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30 Financial risk management and financial instruments
Ahold at a glance
Notes to the consolidated
financial statements
Our strategy
Our performance
Governan
Financials
Investors
Ahold Annual Report 2013
Financial risk management
The Treasury function provides a centralized service to the Company for funding, foreign exchange, interest rate, liquidity and counterparty risk management. Treasury operates within a
framework of policies and procedures that is reviewed regularly. The Treasury function is not operated as a profit center. Treasury's function is to manage the financial risks that arise in relation
to underlying business needs. Ahold's Management Board has overall responsibility for the establishment and oversight of the Treasury risk management framework. Ahold's management
reviews material changes to Treasury policies and receives information related to Treasury activities.
In accordance with its Treasury policies, Ahold uses derivative instruments solely for the purpose of hedging exposures. These exposures are mainly connected with the interest rate and currency
risks arising from the Company's operations and its sources of finance. Ahold does not enter into derivative financial instruments for speculative purposes. The transaction of derivative
instruments is restricted to Treasury personnel only and Ahold's Internal Control department reviews the Treasury internal control environment regularly. Relationships with credit rating agencies
and monitoring of key credit ratios are also managed by the Treasury department.
Ahold's primary market risk exposures relate to foreign currency exchange rates and interest rates. In order to manage the risks arising from these exposures, various financial instruments may
be utilized.
Currency risk
Ahold operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the U.S. dollar. Since Ahold's subsidiaries primarily
purchase and sell in local currencies, the Company's exposure to exchange rate movements in commercial operations is naturally limited. The Company is subject to foreign currency exchange
risks due to exchange rate movements in connection with the translation of its foreign subsidiaries' income, assets and liabilities into euros for inclusion in its consolidated financial statements.
To protect the value of future foreign currency cash flows, including loan and interest payments, lease payments, dividends and firm purchase commitments, and the value of assets and
liabilities denominated in foreign currency, Ahold seeks to mitigate its foreign currency exchange exposure by borrowing in local currency and entering into various financial instruments,
including forward contracts and currency swaps. It is Ahold's policy to cover foreign exchange transaction exposure in relation to existing assets, liabilities and firm purchase commitments.
Translation risk related to Ahold's foreign subsidiaries, joint ventures and associates is not actively hedged.
In 2013, Ahold had a significant SEK exposure arising from the ICA divestment that was hedged in compliance with the Company's risk management framework.
Foreign currency sensitivity analysis
Assuming the euro had strengthened (weakened) by 10% against the U.S. dollar compared to the actual 2013 rate, with all other variables held constant, the hypothetical result on income
before income taxes would have been a decrease (increase) of €32 million (2012: €33 million), mainly as a result of foreign exchange losses on the translation of U.S. dollar denominated
cash and cash equivalents and a change of the fair value of the GBP cross-currency swap for which no hedge accounting is applied.
Interest rate risk
Ahold's interest rate risk arises primarily from its debt. To manage interest rate risk, Ahold has an interest rate management policy aimed at reducing volatility in its interest expense and
maintaining a target percentage of its debt in fixed rate instruments. Ahold's financial position is largely fixed by long-term debt issues and the use of derivative financial instruments such as
interest rate swaps and cross-currency interest rate swaps. As of December 29, 201 3, after taking into account the effect of interest rate swaps and cross-currency swaps, approximately 98%
of Ahold's interest bearing debt was at fixed rates of interest (2012: 97%).
Interest rate sensitivity analysis
The total interest expense recognized in the 201 3 income statement related to the variable rates of long-term debt, net of swaps, amounted to €5 million (2012: €7 million). The Company
estimates that with a possible increase (decrease) of euro and U.S. dollar market interest rates of 25 basis points with all other variables (including foreign exchange rates) held constant, this
would result in a hypothetical effect on income before income taxes of a loss (gain) of nil (2012: nil). In addition, a hypothetical result relating to fair value movements of derivative hedges that
do not qualify for hedge accounting would have been a loss of €2 million or a gain of €2 million, respectively (2012: a loss of €4 million or a gain of €4 million, respectively). In performing
this analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0%.
The total interest income recognized in the 201 3 income statement amounted to €7 million (2012: €10 million) related mainly to variable rate money market fund investments and deposits.
The Company estimates that with a possible increase (decrease) of euro and U.S. dollar market interest rates of 25 basis points with all other variables (including foreign exchange rates)
held constant, this would result in a hypothetical effect on income before income taxes of a gain of €9 million or a loss of €5 million, respectively (2012: gain of €3 million or a loss of €2
million). In performing this analysis, the effect was limited to a point where the absolute value of the reference interest would not decrease below 0%.