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The Company does not purchase or hold financial derivative instruments for trading purposes. Assets and liabilities related
to derivative instruments are disclosed in
note (47) Other current assets,
note (48) Other non-current financial assets and
note (54) Accrued liabilities respectively. Currency fluctuations may impact Philips’ financial results.
The Company is exposed to currency risk in the following areas:
- Transaction exposures, such as forecasted sales and purchases, and on-balance-sheet receivables or payables resulting from
such transactions;
- Translation exposure of net income in foreign entities;
- Translation exposure of foreign-currency intercompany and external debt and deposits;
- Translation exposure of equity invested in consolidated foreign entities; and
- Exposure to equity interests in non-functional-currency equity-accounted-investees and available-for-sale investments.
It is Philips’ policy that significant transaction exposures are hedged. The Philips policy generally requires committed foreign-currency
exposures to be hedged fully using forwards. Anticipated transactions are hedged using forwards or options or a combination
thereof. The policy for the hedging of anticipated exposures specifying the use of forwards/options and the hedge tenor varies
per business and is a function of the ability to forecast cash flows and the way in which the businesses can adapt to changed
levels of foreign exchange rates. As a result, hedging activities may not eliminate all currency risks for these transaction
exposures. Generally, the maximum tenor of these hedges equals 18 months. The Company does not hedge the exposure arising
from translation exposure of net income in foreign entities. Translation exposure of equity invested in consolidated foreign
entities financed by equity is partially hedged. If a hedge is entered into, it is accounted for as a net investment hedge.
The currency of the external funding and deposits of the Company is matched with the required financing of subsidiaries either
directly by external foreign currency loans and deposits, or by using foreign exchange swaps. In certain cases where group
companies have foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange
derivatives.
Philips does not currently hedge the foreign exchange exposure arising from equity-accounted investees and available-for-sale
investments.
The Company uses foreign exchange derivatives to manage its currency risk. The US dollar and pound sterling account for a
high percentage of the Company's foreign exchange derivatives.
The Company hedges certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by commodity price volatility. The commodity price derivatives that Philips enters into are normally concluded
as cash flow hedges to offset forecasted purchases.
Changes in the value of foreign currency accounts receivable/payable as well as the changes in the fair value of the hedges
of accounts receivable/payable are reported in the income statement under cost of sales. The hedges related to forecasted
transactions are recorded as cash flow hedges. The results from such hedges are deferred within other comprehensive income
in stockholders’ equity. Currently, a loss of EUR 28 million is deferred in stockholders’ equity as a result of these hedges.
During 2008, a loss of EUR 3 million was recorded in the income statement in the line cost of sales in the line cost of sales
as a result of ineffectiveness of transaction hedges.
Changes in the fair value of hedges related to external and intercompany debt and deposits are recognized within Financial
income and expenses in the income statement. The changes in the fair value of these hedges related to foreign exchange movements
are largely offset in the income statement by changes in the fair value of the hedged items. The Company recorded a gain of
EUR 11 million in other comprehensive income under currency translation differences as a result of net investment hedges of
investments in foreign subsidiaries during 2008.
Philips has 2 embedded derivatives within convertible bonds. One was issued to Philips in September 2005 by TPV Technology
Ltd., the face value of the bond being EUR 149 million and the value of the option at year-end EUR 10 million. Changes in
the value of the embedded derivative are reported in Financial income and expenses during 2008 (EUR 37 million). A further
convertible bond was issued to Philips in August 2008 by CBAY, the face value of the bond being EUR 65 million and the value
of the option at year-end less than EUR 1 million. Changes in the value of the embedded derivative are reported in Financial
income and expenses during 2008 (EUR 6 million).
Please refer to the section
Details of treasury risks, which is deemed incorporated and repeated herein by reference.
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