Notes: 29
Fair value of financial instruments
Other derivative instruments
158
Ahold Annual Report 2003
Financial Statements
Foreign exchange and interest rate risk management
Since Ahold has operations in a variety of countries throughout the world, a substantial portion of its assets, liabilities
and results are denominated in foreign currencies, primarily the US dollar. As a result, the Company is subject to
foreign currency exchange risk due to exchange rate movements, which affect Ahold's transaction costs and the
translation of the results and underlying net assets of its foreign subsidiaries. Ahold actively manages foreign
currency exposure by financing in local currency borrowings to the extent possible or practical. Using this hedging
technique, Ahold manages its overall debt portfolio to match asset investments on a country-by-country basis. When
local financing is not possible or practical, the Company will finance foreign operations through intercompany loans.
Ahold has been able to substantially mitigate foreign currency exposure with local borrowings or by entering into
cross-currency swaps to hedge third-party debt in a currency other than the functional currency of the entity.
Ahold uses a combination of interest rate, cross-currency and foreign currency exchange swaps to hedge
variable rate exposures resulting from changes in interest rates and foreign currency exchange rates on borrowings
in currencies other than the functional currency. Ahold's objective in managing exposures to interest rate and foreign
exchange rate fluctuations on debt is to reduce income and cash flow volatility. Ahold's financial position is largely
fixed by long-term debt issues and derivative financial instruments. Interest rate swaps allow the Company to
maintain a target range of floating debt.
The following table presents the nominal amounts and fair values of Ahold's financial instruments:
Nominal
amount
December 28,
2003
Fair
value
Nominal
amount
December 29,
2002
Fair
value
Assets
Loans receivable
283
288
342
350
Liabilities
Borrowings
(9,841)
(10,097)
(11,909)
(13,836)
Derivative financial instruments
Currency derivatives
110
(6)
414
(4)
Cross currency derivatives
3,338
517
3,418
12
Interest rate derivatives
1,242
36
849
39
Fuel derivatives
4 million
1
14 million
1
gallons
gallons
Total derivative financial instruments
4,690
548
4,681
48
The carrying amounts of cash, accounts receivable, accounts payable, current loans payable and capital lease
commitments approximate their fair value due to the short-term nature of these instruments.
The fair value of long-term debt is estimated using discounted cash flow analysis based on interest rates from
similar types of borrowing arrangements or at quoted market prices, if applicable. The fair value of derivative
financial instruments is the amount at which these instruments could be settled.
The main reason for the change in the fair value in the derivative financial instruments of EUR 47 in 2002
to EUR 548 in 2003 is because of the US dollar weakness.
In countries where the local currency is subject to large fluctuations, Ahold often enters into lease agreements
denominated in currencies that differ from the local currency (historically, this included the US dollar and currencies
subsequently replaced by the Euro). As a result, the Company had embedded foreign exchange derivatives
in certain lease contracts in the Czech Republic, Slovakia and Poland. Under Dutch GAAP these embedded
derivatives are not accounted for separately.
