Annual Report - Sonova Holding AG

Employee benefit plans
Phonak has various employee benefit plans. Most of its
salaried employees are covered by these plans, many of which
are defined benefit plans. The present value of the defined
benefit obligations at the end of the financial period 2005/06
amounts to CHF 98.0 million as disclosed in Note 31. With
such plans, actuarial assumptions are made for the purpose of
estimating future developments, including estimates and
assumptions relating to discount rates, the expected return on
plan assets in individual countries and future wage trends.
Actuaries also use statistical data such as mortality tables and
staff turnover rates with a view to determining employee
benefit obligations. If these factors change due to a change in
economic or market conditions, the subsequent results could
deviate considerably from the actuarial reports and calculations.
Over the medium term such deviations could have a significant
effect on income and expenses arising from employee benefit
plans. The carrying amounts of the plan assets and liabilities
in the balance sheet are set out in Note 31.
Provision for warranty and returns
The Group recorded provisions for warranty and returns
of CHF 33.2 million as of March 31, 2006 as disclosed in Note 22.
The calculation of these provisions is based on turnover
and past experience of warranty claims and returns. The actual
costs for warranty and returns may differ from the estimates.
3.5 Financial risk management
The Group is exposed to the following financial risks:
Interest rate risk
Interest rate risk relates primarily to long-term interest
bearing liabilities. The Group’s mortgages as well as a portion of
the other long-term debts represent long-term fixed-rate contracts,
which minimize the risk of changing interest rates.
The remainder of the long-term debts are currently subject to
money market rates. The interest situation and hedging
possibilities are continuously monitored. Derivative instruments
are currently not being used to hedge against changes in
interest rates.
Exchange rate risk
The Group buys and sells products in foreign currencies
and is therefore exposed to exchange rate risks. To minimize
foreign currency exchange risks, relating in particular to
inter-company sales and the settlement of inter-company loans,
forward currency contracts are entered into. Generally, these
contracts do not qualify for hedge accounting treatment under
IAS 39, and accordingly exchange losses and gains on forward
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Consolidated Financial Statements
currency contracts are recognized in the income statement. However,
if a forward contract qualifies as a hedge, under IAS 39,
such exchange gains and losses on the contract are recorded
in equity and are reclassified to the income statement
when the gains or losses on the underlying transaction are
recorded.
Credit risk
Financial assets which could expose the Group to a potential
concentration risk are principally cash and bank balances and
trade receivables. Banking relations are maintained only with firstclass
financial institutions. The Group performs continuous
credit checks on its customers and is not exposed to any significant
concentration risks.
3.6 Investments
Phonak classifies its investments in the following categories:
financial assets at fair value through profit or loss, loans and
receivables, held-to-maturity investments, and available-for-sale
financial assets. The classification depends on the purpose for
which the investments were acquired. Management determines
the classification of its investments at initial recognition and
reclassifies them whenever their intention or ability changes. All
purchases and sales are recognized on the settlement date.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are assets
held for trading, acquired for the purpose of generating a profit
from short-term fluctuations in price or dealer’s margin.
Derivative financial assets and derivative financial liabilities are
always deemed as held for trading unless they are designated
and effective hedging instruments. Financial assets held for trading
are measured at their fair value plus initial transaction
costs. Fair value changes on a financial asset held for trading are
included in net profit or loss for the period in which they arise.
Assets in this category are classified as current assets if they are
either held for trading or are expected to be realized within 12
months of the balance sheet date.
Loans and receivables
Loans and receivables are non-derivative financial assets
with fixed or determinable payments that are not quoted in
an active market. They arise when the Group provides money,
goods or services directly to a debtor with no intention of
trading the receivable. They are included in current assets, except
for maturities more than 12 months after the balance-sheet
date. These are classified as non-current assets. Loans and receivables
are included in trade and other receivables in the balance