IMMOEAST Annual Report 2006/07

226 IMMOEAST Annual Report 2006/07
8.1.2 Risk report
8.1.2.1 Default/credit risk
Credit risk (default risk) is understood to represent the risk that one party to a financial instrument causes the other
party to incur a financial loss by failing to meet a financial obligation. In accordance with IFRS 7.36, an entity must
disclose – for each class of financial instrument – information on the maximum exposure to credit risk as of the
balance sheet date without taking account of any collateral held or other enhancements and also provide a description
of collateral received and any credit enhancements as well as information on the carrying value of the financial
assets whose contract terms were amended and which would have been classified as past due or impaired under
the previous contract terms. In accordance with IFRS 7.B9, the amounts offset in keeping with IAS 32.42 ff. and
impairment charges as defined in IAS 39 should be deducted from the gross carrying value of financial assets. The
remaining amount represents the maximum credit risk. Collateral held in security and other credit enhancements are
not included in this calculation, but only disclosed separately (IFRS 7.36(b)).
Credit risks arise from the possibility that the counterparty to a transaction fails to meet his/her obligations, and the
Group incurs financial damages as a result. The maximum credit risk for assets is represented by the amounts shown
on the balance sheet. The risk of default associated with financial assets is reflected in impairment charges. The risk
of default for IMMOEAST is low because the credit standing of customers is reviewed on a regular basis, and no single
tenant is responsible for more than 5% of total outstanding receivables.
The volume of primary financing instruments held by the Group is shown on the balance sheet, whereby the value of
financial assets represents the maximum risk of default. The risk of default associated with other primary financing
instruments and derivative financial instruments is also low because all financing transactions are concluded with
financial institutions that have excellent credit ratings.
The most important instrument for the management and control of default risk is the diversity of the property portfolio
and the selection of a suitable tenant structure for each property. The risk of default on receivables due from
tenants is low because tenants are generally required to provide collateral (for residential properties: cash deposits,
for commercial properties: bank guarantees or cash deposits) and the credit standing of tenants is monitored on a
regular basis.
8.1.2.2Marketrisk
Market risk is the risk that the fair value or future cash flows of a financial instrument may fluctuate due to a change
in market prices. There are three types of market risk: foreign exchange risk, interest rate risk and other price risks.
8.1.2.2.1 Foreign exchange risk
Foreign exchange risks can affect IMMOEAST AG in two forms: fluctuation in foreign exchange rates can influence the
results of valuations, and also have an impact on the asset position of the company.
8.1.2.2.1.1 Impact on valuation
The results from companies located outside the Euro zone, which are included using full or proportionate consolidation,
are translated based on the functional currency of the local company in accordance with the modified current
rate method. The expert opinions on properties are prepared in Euros and fluctuations in exchange rates will influence
the results from the revaluation of properties.
An increase in foreign exchange rates compared to the Euro will lead to higher Euro amounts in the fair values of
investment properties than the amounts reflected in the expert opinions from the prior year. When the latest value is
compared with the unchanged amount from a prior year expert opinion in Euro, the translation of the prior year Euro
amount back into the functional currency (local currency) leads to a lower value – because of the higher exchange
rate – and therefore to a write-down. If the value in the expert opinion rises, this foreign exchange effect reduces the