Annual Report 2006 ISS Global A/S

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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 _____________________________________________________________________________________________________________ ANNUAL REPORT 2006 / Consolidated Financial Statements 90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 January – 31 December. Amounts in DKK millions 31. Derivatives (continued) Contractual values and unrealised gains and losses are specified below for financial instruments used to hedge the foreign exchange risk and the interest rate risk: 2006 Unrealised gain/(loss) on Contractual revaluation Financial instruments Forward foreign currency, purchases value to fair value AUD 22 (0) CHF 209 (0) EUR 5,740 1 GBP 692 (1) NOK 352 (0) Others 27 0 7,042 Forward foreign currency, sales AUD 1,474 HKD 203 SEK 66 USD 183 USD-related 32 Others 344 Interest rate instruments Interest rate swap - 2010 (CHF), payer 1) Interest rate swap - 2010 (EUR), payer 1) Interest rate swap - 2010 (EUR), payer 1) Interest rate swap - 2010 (GBP), payer 1) Interest rate swap - 2010 (GBP), payer 1) Interest rate swap - 2010 (NOK), payer 1) Interest rate swap - 2010 (SEK), payer 1) 2,302 (0) (5) 0 0 0 (1) (0) Included in the income statement for 2006 (0) (0) 1 (1) (0) 0 (0) (5) 0 0 0 (1) (0) (6) (6) - 179 0 0 600 6 0 3,132 58 (0) 420 2 0 1,443 18 0 552 7 0 503 6 0 6,829 97 0 97 Total financial instruments 91 (6) 97 Hedging of net investments in foreign subsidiaries at 31 December 2006. As at 31 December 2006, no such hedging was entered into. 1) The swaps convert a major part of the floating rates within the bank loans to fixed interest rate. Taken directly to equity on 31 December 2006 Maturity - - - - - - - - - - - - - 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 0 2010 6 2010 58 2010 2 2010 18 2010 7 2010 6 2010 Continues _____________________________________________________________________________________________________________ ANNUAL REPORT 2006 / Consolidated Financial Statements 91
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ISS Global A/S Bredgade 30 DK - 126
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Key Figures Amounts in DKK millions
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growth. Furthermore, the effect of
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In 2006, ISS Global continued the p
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to costs related to a turnaround pl
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structure, ISS established an Opera
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Strategy ISS Global is a fully owne
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Geography ISS intends to increasing
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Openness and transparency In additi
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tors. The controllers perform follo
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Risk Factors ISS Global is a fully
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tual obligations could harm ISS’s
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If ISS fails to manage growth and i
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ISS may incur substantial liabiliti
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thus reduce or prevent dividend pay
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Independent Auditor’s Report To t
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Organic growth ISS Global uses esti
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2006 primarily related to redundanc
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Tempo as well as a number of smalle
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Page 41 and 42: CONSOLIDATED CASH FLOW STATEMENT 1
Page 43 and 44: CONSOLIDATED STATEMENT OF TOTAL REC
Page 45 and 46: NOTES TO THE CONSOLIDATED FINANCIAL
Page 89: NOTES TO THE CONSOLIDATED FINANCIAL
Page 103 and 104: CASH FLOW STATEMENT OF THE PARENT C
Page 105 and 106: STATEMENT OF TOTAL RECOGNISED INCOM
Page 107 and 108: NOTES TO THE FINANCIAL STATEMENTS O
Page 123: Definitions EBITDA = Operating prof
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Annual Report 2006 ISS Global A/S

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