Review of 2010 â USD version - Skanska

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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
Note 06 Continued earnings and cash flow. Interest rate risk is defined as the possible negative impact on net financial items in case of a one percentage point increase in interest rates across all maturities. The change in fair value related to interest-bearing assets and liabilities Maturity Currencies Limit Nominal Utilized Market funding programs Commercial paper (CP) program, maturities 0–1 years SEK/EUR SEK 6,000 M 882.0 0.0 Medium Term Note (MTN) program, maturities 1–10 years SEK/EUR SEK 8,000 M 1,176.0 0.0 2,057.9 0.0 Committed credit facilities Syndicated bank loan 2014 SEK/EUR/USD EUR 750 M 993.7 0.0 Bilateral loan agreements 2012 EUR EUR 70 M 92.8 92.8 Pension re-borrowing loans 2016 EUR EUR 20 M 26.5 26.5 2017 EUR EUR 58 M 76.9 76.9 Other credit facilities 75.1 1.2 1,264.9 197.3 including derivatives may not exceed SEK 100 M (corresponding to USD 14.7 M). Derivative contracts, mainly interest rate swaps and currency swaps, are used as needed to adapt the interest rate refixing period and currency. The average interest rate refixing period for all interest-bearing assets was 0.5 (0.1) years. The increase was mainly due to bridge financing in conjunction with the New Karolinska Solna project. The interest rate for these amounted to 0.91 (0.63) percent at year-end 2010. Of the Group’s total interest-bearing financial assets, 37 (28) percent carry fixed interest rates and 63 (72) per cent variable interest rates. The average interest rate refixing period for all interest-bearing liabilities was 0.9 (1.2) years. The interest rate for these amounted to 3.09 (3.65) percent excluding derivatives at year-end. Of total interest-bearing financial liabilities, 37 (29) percent carry fixed interest rates and 63 (71) percent variable interest rates. On December 31, 2010 there was one outstanding interest rate swap contract, amounting to USD 58.8 M (0.0). The contract has an amortizing structure and swaps a fixed interest rate asset to a floating rate. There were also interest rate swap contracts in partly owned joint venture companies. The fair value of interest-bearing financial assets and liabilities, plus derivatives, would change by about USD 9.1 M (13.6) in case of a one percentage point change in market interest rates across the yield curve, given the same volume and interest rate refixing period as on December 31, 2010. At year-end 2009, the Group’s unutilized credit facilities totaled USD 1,080.4 M (1,170.0). Liquidity reserve and maturity structure The objective is to have a liquidity reserve of at least SEK 4 billion (corresponding to USD 0.6 billion) available within one week in the form of cash equivalents or committed credit facilities. At year-end 2010, cash and cash equivalents and committed credit facilities amounted to about SEK 14 (18) billion (corresponding to USD 2.1 [2.5] billion), of which about SEK 10 billion (corresponding ro USD 1.5 billion) is available within one week. The maturity structure of financial interest-bearing liabilities and derivatives related to borrowing was distributed over the coming years according to the following table. Maturity period Carrying amount Future payment amount Within 3 months Maturity Over 3 months within 1 year Over 1 year within 5 years More than 5 years Interest-bearing financial liabilities 538.9 555.0 182.6 174.8 185.1 12.6 Derivatives: Currency forward contracts Inflow 15.7 1,779.8 1,779.8 Outflow –20.6 –1,783.5 –1,783.5 Total 534.0 551.4 178.9 174.8 185.1 12.6 The average maturity of interest-bearing liabilities amounted to 1.4 (1.9) years. Other operating liabilities Other operating liabilities that consist of financial instruments fall due for payments according to the table below. Other operating liabilities 2010 2009 Due within 30 days 89.2 99.6 Due in over 30 days but no more than one year 124.9 25.6 Due in more than one year 9.8 24.5 Market risk 224.0 149.7 Market risk is the Group’s risk that the fair value of financial instruments or future cash flows from financial instruments will fluctuate due to changes in market prices. The main market risks in the consolidated accounts are interest rate risk and foreign exchange risk. Interest rate risk Interest rate risk is the risk that changes in interest rates will affect the Group’s future Foreign exchange risk Foreign exchange risk is defined as the risk of negative impact on the Group’s income statement and statement of financial position due to fluctuations in exchange rates. This risk can be divided into transaction exposure, i.e. net operating and financial (interest/principal payment) flows, and translation exposure related to net investments outside Sweden. Transaction exposure Transaction exposure arises in a local unit when the unit’s inflow and outflow of foreign currencies are not matched. Although the Group has a large international presence, its operations are mainly of a local nature in terms of foreign exchange risks, because project revenue and costs are mainly denominated in the same currency. If this is not the case, the objective is for each respective business unit to hedge its exposure in contracted cash flows against its functional currency in order to minimize the effect on earnings caused by shifts in exchange rates. The main tool for this purpose is currency forward contracts. The foreign exchange risk for the Group may amount to a total of SEK 50 M (corresponding to USD 7.3 M) with risk calculated as the effect on earnings of a five percentage point shift in exchange rates. As of December 31, 2010, foreign exchange risk accounted for SEK 45 M (43) (corresponding to USD 6.6 M [6.0]) of transaction exposure, of which EUR accounted for SEK 11 M (corresponding to USD 1.6 M), PLN for SEK 21 M (corresponding to USD 3.1 M) and USD for SEK 12 M (corresponding to USD 1.8 M). Contracted net flows in currencies that are foreign to the respective Group company are distributed among currencies and maturities as follows. The Group's contracted net foreign currency flow 2011 2012 2013 and later EUR 1 161.1 25.0 11.0 USD 9.1 JPY 6.3 –0.3 CLP 0.0 HUF –3.7 CZK –48.2 –7.5 –1.5 PLN –89.8 Other currencies 1.3 Total equivalent value 36.2 17.5 9.3 1 Mostly related to a highway project in Poland. Skanska applies hedge accounting mainly in its Polish operations for contracted flows in EUR. The fair value of these hedges totaled USD 5.3 M (8.8) on December 31, 2010. The hedges fulfill effectiveness requirements, which means that unrealized profit or loss is recognized under “Other comprehensive income.” The fair value of currency hedges for which hedge accounting is not applied totaled USD –0.4 M (-0.6) on December 31, 2010, including the fair value of embedded derivatives. Changes in fair value are recognized in the income statement. Skanska Review of 2010 – USD version Notes, including accounting and valuation principles 111
