and development costs is
denominated in euros, while a proportion of its revenues
is denominated in US dollars. Consequently, fl uctuations
in the exchange rate of the US dollar against the euro
can have an impact on Philips’ fi nancial results. In particular,
a relatively weak US dollar during any reporting period
will reduce Philips’ income from operations, while a stronger
US dollar will improve it.
Philips is exposed to currency risk in the following areas:
transaction exposures, such as forecasted sales and
purchases and receivables/payables resulting from
such transactions;
translation exposure of net income in foreign entities;
translation exposure of investments in foreign entities;
exposure of non-functional-currency-denominated debt;
exposure of non-functional-currency-denominated
equity investments.
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It is Philips’ policy that signifi cant transaction exposures
are hedged by the businesses. Accordingly, all businesses
are required to identify and measure their exposures
from material transactions denominated in currencies
other than their own functional currency. Philips’ policy
generally requires committed foreign currency exposures
to be fully hedged using forwards. Anticipated transactions
are hedged using forwards or options or a combination
thereof. The policy for the hedging of anticipated exposures
specifi es the use of forwards/options. The hedge tenor
varies per business and is a function of the ability to
forecast cashfl ows and the way in which the businesses
can adapt to changed levels of foreign exchange rates. As
a result, hedging activities may not eliminate all currency
risks for these transaction exposures. Generally, the
maximum tenor of these hedges is less than 18 months.
The following table outlines the estimated nominal value
in millions of euros for transaction exposure and related
hedges for the most signifi cant currency exposures of
Philips as of December 31, 2006:
Estimated transaction exposure and related hedges
in millions of euros
maturity 0-60 days maturity over 60 days
exposure hedges exposure hedges
Hedges of receivables
USD vs EUR 511 (471 ) 1,667 (1,115 )
JPY vs EUR 47 (44 ) 146 (121 )
GBP vs EUR 67 (65 ) 110 (72 )
PLN vs EUR 33 (33 ) 42 (32 )
EUR vs SEK 32 (32 ) 170 (34 )
USD vs SGD 75 (71 ) 57 (34 )
EUR vs SGD 32 (31 ) 103 (53 )
EUR vs USD 137 (112 ) 424 (82 )
Hedges of payables
USD vs BRL (17 ) 16 (81 ) 81
PNL vs EUR (21 ) 17 (121 ) 71
USD vs EUR (755 ) 711 (1,329 ) 786
EUR vs GBP (20 ) 18 (91 ) 64
USD vs SGD (108 ) 105 (39 ) 33
MXN vs USD (23 ) 18 (89 ) 51
The fi rst currency displayed is the exposure that is being hedged followed by the
functional currency of the hedging entity. Due to their high correlation the US
Dollar and Hong Kong Dollar have been grouped within the table and are
referred to as USD.
Philips does not hedge the translation exposure of net
income in foreign entities.
6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group