Scania - Annual Report 2006

Scania annual report 2006 93 Financial assets in the Scania Group consist primarily of financial leases and hire purchase receivables that have arisen in the Customer Finance segment as a consequence of financing customers’ vehicle purchases. Other financial assets of significance are trade receivables from independent dealerships and end customers in the Vehicles and Services segment plus short-term investments and cash and cash equivalents. Scania’s financial liabilities consist largely of loans, mainly taken out to in order fund the Customer Finance segment’s lending and leasing to customers and, to a lesser extent, to fund working capital in Vehicles and Services. Financial assets and liabilities give rise to various kinds of risks, which are primarily managed by means of various derivative instruments. Scania uses derivative instruments, mainly for the purpose of: – Transforming corporate-level borrowings in a limited number of currencies to those currencies in which the respectively funded assets are denominated. – Transforming the interest rate refixing period for borrowings to the interest rate refixing period in the Customer Finance loan and lease portfolio, as well as the desired interest rate refixing period for funding of other assets. – C onverting expected future commercial payments in foreign currencies to Swedish kronor. – To a lesser extent, converting projected surplus liquidity in foreign currencies to Swedish kronor. NOTE 30 Financial inst ruments and f inancial r isk management Financial risk management in the Scania Group In addition to business risks, Scania is exposed to various financial risks in its operations. The financial risks that are of the greatest importance are currency, interest rate, refinancing and credit risks, which are all regulated by a Financial Policy adopted by Scania’s Board of Directors. Credit risk related to customer commitments is managed, within established limits, on a decentralised basis by means of local credit assessments. Decisions on major credit commitments are made in corporate credit committees. Other risks are managed primarily at corporate level by Scania’s treasury unit. Scania’s Financial Policy states that financial risks shall be minimised and access to liquidity shall be safeguarded. On a daily basis, the corporate treasury unit measures the risks of outstanding positions, which are managed within established limits in compliance with the Financial Policy. Currency risk Currency risk is the risk that changes in currency exchange rates will adversely affect cash flow. Changes in exchange rates also affect Scania’s income statement and balance sheet as follows: – Earnings are affected when income and expenses in foreign currencies are translated to Swedish kronor. – The balance sheet is affected when assets and liabilities in foreign currencies are translated to Swedish kronor. During 2006, 93 (94 and 94, respectively) percent of Scania’s sales occurred in countries outside Sweden. Since a large proportion of production occurs in Sweden, at costs denominated in Swedish kronor, this means that Scania has large net inflows of foreign currencies. During 2006, total net revenue in foreign currencies amounted to about SEK 26 (22 and 20, respectively) billion. The largest currencies in this flow were EUR and GBP. Note 32 shows Scania’s net flows in the most commonly occurring currencies. Based on revenue and expenses in foreign currencies during 2006, a one percentage point change in the Swedish krona against other currencies, excluding currency hedging, has an impact on operating income of about SEK 260 m. (220 and 200, respectively) on an annual basis. Scania’s policy is to hedge its currency flows during a period of time equivalent to the projected orderbook until the date of payment. However, the hedging period is allowed to vary between 0 and 12 months. In dealing with currency risk, Scania uses forecasted future cash flows. Hedging of currency risks mainly occurs by selling currencies on forward contracts, but also by means of currency options. The effect of currency derivatives on operating income totalled SEK 110 m. (-410 and 65, respectively). The value of outstanding contracts not recognised in earnings can be seen in the table below. Hedging of currency flows, 31 December 2006 AUD/SEK CHF/SEK DKK/SEK EUR/SEK GBP/SEK KRW/SEK NOK/SEK USD/SEK ZAR/SEK Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Volume 1 Rate 2 Q1 2007 36 5.46 15 6.16 132 1.25 250 9.32 30 13.84 16,100 0.0076 248 1.16 – 119 0.97 Q2 2007 – – 80 1.23 140 9.11 10 13.59 – 140 1.11 – – 0.00 Q3 2007 – – – – – – – – – Q4 2007 – – – – – – – – – Total 36 5.46 15 6.16 212 1.24 390 9.25 40 13.78 16,100 0.0076 388 1.14 – 119 0.97 Closing day rate 31 Dec 2006 5.44 5.63 1.21 9.05 13.49 0.0074 1.09 6.87 0.99 Unrealised gain/loss (SEK m.) 3 recognised in hedge reserve 31 Dec 2006 3 8 7 79 6 0 19 2 -2 Hedging of currency flows, 31 Dec 2005 Total 46 5.82 64 6.06 480 1.24 735 9.28 65 13.66 22,432 0.0075 495 1.16 40 7.95 294 1.22 1 Volume is expressed in millions of local currency units. 2 A verage forward price and lowest redemption price for currency options. 3 Fair value recognised in a fair value reserve in equity for cash flow hedgings where hedge accounting is applied. 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