Atlas Copco - Annual Report 1999

NOTES TO THE FINANCIAL STATEMENTS
Financial Exposure
The objective of Atlas Copco’s financial risk policy is to minimize
the financial risks to which the Group is exposed. It is designed
to create stable conditions for the business operations of
the divisions and contribute to a stable growth in shareholders’
equity and dividend.
Currency risk
Changes in exchange rates affect Group earnings and equity in
various ways:
• Group earnings – when revenues from sales and costs for production
are in different currencies (transaction risk).
• Group earnings – when earnings of foreign subsidiaries are
translated into SEK (translation risk).
• Group shareholders’equity – when the net assets of foreign subsidiaries
are translated into SEK (translation risk).
Transaction risk
The Group’s net cash flows in foreign currency give rise to
transaction risks which corresponds to a value of approximately
SEK 5,000 m. The largest surplus currencies, meaning those in
which revenues exceed costs, and the deficit currencies, are
shown in graph 1.
According to the policy such foreign currency flows must be
hedged but only for the period it is estimated it takes to adjust
prices and/or costs to the new exchange rates. These periods vary
among the divisions and amount on average to 3–4 months for
the Group.
Graph 1
Transaction Exposure (in the
most important currencies)
SEK billion
3
2
1
0
–1
–2
–3
USD
CAD
AUD
NOK
32 ATLAS COPCO 1999
EUR
SEK
Graph 2
Net Assets
in Foreign Currency
SEK billion
8
7
6
5
4
3
2
1
0
USD
GBP
FRF
DEM
OTHER
Consequently, changes in exchange rates have a relatively rapid
impact on Group earnings.
The hedging of currencies is aimed at securing calculated
gross margins, and not maximizing them through speculation.
Translation risk
The risk policy states that the translation effect of currency
changes on the Group’s equity, expressed in SEK, shall be reduced
by matching the currency of loans with the currency of the net
assets, which corresponds to the value of net investment in foreign
entities. Derivative contracts like forwards, swaps and
options shall not be used for this hedging purpose, as derivative
contracts give rise to cash flow risks at roll-over dates.
The percentage of foreign equity that will be effectively
hedged against the SEK will vary depending on the borrowing
requirements. As per December 31, 1999, approximately 24 percent
was hedged, primarily USD vs SEK.
The interest differential between international and Swedish
interest rates on the remaining forward contracts and swap
agreements used in the hedge appears in the Group’s interest net
and was in 1999 SEK –8 m. (–6). Note 18 in the financial statements
shows how shareholders’ equity was affected by currency
hedging in 1999. The value of the equity of foreign subsidiaries
at year-end 1999 corresponded to approximately SEK 11,300 m.
and is shown in graph 2, distributed by main currencies.
Graph 3 shows the approximate currency translation effects
on Group earnings for the year when the earnings of foreign
subsidiaries are translated to SEK.
Graph 3
Translation Effect
on Earnings before Tax
Change in exchange rate SEK, %
8.0
6.0
4.0
2.0
0
– 2.0
– 4.0
+150 +100
+50
0
Change in earnings
SEK m.
–50 –100 –150
Interest-rate risk
Atlas Copco’s net interest
items are affected by changes
in market interest rates. The
speed with which a permanent
change in the interest rate
can have an impact on net
interest income or expense is
dependent on the duration of
the fixed interest periods on
loans and investments.
According to the financial
risk policy, the average interest-rate
period for loans shall
not exceed three years and
not be less than three
months. Deposits with fixed
interest shall not exceed 12
months. At the time of print-