Equity method accounting of ICA
FUTURE ACCOUNTING CHANGES
RISK MANAGEMENT AND USE OF FINANCIAL
INSTRUMENTS AND DERIVATIVES
Foreign currency risk
Interest rate risk
We account for our joint venture ICA under the equity
method, although its investment comprises of 60% of the
shares. The determination whether the 60% ownership
constitutes control requires significant judgment. The 60%
shareholding interest in ICA does not entitle us to unilateral
decision-making authority over ICA due to the shareholders
agreement with our joint venture partner, which provides
that certain decisions will be made only on the basis of
mutual consent. On the basis of the shareholders agreement
with our joint venture partner, we concluded that we have no
control over ICA and, consequently, we do not consolidate
ICA's financial statements.
We will be subject to new accounting guidelines under IFRS
and US GAAP, including the following two:
In 2004 the International Financial Reporting
Interpretations Committee (the "IFRIC"), the IASB's
interpretive body, issued IFRIC Interpretation 4
"Determining whether an Arrangement contains a Lease"
("IFRIC 4"). IFRIC 4 provides guidance for determining
whether certain arrangements that do not take the legal form
of a lease but convey a right to use an asset are, or contain,
leases that should be accounted for in accordance with the
lease accounting standard. IFRIC 4 is effective for annual
periods beginning on or after January 1, 2006. We are in
the process of evaluating the impact, if any, of the adoption
of IFRIC 4 on our financial results or position.
In October 2005, the Financial Accounting Standards Board
(the "FASB") issued FSP No. FAS 13-1, "Accounting for
Rental Costs Incurred during a Construction Period" ("FSP
13-1"). FSP 13-1 requires rental costs associated with
operating leases that are incurred during a construction
period to be recognized as rental expense beginning with
2006. We have historically capitalized rental costs incurred
during a construction period under US GAAP as well as
IFRS. We will apply the new guidance under IFRS beginning
with 2006. This voluntary change in accounting policy will
be applied prospectively from the earliest date practicable.
We are in the process of evaluating the impact of FSP 13-1
on our future financial results or position.
For a full discussion of future accounting changes, see
Notes 2 and 37 to our consolidated financial statements
included in this annual report.
Our primary market risk exposures, similar to 2004, relate
to currency foreign exchange rates and interest rate
fluctuations and commodity price fluctuations. These
fluctuations could have a negative impact on our net income
and financial position. In order to manage the risk arising
from these exposures, we may utilize a variety of foreign
exchange, interest rate and commodity forward contracts
and swaps. We use such derivative financial instruments
and conventional financial instruments for the purpose of
reducing our risk by hedging the underlying economic
exposures. We do not enter into derivative financial
instruments for trading or speculative purposes. Most of
our derivatives are over-the-counter instruments.
We are exposed to foreign currency exchange translation
risk. A substantial portion of our assets, liabilities and
operating results are denominated in foreign currencies,
primarily the U.S. dollar. We are subject to foreign currency
exchange risk due to exchange rate movements in
connection with the translation of the operating results and
the assets and liabilities of our foreign subsidiaries into
euros for inclusion in our consolidated financial statements.
We do not use financial instruments to hedge the translation
risk related to our foreign currency denominated
subsidiaries, joint ventures and associates.
We are also exposed to foreign exchange currency
transaction risk, including lease payment obligations and
firm purchase commitments denominated in foreign
currencies. To protect the value of future settlements of
such transactions, including receivables and accounts
payable denominated in foreign currencies, we enter into
derivative financial instruments, including forward contracts
and currency swaps. It is our policy to cover foreign
exchange currency transaction exposure in relation to
existing assets, liabilities and firm commitments.
For a full discussion on foreign currency risk, including a
tabular sensitivity analysis, see Note 34 to our consolidated
financial statements included in this annual report.
Our interest rate risk arises primarily from borrowings. We
are most vulnerable to changes in euro and U.S. dollar
interest rates and, to a lesser extent, to changes in British
pound and Japanese yen interest rates. To manage interest
rate risk, we have an interest rate management policy aimed
at reducing volatility in our interest expense and maintaining
a target percentage of our borrowings in fixed rate
instruments. Our financial position is largely fixed by
AHOLD ANNUAL REPORT 2005 83
