Notes to the consolidated financial statements Annua l Report 2014 119
30 Financial risk management and financial instruments
Financial risk management
Ahold at a glance I Business review I Governance I Financials
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 also 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.
Currency risk
Ahold operates internationally and is exposed to foreign exchange risk arising from 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. Translation risk related to Ahold's foreign subsidiaries, joint ventures and associates is not actively hedged.
To protect the value of future foreign currency cash Rows, 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.
Foreign currency sensitivity analysis
Assuming the euro had strengthened (weakened) by 10% against the U.S. dollar compared to the actual 2014 rate, with all other variables held constant, the hypothetical result on income before income taxes would have
been a decrease (increase) of €6 million (2013: €6 million, adjusted from last year's disclosure of €32 million), as a result of foreign exchange losses on the translation of U.S. dollar denominated cash and cash equivalents.
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 28,
2014, 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 (2013: 98%).
Interest rate sensitivity analysis
The total interest expense recognized in the 2014 income statement related to the variable rates of long-term debt, net of swaps, amounted to €4 million (2013: €5 million). The Company estimates that with a possible increase
(decrease) of 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 (2013: 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
(2013: a loss of €2 million or a gain of €2 million, respectively).
