Carrefour - 2017 Registration Document

4 MANAGEMENT’S DISCUSSION AND ANALYSIS AS OF DECEMBER 31, 2017 Risk management CARREFOUR | 2017 REGISTRATION DOCUMENT 199 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 – mainly swaps and options – are nonetheless used to hedge borrowings against the risk of changes in interest rates. 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. Currency risk Detailed information on currency risk appears in Note 12.7 to the Consolidated Financial Statements. Currency transaction risk is the risk of an unfavourable 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 risk related to import transactions (i.e., goods purchases billed in foreign currencies) covered by firm commitments is hedged by forward purchases of the payment currency. Currency hedges are generally for periods of less than 12 months. Currency translation risk is the risk of an unfavourable change in exchange rates reducing the value of the net assets of a subsidiary whose functional currency is not the euro, after conversion into euros for inclusion in the Group’s Consolidated Financial Statements. 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, Argentine peso and Chinese renminbi. For example, changes in the average exchange rates used in 2017 compared with those for 2016 increased consolidated net sales by 269 million euros or 0.3% and recurring operating income by 58 million euros, or 3%. Lastly, when financing is arranged locally, it is generally denominated in local currency. Credit risk 1) Trade receivables necessary, based on an estimate of the debtor’s ability to pay the amount due and the age of the receivable. Trade receivables correspond mainly to amounts receivable from franchisees (for delivered goods and franchise fees), suppliers (mainly rebates and commercial income) and tenants of shopping mall units (rent). Impairment losses are recognised where At December 31, 2017, trade receivables net of impairment (excluding receivables from suppliers) amounted to 1,433 million euros (see Note 5.4.3 to the Consolidated Financial Statements). At that date, past due receivables amounted to a net 165 million euros, of which 30 million euros were over 90 days past due (2.1% of total trade receivables net of impairment, excluding receivables from suppliers). No impairment has been recognised for these receivables as the Group considers that the risk of non-recovery is very limited. 2) Investments (cash equivalents and other current financial assets) The Group’s short-term cash management strategy focuses on acquiring liquid investments that are easily convertible into cash and are subject to an insignificant risk of changes in value. Investments are made for the most part by Corporate Treasury and Financing, in diversified instruments such as term deposits with leading banks and mutual funds classified by the French financial markets authority (Autorité des marchés financiers – AMF) as “money market” and “short-term money market” funds without any withdrawal restrictions. Investments made at the country level are approved by Corporate Treasury and Financing. Counterparty risk monitoring procedures are implemented to track counterparties’ direct investment strategies and the underlying assets held by mutual funds in which the Group invests. The Group’s objective is to never hold more than 5% of a fund’s units and to never invest more than 250 million euros in any single fund. Equity risk Equity risk corresponds to the potential impact of changes in the Carrefour share price on its share-based payment commitments and on treasury shares. Group policy is to avoid taking positions on its own shares or those of other companies, except in response to particular circumstances or needs. From time to time, the Group buys back its shares on the market or purchases call options on its shares, mainly in connection with its liquidity agreement and performance share plans. The frequency and size of these purchases depend on the share price. At December 31, 2017, shares and options held by the Group covered its total commitments under outstanding performance share plans. Marketable securities portfolios and other financial investments held by the Group consist for the most part of money market instruments that do not expose the Group to any material equity risk. In addition, the equity risk arising on the convertible bond issue made by the Group in June 2017 is fully hedged by symmetrical options purchased from banks. The derivatives are recognised as assets and liabilities in the statement of financial position in an amount of 12.4 million euros.