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197
2014 Registration Document
Consolidated Financial Statements Year ended December 31, 2014
5
Notes to the Consolidated statements
36.2
INTEREST RATE RISK
Interest rate risk is the risk of a change in interest rates leading to an
increase in the Group’s net borrowing costs.
It is managed at headquarters level by Corporate Treasury and Financing,
which reports monthly to an Interest Rate Risk Committee responsible
for recommending hedging strategies and methods to be used to limit
interest rate exposures and optimize borrowing costs.
Long-term borrowings are generally at fixed rates of interest and do not
therefore give rise to any exposure to rising interest rates.
Various financial instruments are nonetheless used to hedge borrowings
against the risk of changes in interest rates. These are mainly basic
swaps and options. Hedge accounting is applied in all cases where the
required criteria are met.
Variable rate long-term borrowings are hedged using financial instruments
that cap rises in interest rates over all or part of the life of the debt.
The following table shows the sensitivity of total borrowings to changes in interest rates over one year:
(loss/gain)
(in € millions)
50-bps decline
50-bps increase
Impact on
shareholders’ equity
Impact on income
statement
Impact on
shareholders’ equity
Impact on income
statement
Investments
(6.2)
6.2
Variable rate borrowings
(1.7)
1.7
Borrowings hedged by fair value hedges
(2.5)
2.5
Swaps qualified as fair value hedges
5.2
(5.1)
Swaps qualified as cash flow hedges
Options classified as cash flow hedges
(7.0)
22.4
Options classified as held for trading
0.0
0.2
TOTAL EFFECT
0.0
(12.2)
0.0
27.9
36.3
CURRENCY RISK
Currency transaction risk
is the risk of an unfavorable change in
exchange rates having an adverse effect on cash flows from commercial
transactions denominated in foreign currency.
The Group conducts its international operations through subsidiaries that
operate almost exclusively in their home country, such that purchases and
sales are denominated in local currency. As a result, the Group’s exposure
to currency risk on commercial transactions is naturally limited and mainly
concerns imported products. Currency risks on import transactions
(
i.e.
goods purchases billed in foreign currencies) covered by firm
commitments are hedged by forward purchases of the payment currency.
Currency hedges are generally for periods of less than 12 months.
The following table shows the effect of an increase/decrease in exchange rates on instruments accounted for as cash flow hedges:
(in € millions)
10% decline
10% increase
Impact on
shareholders’ equity
Impact on income
statement
Impact on
shareholders’ equity
Impact on income
statement
USD/EUR Cash
Flow hedging position
39.4
(39.4)
HGK/EUR Cash
Flow hedging position
(0.5)
0.4
The currency translation risk
is the risk of an unfavorable change in
exchange rates reducing the value of the net assets of a subsidiary
whose functional currency is not the euro, after conversion into euro for
inclusion in the Group’s consolidated statement of financial position.
The consolidated statement of financial position and income statement
are exposed to a currency translation risk: consolidated financial ratios
are affected by changes in exchange rates used to translate the income
and net assets of foreign subsidiaries operating outside the eurozone.
The translation risk on foreign operations outside the eurozone mainly
concerns the Brazilian real and Argentine peso. For example, changes in
the average exchange rates used in 2014 compared with those for 2013
reduced consolidated net sales by €2,356 million or 3.2% and operating
income by €74 million or 2.9%.
Lastly, when financing is arranged locally, it is generally denominated
in local currency.