Electrolux 1996 Annual Report Download - page 33

In 1996, the Group thus had sales primarily
in currencies within the DEM block, and
expense primarily in ITL and SEK.
Group subsidiaries cover their risks
in commercial currency flows through
the Group’s financial units. The financial
operation thus assumes the currency risks
and can cover them externally through
forward contracts, borrowings or deposits.
Options and other derivative instruments
are also used. Exchange differences arising
from short-term commercial receivables
and liabilities in foreign currencies are
included in operating income.
The Group’s currency policy involves a
relatively short period for forward hedging,
normally 1–6 months for the greater part
of the flow exposure. In addition, tactical
decisions are made at appropriate times
regarding hedging of commercial flows.
Exposure arising from translation
of income statements
Changes in exchange rates also affect
Group income in connection with trans-
lation of income statements in foreign
subsidiaries into Swedish kronor.
In connection with the translation of
income statements in foreign subsidiaries,
changes in exchange rates involved an
adverse effect of SEK 156m on operating
income for the year relative to 1995.
Exposure arising from translation
of balance sheets
The net of assets and liabilities in foreign
subsidiaries comprises a net investment in
foreign currency, which generates a trans-
lation difference in connection with con-
solidation. In order to limit degradation of
Group equity, borrowings and forward
contracts are based on the estimated risk,
with due consideration for the fiscal
effects. This means that the decline in
value of a net investment arising from a fall
in the exchange rate for a specific currency
against the krona is offset by the exchange
gains on the parent company’s borrowings
and forward contracts in the same cur-
rency, and vice versa. The Group’s cur-
rency policy stipulates that the magnitude
of the total coverage can vary between a
maximum of 139% of the net investment
before taxes – at which the effect of
exchange-rate fluctuations on equity
expressed in Swedish kronor is in principle
zero – and the level at which the Group’s
net debt/equity ratio is maintained intact
in the event of exchange-rate fluctuations.
The average total coverage during 1996 was
approximately 100% (102) before taxes.
At year-end, forward contracts as
hedges for net foreign investment
amounted to SEK 10,156m (10,718).
Net translation differences arising
from consolidation of foreign subsidiaries
in 1996 amounted to SEK +271m (–994).
See Note 14 on page 40. In computing
these differences, due consideration is
given to exchange differences in the parent
company referring to borrowings and for-
ward contracts intended as hedges for
equity in subsidiaries, less estimated taxes.
The above amount has been taken directly
to equity in the consolidated balance sheet.
However, translation losses referring to
countries with highly inflationary econo-
mies have been charged against operating
income. See the description of accounting
principles on page 35.
Credit risks
Credit risks within the financial operation
arise from financing of sales as well as in
the form of credit risks related to deposits
of liquid funds and as counterpart risks
related to derivatives. In order to limit
financial credit risks, a counterpart guide-
line has been established that defines the
maximum permissible exposure in relation
to permissible counterparts.
The Group’s financial operation
The financial operation in Electrolux is a
separate product line with three main
fields of activity:
•Borrowing in order to finance Group
operations
•Management of liquidity and liabilities
•Financing of sales.
This product line includes more than
thirty units. Fifteen local financial centers
are positioned in the Group’s major mar-
kets in Western Europe and North Amer-
ica. The financial operation employed
about 200 people in 1996, of whom about
40 were in Stockholm.
The short-term operations of these
internal banks are managed from Stock-
holm, as are long-term financing and the
Group’s overall financial risk exposure.
Financial operations include active cash
management and comprehensive currency
trading, primarily in Sweden and Italy.
Support for the Group’s operative units
includes leasing and rental activities, fac-
toring for customers and suppliers, and
various types of dealer financing.
Both currency trading and interest
arbitrage generated satisfactory income in
1996. Income for operations that support
sales improved additionally.
The Risk Management function in-
cludes coordination of the Group’s pro-
tection against various types of risk expo-
sure and comprises several own insurance
companies. Two of these, in Sweden and
the US, have charters for direct insurance
and reinsurance. A company in Luxem-
bourg is devoted exclusively to reinsu-
rance, and a company in Ireland focuses on
direct insurance within the EU.
29
Electrolux Annual Report 1996