Notes to the
consolidated
financial statements
continued
30 Financial risk management and financial instruments
Overview
Business review
Governance
Financials
Investors
Ahold Delhaize Annual Report 2016
Relationships with credit rating agencies and monitoring of key credit ratios are also managed by the Treasury department.
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 does not operate
as a profit center and manages the financial risks that arise in relation to underlying business needs. Ahold Delhaize’s Management Board has
overall responsibility for the establishment and oversight of the Treasury risk management framework. Ahold Delhaize’s management reviews
material changes to Treasury policies and receives information related to Treasury activities.
Currency risk
Ahold Delhaize operates internationally and is exposed to foreign exchange risk arising from currency exposures, primarily with respect to the U.S.
dollar. Since Ahold Delhaize’s subsidiaries primarily purchase and sell in local currencies, the Company’s exposure to exchange rate movements
in its 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 Delhaize’s foreign subsidiaries, joint ventures and associates is not actively hedged; however, the
Company aims to minimize this exposure by funding its foreign operations in their functional currency, wherever feasible.
Foreign currency sensitivity analysis
Assuming the euro had strengthened (weakened) by 10% against the U.S. dollar compared to the actual 2016 rate, with all other variables held
constant, the hypothetical result on income before income taxes would have been a decrease (increase) of nil (2015: €6 million), as a result of
foreign exchange losses on the translation of U.S. dollar-denominated cash and cash equivalents.
Interest rate risk
Ahold Delhaize’s outstanding debt position is exposed to changes in interest rates. To manage interest rate risk, Ahold Delhaize 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.
As of January 1, 2017, after taking into account the effect of interest rate swaps and cross-currency swaps, the entirety of Ahold Delhaize’s long-term
debt was at fixed rates of interest (2015: 99%).
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 Delhaize 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 Delhaize’s policy to cover foreign exchange transaction exposure in relation to existing assets, liabilities and firm
purchase commitments.
Interest rate sensitivity analysis
The total interest expense recognized in the 2016 income statement related to the variable rates of long-term debt, net of swaps, amounted to
€2 million (2015: €3 million). An increase (decrease) in market interest rates by 25 basis points, with all other variables (including foreign exchange
rates) held constant, would have resulted in a loss (gain) of nil (2015: nil). In addition, a similar increase (decrease) in market interest rates would have
resulted in a fair-value gain of €1 million or a loss of nil, respectively (2015: a loss of nil or a gain of €2 million, respectively) on derivative hedges that
do not qualify for hedge accounting.
In accordance with its Treasury policies, Ahold Delhaize 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 Delhaize
does not enter into derivative financial instruments for speculative purposes. The transaction of derivative instruments is restricted to Treasury
personnel only and Ahold Delhaize’s Internal Control department reviews the Treasury internal control environment regularly.
