Review of 2010 – USD version - Skanska

Note
06
Financial instruments and financial risk
management
Financial instruments are reported in compliance with IAS 39, “Financial Instruments:
Recognition and Measurement,” IAS 32, “Financial Instruments: Presentation” and
IFRS 7, “Financial Instruments: Disclosures.”
Skanska’s gross amounts due from and to customers for contract work are not recognized
as a financial instrument and the risk in these gross amounts due is thus not reported
in this note.
Risks in partly-owned joint venture companies in Infrastructure Development are managed
in each respective company. Skanska’s aim is to ensure that financial risk management
in these companies is equivalent to that which applies to the Group’s wholly owned
companies. Because the contract period in many cases amounts to decades, management
of the interest rate risk in financing is essential in each respective company. This risk is managed
with the help of long-term interest rate swaps. These holdings are reported according
to the equity method of accounting. As a result, financial instruments in each company
are included in the items “Income from joint ventures and associated companies,” “Effect
of cash flow hedges,” and “Investments in joint ventures and associated companies.”
Disclosures on financial instruments in associated companies and joint ventures are not
included in the following disclosures.
FINANCIAL RISK MANAGEMENT
Through its operations, aside from business risks Skanska is exposed to various financial
risks such as credit risk, liquidity risk and market risk. These risks arise in the Group’s
reported financial instruments such as cash and cash equivalents, interest-bearing
receivables, trade accounts receivable, accounts payable, borrowings and derivatives.
Objectives and policy
The Group endeavors to achieve a systematic assessment of both financial and business
risks. For this purpose, it uses a common risk management model. The risk management
model does not imply avoidance of risks, but is instead aimed at identifying and managing
these risks.
Through the Group’s Financial Policy, each year the Board of Directors states guidelines,
objectives and limits for financial management and administration of financial risks in the
Group. This policy document regulates the allocation of responsibility among Skanska’s
Board, the Senior Executive Team, Skanska Financial Services (Skanska’s internal financial
unit) and the business units.
Within the Group, Skanska Financial Services has operational responsibility for ensuring
Group financing and for managing liquidity, financial assets and financial liabilities.
A centralized financial unit enables Skanska to take advantage of economies of scale and
synergies.
The objectives and policy for each type of risk are described in the respective sections
below.
Credit risk
Credit risk describes the Group’s risk from financial assets and arises if a counterparty
does not fulfill its contractual payment obligation to Skanska. Credit risk is divided into
financial credit risk, which refers to risk from interest-bearing assets, and customer
credit risk, which refers to the risk from trade accounts receivable.
Financial credit risk − risk in interest-bearing assets
Financial risk is the risk that the Group runs in its relations with financial counterparties
in the case of deposits of surplus funds, bank account balances and investments in
financial assets. Credit risk also arises when using derivative instruments and consists
of the risk that a potential gain will not be realized in case the counterparty does not
fulfill its part of the contract. In order to reduce the credit risk in derivatives, Skanska has
signed standardized netting (ISDA) agreements with all financial counterparties with
which it enters into derivative contracts.
Skanska endeavors to limit the number of financial counterparties, which must possess
a rating at least equivalent to BBB+ at Standard & Poor’s or the equivalent rating at
Moody’s. The permitted exposure volume per counterparty is dependent on the counterparty’s
credit rating and the maturity of the exposure.
Maximum exposure is equivalent to the fair value of the assets and amounted to
USD 2,213.1 M. The average maturity of interest-bearing assets amounted to 0.5 (0.2)
years on December 31, 2010. The increase was primarily due to bridge financing in conjunction
with the New Karolinska Solna project.
Customer credit risk − risk in trade accounts receivable
Customer credit risks are managed within the Skanska Group’s common procedures for
identifying and managing risks: the Skanska Tender Approval Procedure (STAP) and the
Operational Risk Assessment (ORA).
Skanska’s credit risk with regard to trade receivables has a high degree of risk diversification,
due to the large number of projects of varying sizes and types with numerous different
customer categories in a large number of geographic markets.
The portion of Skanska’s operations related to construction projects extends only limited
credit, since projects are invoiced in advanced as much as possible. In other operations,
the extension of credit is limited to customary invoicing periods.
Trade accounts receivable Dec 31, 2010 Dec 31, 2009
Carrying amount 2,509.0 2,610.6
Impairment losses 75.4 75.4
Cost 2,584.4 2,686.0
Change in impairment losses,
trade accounts receivable 2010 2009
January 1 75.4 74.5
Impairment loss/reversal of impairment loss
for the year 2.5 10.5
Impairment losses settled –1.2 –11.0
Reclassifications
Exchange rate differences –1.2 1.5
December 31 75.4 75.4
Risk in other operating receivables including shares
Other financial operating receivables consist of accrued interest income, deposits,
receivables for properties divested etc. No operating receivables on the closing day were
past due and there were no impairment losses.
Other financial operating receivables are reported by time interval with respect to
when the amounts fall due in the future.
2010 2009
Due within 30 days 18.1 4.5
Due in over 30 days but no more than one year 4.6 8.3
Due in more than 1 year 0.0 0.1
Total 22.6 12.9
Holdings of less than 20 percent of voting power in a company are reported as shares.
Their carrying amount is USD 6.0 M (7.7). Shares are subject to changes in value. Impairment
losses on shares total USD –0.9 M (–4.0), of which USD 0.0 M (0.0) during 2010.
Liquidity risk
Liquidity risk is defined as the risk that Skanska cannot meet its payment obligations due
to lack of liquidity or to difficulties in obtaining or rolling over external loans.
The Group uses liquidity forecasting as a means of managing the fluctuations in shortterm
liquidity. Surplus liquidity shall, if possible, primarily be used to repay the principal on
loan liabilities.
Funding
Skanska has several borrowing programs − both committed bank credit facilities and
market funding programs − which provide good preparedness for temporary fluctuations
in the Group’s short-term liquidity requirements and ensure long-term funding.
During 2009, through its Finnish operations, Skanska borrowed EUR 91 M (corresponding
to USD 120 M) in the form of pension re-borrowing from two Finnish insurance
companies. The loans carried fixed interest with principal repayments every six months.
After year-end these loans were repaid, and they were thus recognized as interest-bearing
current financial liabilities on December 31, 2010.
110 Notes, including accounting and valuation principles Skanska Review of 2010 – USD version