Philips 2015 Annual Report Download - page 168

Group nancial statements 12.9
168 Annual Report 2015
was partially oset by a EUR 34 million decrease related
to foreign exchange transactions of the EUR against the
USD.
The EUR 66 million increase includes a gain of EUR 5
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 61 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, 2014 was an unrealized
liability of EUR 27 million. An instantaneous 10%
increase in the value of the EUR 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 USD
against the EUR, a EUR 14 million increase related to
foreign exchange transactions of the JPY against EUR,
a EUR 14 million increase related to foreign exchange
transactions of the GBP, partially oset by a EUR 46
million decrease related to foreign exchange
transactions of the EUR against the USD.
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
644 million relates to the positive impact of the weaker
EUR 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, JPY and SAR.
As of December 31, 2015 cross currency interest rate
swaps and foreign exchange forward contracts with a
fair value liability of EUR 812 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 2015 a total
gain of EUR 0.1 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, 2015, was a liability of EUR 794 million.
An instantaneous 10% increase in the value of the euro
against all currencies would lead to an increase of EUR
187 million in the value of the derivatives, including a
EUR 210 million increase related to the USD.
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 EUR 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 USD.
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 5,760 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 1,766 million in cash and
cash equivalents, total long-term debt of EUR 4,095
million and total short-term debt of EUR 1,665 million.
At December 31, 2015, Philips had a ratio of xed-rate
long-term debt to total outstanding debt of
approximately 68%, compared to 85% one year earlier.
A sensitivity analysis conducted as of January 2016
shows that if long-term interest rates were to decrease
instantaneously by 1% from their level of December 31,
2015, with all other variables (including foreign
exchange rates) held constant, the fair value of the
long-term debt would increase by approximately EUR
303 million. If there was an increase of 1% in long-term
interest rates, this would reduce the market value of the
long-term debt by approximately EUR 302 million.
If interest rates were to increase instantaneously by 1%
from their level of December 31, 2015, with all other
variables held constant, the annualized net interest