IMMOEAST Annual Report 2006/07

Analysis of Results
liabilities and trade accounts payable, which are shown at amortised cost. Derivative financial instruments are used
to hedge the risk associated with fluctuations in foreign exchange rates and interest rates arising from business
operations as well as the risk associated with monetary investments and financing.
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 closing
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 AG 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.
Market risk
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.
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.
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
Report by the Executive Board 249
Highlights 2006/07
Business Model and Strategy
Portfolio Structure
Corporate Governance and Outlook
Property Portfolio
Development of Business
Consolidated Financial Statements
Service and Glossary