Philips 2014 Annual Report Download - page 173

Group nancial statements 12.9
Annual Report 2014 173
income statement. During 2014, a net gain of EUR 1
million was recorded in the consolidated statement of
income as a result of ineectiveness on certain
anticipated cash ow hedges.
The total net fair value of hedges related to transaction
exposure as of December 31, 2014 was an unrealized
liability of EUR 27 million. An instantaneous 10%
increase in the value of the euro against all currencies
would lead to an increase of EUR 96 million in the value
of the derivatives; including a EUR 73 million increase
related to foreign exchange transactions of the US
dollar against the euro, a EUR 14 million increase related
to foreign exchange transactions of the Japanese yen
against euro, a EUR 14 million increase related to foreign
exchange transactions of the Pound sterling, partially
oset by a EUR 46 million decrease related to foreign
exchange transactions of the euro against the US dollar.
The EUR 96 million increase includes a gain of EUR 28
million that would impact the income statement, which
would largely oset the opposite revaluation eect on
the underlying accounts receivable and payable, and
the remaining gain of EUR 68 million would be
recognized in equity to the extent that the cash ow
hedges were eective.
The total net fair value of hedges related to transaction
exposure as of December 31, 2013 was an unrealized
asset of EUR 44 million. An instantaneous 10% increase
in the value of the euro against all currencies would lead
to an increase of EUR 63 million in the value of the
derivatives; including a EUR 56 million increase related
to foreign exchange transactions of the US dollar
against the euro, a EUR 15 million increase related to
foreign exchange transactions of the Pound Sterling
against euro, a EUR 13 million increase related to foreign
exchange transactions of the Japanese yen, partially
oset by a EUR 45 million decrease related to foreign
exchange transactions of the euro against the US dollar.
Foreign exchange exposure also arises as a result of
inter-company loans and deposits. Where the
Company enters into such arrangements the nancing
is generally provided in the functional currency of the
subsidiary entity. The currency of the Company’s
external funding and liquid assets is matched with the
required nancing of subsidiaries either directly
through external foreign currency loans and deposits,
or synthetically by using foreign exchange derivatives,
including cross currency interest rate swaps and foreign
exchange forward contracts. In certain cases where
group companies may also have external foreign
currency debt or liquid assets, these exposures are also
hedged through the use of foreign exchange
derivatives. Changes in the fair value of hedges related
to this exposure are either recognized within nancial
income and expenses in the statements of income,
accounted for as cash ow hedges or where such loans
would be considered part of the net investment in the
subsidiary then net investment hedging would be
applied. Translation exposure of foreign-currency
equity invested in consolidated entities may be
hedged. If a hedge is entered into, it is accounted for as
a net investment hedge. Net current period change,
before tax, of the currency translation reserve of EUR
600 million relates to the positive impact of the weaker
EURO against the foreign currencies of countries in
which Philips’ operations are located, partially oset by
net investment hedging instruments. The change in
currency translation reserve was mostly related to
development of the USD and to a lesser extent to other
currencies such as the CNY, GBP and INR.
As of December 31, 2014 cross currency interest rate
swaps and foreign exchange forward contracts with a
fair value liability of EUR 655 million and external bond
funding for a nominal value of USD 4,059 million were
designated as net investment hedges of our nancing
investments in foreign operations. During 2014 a total
gain of EUR 0.2 million was recognized in the income
statement as ineectiveness on net investment hedges.
The total net fair value of these nancing derivatives as
of December 31, 2014, was a liability of EUR 623 million.
An instantaneous 10% increase in the value of the euro
against all currencies would lead to an increase of EUR
301 million in the value of the derivatives, including a
EUR 323 million increase related to the US dollar.
As of December 31, 2013 cross currency interest rate
swaps and foreign exchange forward contracts with a
fair value liability of EUR 262 million and external bond
funding for a nominal value of USD 4,059 million
were designated as net investment hedges of our
nancing investments in foreign operations. During
2013 a total gain of EUR 2 million was recognized in the
income statement as ineectiveness on net investment
hedges. The total net fair value of these nancing
derivatives as of December 31, 2013, was a liability of
EUR 260 million. An instantaneous 10% increase in the
value of the euro against all currencies would lead to an
increase of EUR 228 million in the value of the
derivatives, including a EUR 255 million increase related
to the US dollar.
Philips does not currently hedge the foreign exchange
exposure arising from equity interests in non-
functional-currency investments in associates and
available-for-sale nancial assets.
Interest rate risk
Interest rate risk is the risk that the fair value or future
cash ows of a nancial instrument will uctuate
because of changes in market interest rates. Philips had
outstanding debt of EUR 4,104 million, which created
an inherent interest rate risk. Failure to eectively
hedge this risk could negatively impact nancial results.
At year-end, Philips held EUR 1,873 million in cash and
cash equivalents, total long-term debt of EUR 3,712
million and total short-term debt of EUR 392 million. At
December 31, 2014, Philips had a ratio of xed-rate
long-term debt to total outstanding debt of
approximately 85%, compared to 80% one year earlier.