Kesko's year 2007

120 Kesko's year 2007
Note 44
Financial risk management
Financial risk management
With respect to financial risks, the Group observes a uniform funding
policy that has been approved by the company's Board of Directors. Compliance
with this policy and developments in the Group's financial situation
are monitored by the Audit Committee of the Board of Directors. The
policy covers the sectors for which Corporate Treasury holds central
responsibility, namely Group funding, liquidity management, bank relations
and the management of financial risks. In the main, the Group's
funding is arranged through the parent company, and the Corporate
Treasury arranges intra-Group loans for the funding of subsidiaries in
their local currencies. For companies with significant external ownership,
the Group has not guaranteed financial liabilities in excess of its
ownership interest.
Currency risk and sensitivity analysis
The Group's balance sheet is exposed to translation risks in connection
with investments in subsidiaries outside the eurozone. This balance
sheet exposure has been hedged by using currency-denominated loans
and forward fx agreements if the translation risk is in excess of €1 million.
The most significant balance sheet exposure positions are in Estonian
kroon, Norwegian krone, Swedish krona, Russian rouble, Lithuanian
lit and Latvian lat.
The Group has not hedged foreign currency denominated goodwill
(incl. allocated goodwill) with a counter value of €112.4 million (€105.6
million) at 31 December 2007.
The currency risk exposed to translation risk, excluding foreign-currency-denominated
goodwill, is small in proportion to the volume of
operations and the balance sheet total. A simultaneous 10% weakening
of the six central currencies (NOK, EEK, LTL, RUB, LVL, SEK) against the
euro would result in a €4.6 million negative change in equity at 31
December 2007 (€7.3 million).
Translation risk and hedging at 31 December 2007
€ million Latvia Norway Estonia Sweden Russia Lithuania Others Total
Equity exposed to translation risk*) 7.9 27.2 78.6 3.0 21.0 39.8 7.9 185.4
Hedging derivatives 3.6 37.7 5.3 18.9 13.8 79.3
Hedging loans 2.2 22.6 25.9 9.8 60.5
Open position 2.1 4.6 15.0 -2.3 2.1 16.2 7.9 45.6
*) equity excl. allocated goodwill
Translation risk and hedging at 31 December 2006
€ million Latvia Norway Estonia Sweden Russia Lithuania Others Total
Equity exposed to translation risk*) 7.6 42.6 39.1 9.3 18.8 29.5 4.1 151.0
Hedging derivatives 2.9 9.7 2.2 8.7 15.9 39.4
Hedging loans 24.3 9.6 4.3 38.2
Open position 4.7 8.6 29.5 7.1 10.1 9.3 4.1 73.4
*) equity excl. allocated goodwill
Kesko Corporation's USD-denominated private placement loan has
been hedged against currency risk and interest rate risk by applying
hedge accounting. Currency and interest rate swaps in the same amount
and maturity as the loan have been designated as the hedging instruments.
Consequently, the loan is entirely hedged against currency and
interest rate risk. During the period, no amount of ineffectiveness has
been recognised in the income statement relating to this credit facility.
International purchasing activity exposes the Group to transaction
risks relating to several foreign currencies. Due to the fast turnover of
some products, the exposure related to their purchases cannot grow to a
significant level because the selling prices of these products can be
changed as necessary. The percentage of hedging is decided by the subsidiaries
and business units concerned. Transaction risk exposures
mainly relate to the US dollar. Business units carry out their hedging
operations together with Corporate Treasury, which hedges risk positions
using market transactions within the limits confirmed for each currency.
A sensitivity analysis for the currency risk relating to the USD, prepared
in compliance with IFRS 7, would have contributed a pre-tax profit
of €+/-0.4 million (€+/-0.7 million) at the balance sheet date of 31 December
2007, had the USD rate change been +/-10%. It is assumed that the
other variables remain unchanged. The calculation includes foreign currency
denominated trade payables, trade receivables and currency derivatives
recognised in the balance sheet. Their combined net position totals
€6.4 million (€9.7 million). The analysis does not consider the foreign
currency denominated orders, some of which are also hedged.
The Group's foreign subsidiaries also buy currency independently for
commercial purchases. Such purchases do not, however, constitute a significant
proportion of total purchases.
The Group does not apply hedge accounting in accordance with IAS
39 to hedge commercial currency risks. In initial recognition, derivative
instruments are recorded at fair value and at subsequent measurement
they are recognised at fair value. Value changes of currency derivatives
used to hedge purchases and sales are recognised in other operating
income or expenses.
The Group companies are financed in the local currency of each company.
The parent company hedges against related foreign currency risks