Annual Report 2005/06 THE WORLD OF SOUND - Sonova

Employee benefit plansPhonak has various employee benefit plans. Most of itssalaried employees are covered by these plans, many of whichare defined benefit plans. The present value of the definedbenefit obligations at the end of the financial period 2005/06amounts to CHF 98.0 million as disclosed in Note 31. Withsuch plans, actuarial assumptions are made for the purpose ofestimating future developments, including estimates andassumptions relating to discount rates, the expected return onplan assets in individual countries and future wage trends.Actuaries also use statistical data such as mortality tables andstaff turnover rates with a view to determining employeebenefit obligations. If these factors change due to a change ineconomic or market conditions, the subsequent results coulddeviate considerably from the actuarial reports and calculations.Over the medium term such deviations could have a significanteffect on income and expenses arising from employee benefitplans. The carrying amounts of the plan assets and liabilitiesin the balance sheet are set out in Note 31.Provision for warranty and returnsThe Group recorded provisions for warranty and returnsof CHF 33.2 million as of March 31, 2006 as disclosed in Note 22.The calculation of these provisions is based on turnoverand past experience of warranty claims and returns. The actualcosts for warranty and returns may differ from the estimates.3.5 Financial risk managementThe Group is exposed to the following financial risks:Interest rate riskInterest rate risk relates primarily to long-term interestbearing liabilities. The Group’s mortgages as well as a portion ofthe 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 tomoney market rates. The interest situation and hedgingpossibilities are continuously monitored. Derivative instrumentsare currently not being used to hedge against changes ininterest rates.Exchange rate riskThe Group buys and sells products in foreign currenciesand is therefore exposed to exchange rate risks. To minimizeforeign currency exchange risks, relating in particular tointer-company sales and the settlement of inter-company loans,forward currency contracts are entered into. Generally, thesecontracts do not qualify for hedge accounting treatment underIAS 39, and accordingly exchange losses and gains on forwardcurrency 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 recordedin equity and are reclassified to the income statementwhen the gains or losses on the underlying transaction arerecorded.Credit riskFinancial assets which could expose the Group to a potentialconcentration risk are principally cash and bank balances andtrade receivables. Banking relations are maintained only with firstclassfinancial institutions. The Group performs continuouscredit checks on its customers and is not exposed to any significantconcentration risks.3.6 InvestmentsPhonak classifies its investments in the following categories:financial assets at fair value through profit or loss, loans andreceivables, held-to-maturity investments, and available-for-salefinancial assets. The classification depends on the purpose forwhich the investments were acquired. Management determinesthe classification of its investments at initial recognition andreclassifies them whenever their intention or ability changes. Allpurchases and sales are recognized on the settlement date.Financial assets at fair value through profit or lossFinancial assets at fair value through profit or loss are assetsheld for trading, acquired for the purpose of generating a profitfrom short-term fluctuations in price or dealer’s margin.Derivative financial assets and derivative financial liabilities arealways deemed as held for trading unless they are designatedand effective hedging instruments. Financial assets held for tradingare measured at their fair value plus initial transactioncosts. Fair value changes on a financial asset held for trading areincluded in net profit or loss for the period in which they arise.Assets in this category are classified as current assets if they areeither held for trading or are expected to be realized within 12months of the balance sheet date.Loans and receivablesLoans and receivables are non-derivative financial assetswith fixed or determinable payments that are not quoted inan active market. They arise when the Group provides money,goods or services directly to a debtor with no intention oftrading the receivable. They are included in current assets, exceptfor maturities more than 12 months after the balance-sheetdate. These are classified as non-current assets. Loans and receivablesare included in trade and other receivables in the balance56Consolidated Financial Statements