Financial Report 2003 (english) PDF • 287.26 KB - Kuoni Group

36
Annex
26. Derivative Financial Instruments
In the normal course of its business, the Group is exposed to market, credit, interest rate, currency and fuel price risks.
To manage these risks, various derivative financial instruments are used. While these are subject to the risk of
market rates changing subsequent to acquisition, such changes are generally offset by opposite effects on the items
being hedged.
Credit Risk
Exposure to credit risk is monitored on an ongoing basis and covered by appropriate value adjustments on accounts
receivable and prepayments made.
The counterparties to transactions in securities, derivative financial instruments and cash are carefully selected financial
institutions. Given their high credit ratings, management does not expect any counterparty to fail to meet its obliga-
tions. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, except for
foreign currency options.
Interest Rate Risk
The Group is exposed to interest rate risk as a result of movements in interest rates in the capital market. Generally, all
long-term financial liabilities are fixed-interest bearing liabilities. Consequently, changes in interest rates can result in fluc-
tuations in the fair value of such financial liabilities. This would not have any impact on net result or future cash flow,
however. No such derivatives were outstanding as at the balance sheet date.
Foreign Currency Risk
The Group incurs foreign currency risk primarily on purchases and borrowings denominated in a currency other than
the measurement currency of the respective subsidiary. Significantly smaller is the amount of sales denominated in
a currency other than the measurement currency of the respective subsidiary. On a consolidated basis, the Group is also
exposed to currency fluctuations between the Swiss franc and the local measurement currencies of its subsidiaries.
The major currencies giving rise to currency risk are the euro, pound sterling and US dollar.
The Group uses forward exchange contracts, currency options and swaps to hedge its foreign currency risk. Most hedging
contracts have maturities of up to 12 months. Where necessary, the forward exchange contracts are rolled over at
maturity. The Group does not hedge for its net investment in foreign entities and the related foreign currency translation
of local earnings.
The currency hedging contracts outstanding on the balance sheet date are summarised in the following table. Gains and
losses on hedge contracts qualifying as cash flow hedges are expected to be removed from shareholders’ equity within
12 months. Changes in the fair value of forward exchange contracts, currency options and swaps that economically
hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied are recognised
in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and
losses relating to the monetary items are reported under direct costs.