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Review of 2010 - USD version
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The Skanska Group Senior Executive
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United States 28% Business streams:
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Johan Karlström, Skanska’s Presi
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Our new office building projects ar
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Skanska’s core businesses Constru
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Profitable growth 2011-2015 Skanska
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Performance analysis The Group Reve
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Capital structure Capital requireme
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projects during tender preparation
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Green Refurbishment for value-secur
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Evaluating managers To provide a be
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Skanska share price movement, Janua
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Construction 25 Aviation hangar bec
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increase due to stricter energy and
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In August, a milestone breakthrough
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The London skyline has reached a ne
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Skanska Review of 2010 - USD versio
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and Texas and all the way west to C
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Residential Development 37 New home
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Stavanger, on the southern coast of
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In Ellös on the isle of Orust alon
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Ullstorps Gårdar — Country life
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0,6 Commercial Property Development
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The City Green Court office buildin
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Green Lustgården started Poland -
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1 4 5 5 Illustration Tyfonen Illust
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Infrastructure Development 55 New K
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At the end of 2010, Skanska signed
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To win the New Karolinska Solna pro
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Two London hospitals, Barts and the
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Page 65 and 66: Sustainable development 64 Blå Jun
Page 67 and 68: Safety starts with planning Skanska
Page 69 and 70: The Skanska Color Palette TM is now
Page 71 and 72: Sustainable procurement Over 80 per
Page 73 and 74: Skanska Financials 2010 The financi
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Page 77 and 78: Earnings per share USD 1.6 Investme
Page 79 and 80: Material risks and uncertainty fact
Page 81 and 82: The members and deputy members of t
Page 83 and 84: Skanska’s management structure Se
Page 85 and 86: the World Business Council for Sust
Page 87 and 88: Consolidated income statement USD M
Page 89 and 90: Consolidated statement of financial
Page 91 and 92: Consolidated statement of changes i
Page 93 and 94: Consolidated operating cash flow st
Page 95 and 96: Note 01 Consolidated accounting and
Page 97 and 98: Note 01 Continued IFRS 5, “Non-cu
Page 99 and 100: Note 01 Continued Further expenditu
Page 101 and 102: Note 01 Continued The obligation is
Page 103 and 104: Infrastructure Development Skanska
Page 105 and 106: Note 03 Continued Statement of comp
Page 107 and 108: Note 03 Continued Operating cash fl
Page 109 and 110: Note 03 Continued Segments, January
Page 111 and 112: Note 04 Continued Construction Resi
Page 113: Note 04 Continued External revenue
Page 117 and 118: Note 06 Continued The role of finan
Page 119 and 120: Note 06 Continued Reconciliation wi
Page 121 and 122: Note 06 Continued Collateral The Gr
Page 123 and 124: Note 12 Depreciation/amortization D
Page 125 and 126: Note Not 16 Income taxes 14 Net fin
Page 127 and 128: Note 17 Property, plant and equipme
Page 129 and 130: Note 18 Continued Goodwill impairme
Page 131 and 132: Note 20 Continued Specification of
Page 133 and 134: Note 22 Current-asset properties/Pr
Page 135 and 136: Note 26 Equity/earnings per share I
Page 137 and 138: Note 27 Financial liabilities Finan
Page 139 and 140: Note 28 Continued Actuarial assumpt
Page 141 and 142: Note 31 Specification of interest-b
Page 143 and 144: Note 33 Assets pledged Assets pledg
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Page 149 and 150: Note 37 Remuneration to senior exec
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Page 153 and 154: Note Business unit Infrastructure D
Page 155 and 156: Note 42 Consolidated quarterly resu
Page 157 and 158: Note 43 Continued Statements of fin
Page 159 and 160: Note 44 Definitions Average capital
Page 161 and 162: Statement by the President and Chie
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The new environmentally advanced he
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Mike McNally Veronica Rörsgård Ro
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Richard Hörstedt Helsingborg, born
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May - August 2010 5/7/2010 Skanska
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November - December 2010 11/2/2010
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More information about Skanska Worl
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Annual Shareholders’ Meeting Inve
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Review of 2010 â USD version - Skanska