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NOTE 32 FINANCIAL INSTRUMENTS AND
CONCENTRATION OF RISK
Accounting and valuation principles
For a description of accounting and valuation principles, refer to Note 1. As a rule,
Intrum Justitia carries fi nancial instruments at fair value and recognizes changes in
value through profi t or loss.
Reported value and fair value of fi nancial instruments
Shares in subsidiaries, associated companies and other companies
The Parent Company’s holdings of shares in subsidiaries are recognized at cost.
Holdings in the Group of other shares in associated companies are recognized
according to the equity method. The holdings are not marked to market and fair
values cannot be reliably determined.
Shares in other companies refer to a four-percent holding in a company that
is not publicly listed and where fair value cannot be determined without diffi culty,
as well as several small shareholdings in listed companies where both the
carrying amount and fair value are insignifi cant in relation to the Group’s total
assets.
Purchased debt
Purchased debt is recognized at amortized cost according to an effective interest
method. The Group restates the carrying amount by calculating the present value
of estimated future cash fl ows at the receivables’ original effective interest rate.
Adjustments are recognized through profi t or loss. With this valuation method, the
carrying amount is the best estimate of the fair value of debt portfolios.
Other receivables
Other receivables have short maturities. Receivables and foreign currency are
translated in the accounts at closing day rates. Consequently, the carrying amount
corresponds to fair value.
Liquid assets
Liquid assets mainly consist of bank balances. Liquid assets in foreign currency
are translated in the accounts at closing day rates. Consequently, the carrying
amount corresponds to fair value.
Liabilities to credit institutions
The Parent Company’s and the Group’s loan liabilities carry market rate interest
with short interest fi xing terms. Liabilities in foreign currency are translated in the
accounts at closing day rates. Consequently, the carrying amount corresponds to
fair value.
Other liabilities
The Parent Company’s and the Group’s other liabilities have short maturities.
Liabilities in foreign currency are translated in the accounts at closing day rates.
Consequently, the carrying amount corresponds to fair value.
Derivatives
The Parent Company and the Group hold forward exchange contracts to a limited
extent. The contracts have short maturities, typically one or more months. All outstanding
forward exchange contracts are restated at fair value in the accounts,
with adjustments recognized through profi t or loss. The Group also holds interest
rate cap contracts where both the carrying amount and fair value are nil.
Principles of fi nancing and fi nancial risk management
The fi nancial risks that arise in Intrum Justitia’s operations are limited. Thanks to
a strong cash fl ow, combined with little need for investment and operating capital,
external capital needs in operations are low.
Intrum Justitia’s fi nancing and fi nancial risks are managed within the Group
in accordance with the treasury policy established by the Board of Directors.
The treasury policy contains rules for managing fi nancial activities, delegating
responsibility, measuring and identifying fi nancial risks and limiting these risks.
Internal and external fi nancial operations are concentrated in Group Treasury
in Stockholm, which ensures economies of scale when pricing fi nancial transactions.
Because Group Treasury can take advantage of temporary surpluses and
defi cits in the Group’s various countries of operation, the Group’s total interest
expense can be minimized.
Exchange rate risk
Exchange rate risk is the risk that fl uctuations in exchange rates will negatively
affect the Group’s income statement, balance sheet and/or cash fl ows. Exchange
rate risk can be divided into transaction exposure and translation exposure.
Transaction exposure consists of the net of operating and fi nancial receipts and
disbursements in different currencies. Translation exposure consists of the equity
in foreign subsidiaries and associated companies in foreign currency and any
goodwill in connection with acquisitions.
Transaction exposure
In each country, all revenues and the large part of operating expenses are denominated
in local currencies, and thus currency fl uctuations have only a limited impact
on the company’s operating earnings denominated in local currency. National
operations seldom have receivables and liabilities in foreign currency. Revenues
and expenses in national currency are thereby hedged in a natural way, which
limits transaction exposure. The currency exposure that arises within the operating
activities is limited to the extent it pertains to international collection operations.
All major known currency fl ows are hedged on a continuous basis in the
Group and the Parent Company through the use of forward exchange contracts.
Outstanding forward exchange contracts as of December 31, 2005 in the Parent
Company and the Group comprised the following currencies:
Hedged
Hedged
Local currency
amount, buy amount, sell
CHF 2,370,210 13,792,179
CZK 30,711,804 17,144
DKK 11,966,250 36,591
EEK 0 303,591
EUR 7,242,168 41,941,929
GBP 312,338 43,612,854
HUF 0 635,488,286
LVL 0 55,631
NOK 709,546 49,318,387
PLN 151,758 9,508,781
Forward exchange contracts are classifi ed as fi nancial assets carried at fair value
through profi t or loss (held for sale). The carrying amount as of December 31, 2005
corresponds to fair value, SEK 1.0 M. During the year the changes in value of forward
exchange contracts were recognized in the Group profi t or loss in the
amount of SEK –39.2 M. The purpose of these forward exchange contracts has
been to minimize exchange rate differences in the Parent Company attributable
to receivables and liabilities in foreign currency. These exchange rate differences
amounted to SEK 46.1 M during the year. The net effect on the income statement
of exchange rate differences attributable to receivables and liabilities as well as
forward exchange contracts is SEK 6.9 M.
Translation exposure
Intrum Justitia operates in 22 countries. Fluctuations in exchange rates affect
the value of net assets in foreign currency. When the balance sheets for foreign
subsidiaries are translated to SEK, balance sheet exposure arises because
these balance sheets are expressed in currencies other than SEK. The results
and fi nancial position of subsidiaries are reported in the relevant foreign currencies
and later translated into SEK for inclusion in the consolidated fi nancial
statements. Consequently, fl uctuations in the SEK exchange rate vis-à-vis these
currencies affect the Group’s revenues and operating earnings, as well as equity
and other items in its fi nancial statements. Fluctuations between SEK and other
currencies can therefore have an unfavorable effect on earnings and fi nancial
position as indicated in the consolidated fi nancial statements. This exposure is
minimized through the limited need for equity locally and by fi nancing in local
currency. As a result, net exposure in foreign assets is not hedged.
Consolidated earnings in SEK are affected by exchange rate fl uctuations since
earnings by subsidiaries are translated to SEK. Of the Group’s revenues in 2005,
83 percent (84) was from operations outside Sweden. Exchange rate exposure
does not affect the competitive situation faced by local subsidiaries, however,
since they essentially operate in local currency. As a result, this exposure is not
hedged.
A ten-percent appreciation in exchange rates against SEK and each currency
with the greatest exposure would have had the following effect on revenues in 2005:
CHF, SEK +30 M; EUR, SEK +142 M; GBP, SEK +27 M, and NOK, SEK +11 M.
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