Panalpina Annual Report 2006

Consolidated and Annual Financial Statements 2006
86 Panalpina Annual Report 2006
Financial risk factors
Currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures,
primarily in regard to the USD. Foreign exchange risk arises from future commercial transactions, recognized assets and
liabilities as well as net investments in foreign operations.
To manage foreign exchange risks arising from future commercial transactions or recognized assets and liabilities,
entities in the Group use forward contracts, transacted generally with Group Treasury. Foreign exchange risk arises when
future commercial transactions or recognized assets and liabilities are denominated in a currency that is not the Group
entity’s measurement currency. Group Treasury is responsible for managing the net position using external derivatives
contracts.
Interest rate risk
The absence of significant interest bearing liabilities in general and their short-term nature limit exposure to interest rate risk.
The Group has a clear funding policy that forbids affiliates from borrowing in foreign currency and has a clear preference
for intra-group financing. Affiliates are also required to repatriate their excess cash. Liquidity is mainly managed at corporate
level by using money market products. Derivative instruments are used to manage duration of financial instruments in a
prudent way.
Credit risk
Credit risk stems from a counterparty’s failure to meet its obligation. The Group is exposed to credit risk on financial
instruments mainly with its liquid assets, derivatives assets and trade receivables. Credit risk is managed in accordance with
clear and established guidelines.
Liquid assets are invested with highly rated borrowers and there is no exposure of credit risk.
Trade receivables are strictly monitored and clear guidelines are established in order to set credit limits, approval procedures,
and procedures to monitor overdue items. Concentration of credit risk in trade receivables is immaterial.
Settlement risk
This risk is managed by monitoring counterparty activity, settlement limits and by fixing clear limits.
Liquidity risk
The Group holds highly liquid securities. Liquid assets and marketable securities usually have a short-term horizon in order
to match any funding needs.
Insurance risk
The Group has established a captive reinsurance company, Mondi Reinsurance Ltd., Hamilton, Bermuda, that insures
a dedicated risk portion of its errors and omissions, transport-operator and commercial general liability programs. The
exposure of its captive reinsurance company is limited by a third-party insurer that covers losses exceeding an amount
of CHF 1 million on a single case basis and a total aggregate limit of CHF 9 million annually, for claims exceeding
CHF 50,000 per incident. In a consolidated view, the Group, through its captive reinsurance company, bears the risks
insured with its captive reinsurance company up to the limit as if such risks were not insured at all. Furthermore, as third
party coverage is subject to a considerable deductible and a total aggregated limit per year, the Group, in effect, bears the
risk of damages, losses and claims that are above such aggregated limits as well.
The Group has supplemented its insurance program with a claims management and a claims handling system that ensure
transparency of the Group’s risk profile and the proper handling of any claim.
Accounting for derivative financial instruments and hedging activities
Derivative financial instruments are used to hedge foreign currency and interest rate risk. All derivatives are initially
recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at fair value. The
method of recognizing the resulting gain or loss depends on whether the derivative qualifies as a hedging instrument, and if
so, the nature of the item being hedged.
To qualify for hedge accounting, the hedging relationship must meet several strict conditions regarding documentation,
probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, then the
financial instrument does not qualify for hedge accounting. In this case, the hedging instrument and the hedged item
are valued independently of one another. The derivative hedging instrument is reported at fair value with the changes in fair
value included in income (expenses).
For qualifying fair value hedges, the derivative financial instruments are carried at fair value and gains or losses are
recognized in profit or loss. Additionally, the fair value gain or loss on the hedged item attributable to the hedged risk is
recognized in profit or loss.