Philips 2006 Annual Report Download - page 93

Philips Annual Report 2006 93
Translation exposure of equity invested in consolidated
foreign entities fi nanced by equity is partially hedged.
If a hedge is entered into, it is accounted for as a net
investment hedge.
Intercompany loans by the company to its group companies
are generally provided in the functional currency of the
borrowing entity. The currency of the Company’s external
funding is matched with the required fi nancing 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 fi nanced by debt is hedged.
Philips does not currently hedge the foreign exchange
exposure arising from unconsolidated equity investments.
Philips uses foreign exchange derivatives to manage its
currency risk. The inherent risk related to the use of
these derivatives is outlined below. Due to their high
correlation the US dollar and Hong Kong dollar have
been grouped within the following analysis and are
referred to as USD.
The US dollar and Taiwanese dollar account for a high
percentage of Philips’ foreign exchange derivatives. Apart
from that, Philips 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, 2006,
with all other variables held constant, would result in the
following estimated increases in the fair value of Philips’
fi nancial derivatives.
Derivatives sensitivity analysis
in millions of euros
EUR
versus
USD
EUR
versus
GBP
EUR
versus
TWD
USD
versus
TWD
Derivatives related to
transactions (7 ) 18 − 4
Derivatives related to
translation exposure in
foreign entities fi nanced
by debt 98 18 − (4 )
Derivatives related to
translation exposure in
foreign entities fi nanced
by equity 57 − 53 −
Derivatives related to
external debt/cash − − − (29 )
148 36 53 (29 )
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 13 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.
Hedges related to forecasted transactions are accounted
for as cash fl ow hedges. The results from such hedges
are deferred in other comprehensive income within equity.
Currently, a gain of EUR 8 million 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 2007 at the time when the related
hedged transactions affect the income statement.
54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements
Strategic
business risks
Market/Business
environment risks
Operational risks
Financial risks
- Treasury
- Pensions
- Fiscal
Compliance and
nancial reporting
risks
Corporate Governance
Philips Business Control Framework
Philips General Business Principles