Kesko's Annual Report 2009

124 Kesko financial statements 2009
instruments. The percentage of hedging in commercial transactions
is decided by each relevant subsidiary within the limits of
documented hedging policies. The subsidiaries report their currency
exposures to the Group Treasury on a monthly basis.
In the main, the subsidiaries carry out their hedging operations
together with the Group Treasury, which hedges risk positions
by using market transactions within the limits confirmed
for each currency. Intra-Group derivatives are allocated to the
segments in segment reporting.
The Group does not apply hedge accounting in accordance
with IAS 39 to the hedging of currency risks relating to purchases
and sales. In initial measurement, derivative instruments are
recognised at cost and at subsequent measurement they are recognised
at fair value. The value changes of currency derivatives
used to hedge purchases and sales are recognised in 'Other operating
income or expenses'.
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 to
the same amount and with the same 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.
Loan interest rate risk and sensitivity analysis
Interest rate movements affect the Group's interest expense. The
interest rate hedging policy is aimed at equalising the effects of
interest rate movements on the profits for different accounting
periods.
Interest rate risks are centrally managed by the Group Treasury,
which adjusts loan duration by interest rate derivative
instruments. The target duration is three years which is allowed
to vary between one and a half and four years. The realised
duration during the period was 3.5 (3.2) years on average.
A sensitivity analysis for commercial paper liabilities realised
during the period used average balance values. At the balance
sheet date of 31 December 2009, the effect of interest-bearing
variable rate liabilities on pre-tax profit would have been
€-/+3.3 million, if the interest rate level had risen or fallen by
1 percentage point (€-/+3.8 million).
Liabilities to K-retailers consist of two types of interest-
bearing receivables payable by the Kesko Group companies to
K-retailers; retailers' prepayments to Kesko, and retailers' chain
rebates. Chain rebates are subsequent discounts granted to
retailers and their terms vary from one store chain to another.
Private placement bonds and the aggregate amount of
€170.6 million in loans from financial institutions have fixed
rates, and the effective interest cost was 4.8%. At the end of the
year, the average rate of variable-interest-rate loans from
financial institutions, liabilities to retailers and other interestbearing
liabilities was 7.7%. Some of the loans are eurodenominated,
private placement bonds are USD-denominated,
and loans from financial institutions and commercial paper liabilities
include NOK-denominated loans corresponding to €24.1
million (€20.5 million) and LVL-denominated loans corresponding
to €21.1 million (€29.8 million).
Group's transaction position at 31 Dec. 2009
€ million USD SEK NOK EEK LVL LTL RUB BYR
Group's transaction risk -4.5 69.7 43.5 -23.9 39.8 -20.4 32.1 -2.3
Hedging derivatives 10.1 -68.9 -37.8 25.8 -13.5 -3.8 -38.8 0.0
Hedging loans 0.0 0.0 -5.3 0.0 -18.3 0.0 0.0 0.0
Open position 5.6 0.8 0.4 1.9 7.9 -24.2 -6.7 -2.3
A sensitivity analysis of the transaction position shows how a 10% exchange rate change in receivables and liabilities denominated in
foreign currencies would affect the Group's profit. The calculation does not include forecast future currency-denominated cash flows,
but the currency derivatives used to hedge these exposures are included in the analysis.
Sensitivity analysis, effect on pre-tax profit at 31 Dec. 2009
€ million USD SEK NOK EEK LVL LTL RUB BYR
Change +/-10% 0.6 0.1 0.0 0.2 0.8 -2.4 -0.7 -0.2