Annual Report 2006 ISS Global A/S

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 January – 31 December. Amounts in DKK millions
31. Derivatives
ISS Global's financial risk management is based on policies approved by the Board of Directors, specifying guidelines and risk limits
for ISS Global's financial transaction and positions. ISS Global may use derivatives to hedge financial risks. Hedging of financial risks
is managed at corporate level.
Currency risk can be classified in three categories: economic, transaction and translation.
In practical terms, the economic currency risk is somewhat limited for ISS Global, as ISS Global and its competitors generally have
similar cost structures. However, currency movements may have an adverse effect on the general economic situation of countries in
which ISS Global operates and ISS Global may be impacted by such events.
The service industry is characterised by a relatively low level of transaction risk, since the services are produced and delivered in the
same local currency with minimal exposure from imported components. ISS Global's transaction risk primarily relates to the payment
of royalties and service fees to ISS Global, which are made in the local currencies of the paying companies. Thus, a currency risk
exists in relation to the translation of these payments into Danish kroner.
The main currency exposure relates to the risk involved in translating the income statements of foreign subsidiaries into Danish kroner
based on average exchange rates for the year and in relation to the risk of translating the equity in foreign subsidiaries into Danish
kroner based on year-end exchange rates.
ISS Global may choose to hedge the currency exposure on foreign investments by funding such investments in local currencies or
entering into hedging transactions. As at 31 December 2006, no such hedging was entered into.
In 2006, the currencies in which ISS Global's revenue was denominated increased with an average of 0.1% (2005: increased with
0.5%) relative to Danish kroner, increasing ISS Global's revenue by DKK 58 million (2005: increasing ISS Global's revenue by DKK
215 million). Currency movements affected the operating profit by an increase of DKK 3 million (2005: an increase of DKK 16 million).
The effect of the translation of investments in foreign subsidiaries and the effect of hedge transactions, net of tax, decreased equity by
DKK 84 million (2005: increased equity by DKK 101 million).
Interest rate risk is measured by the duration of the net debt. The duration reflects the effect of a simultaneous increase or decrease
in the general level of interest rates for the currencies included in the debt portfolio. As at 31 December 2006, the duration of net debt
was approximately 4.1 years (31 December 2005: 3.4 years). Thus, all other things being equal, an increase (decrease) of one
percentage point in the relevant interest rates would reduce (increase) the market value of net debt by approximately DKK 740 million
(2005: DKK 542 million). Based on the net debt and taking into account the effect of hedging instruments as at 31 December 2006, a
general decrease (increase) of one percentage point in relevant interest rates would reduce (increase) the annual net interest expense
by approximately DKK 13 million, all other things being equal.
ISS Global's loan portfolio primarily consists of bonds issued under the EMTN-programme and bank loans. A part of the interest
payments on the bank loans have been swapped from floating into fixed rates (see note 25, Long-term debt). To manage the duration
of the net debt, ISS Global applies derivatives, such as interest rate swaps, futures and options. The deferred gain or loss on the
interest rate instruments will be recognised directly in equity, net of tax. On realisation of the hedged item, value changes recognised
under equity are reversed and recognised together with the hedged item. When a hedging instrument expires or is sold, terminated or
exercised but the hedged future transactions are still expected to occur, the cumulative gain or loss at that point remains in equity and
is recognised in accordance with the above policy when the transaction occurs.
Credit risk represents the risk of the accounting loss that would be recognised if counterparties failed to perform as contracted.
Losses on bad debt relating to individual customers or counterparties have historically been relatively low. ISS Global performs
ongoing credit evaluations of the financial condition of ISS Global's counterparties in order to reduce the credit risk exposure.
Continues
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ANNUAL REPORT 2006 / Consolidated Financial Statements
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