Food Lion 2010 Annual Report Download - page 71

Delhaize Group - Annual Report 2010 67
DELHAIZE GROUP
AT A GLANCE OUR STRATEGY OUR ACTIVITIES IN 2010
CORPORATE
GOVERNANCE STATEMENT
RISK
FACTORS FINANCIAL STATEMENTS SHAREHOLDER INFORMATION
The following discussion reflects
business risks that are evaluated by our
management and our Board of Directors.
This section should be read carefully in
relation to our prospects and the forward-
looking statements contained in this annual
report. Any of the following risks could have
a material adverse effect on our financial
condition, results of operations or liquidity
and lead to impairment losses on goodwill,
intangible assets and other assets. There
may be additional risks of which the
Group is unaware. There may also be
risks Delhaize Group now believes to be
immaterial, but which could evolve to have
a material adverse effect.
Currency Risk Business Operations
The reporting currency of the Group is the
euro. Delhaize Group’s operations are
conducted primarily in the U.S., Belgium
and Greece, with a small percentage of
our operations in Romania and Indonesia.
The results of operations and the financial
position of each of Delhaize Group’s entities
outside the euro zone are accounted for
in the relevant local currency and then
translated into euro at the applicable foreign
currency exchange rate for inclusion in the
Group’s consolidated financial statements,
which are presented in euro (see also
Note 2.3 ”Summary of Significant Accounting
Policies” in the Financial Statements with
respect to translation of foreign currencies).
Exchange rate fluctuations between these
foreign currencies and the euro may have
a material adverse effect on the Group’s
consolidated financial statements. These
risks are monitored on a regular basis at a
centralized level.
Because a substantial portion of its
assets, liabilities and operating results
are denominated in U.S. dollars, Delhaize
Group is particularly exposed to currency
risk arising from fluctuations in the value
of the U.S. dollar against the euro. The
Group does not hedge the U.S. dollar
translation exposure. The risk resulting from
the substantial portion of U.S. operations
is managed by striving to achieve a
natural currency offset between assets
and liabilities and between revenues and
expenditures denominated in U.S. dollars.
Remaining intra-Group cross-currency
risks which are not naturally offset concern
primarily dividend payments by the U.S.
subsidiary and cross-currency lending,
which in accordance with IFRS “survive” the
consolidation process. When appropriate,
the Group enters into agreements to hedge
against the variation in the U.S. dollar in
relation to dividend payments between
the declaration by the U.S. operating
companies and payment dates. Intra-
Group cross-currency loans not naturally
offset are generally fully hedged through
the use of foreign exchange forward
contracts or currency swaps. After cross-
currency swaps, 85% of financial debt is
denominated in U.S. dollars with 71% of
profits from operations are generated in
U.S. dollars. Significant residual positions
in currencies other than the functional
currency of the operating companies
are generally also fully hedged in order
to eliminate any remaining currency
exposure (see Note 19 ”Derivative Financial
Instruments and Hedging” in the Financial
Statements).
If the average U.S. dollar exchange rate
had been 1 cent higher/lower and all other
variables were held constant, the Group’s
net profit would have increased/decreased
by EUR 3 million (2009: EUR 3 million; 2008:
EUR 2 million).
Financial Instruments
Foreign Currency Risk
Foreign currency risk on financial
instruments is the risk that the fair value or
future cash flows of a financial instrument
will fluctuate because of future changes
in foreign currency exchange rates.
Foreign currency risks arise on financial
instruments that are denominated in a
foreign currency, i.e. in a currency other
than the functional currency of the reporting
entity that holds the financial instruments.
From an accounting perspective, the Group
is exposed to foreign currency risks only
on monetary items not denominated in
the functional currency of the respective
reporting entity, such as trade receivables
and payables denominated in a foreign
currency, financial assets classified as
available for sale, derivatives, financial
Risk Factors
instruments not designated as for hedge
relationships and borrowings denominated
in a foreign currency.
At December 31, 2010, if the U.S. dollar had
weakened/strengthened by 20% (estimate
based on the standard deviation of daily
volatilities of the EUR/USD rate during
2010 using a 95% confidence interval), the
Group’s net profit (all other variables held
constant) would have been EUR 1.4 million
higher/lower (2009: EUR 3.4 million higher/
lower with a rate shift of 24%; 2008:
EUR 0.1 million lower/higher with a rate
shift of 28%). Due to the financing structure
of the Group, such a change in EUR/USD
exchange rate would have no impact on
the equity of Delhaize Group.
Interest Rate Risk
Interest rate risk is the risk that arises on
interest-bearing financial instruments and
represents the risk that the fair value or the
expected cash flows will fluctuate because
of future changes in market interest rates.
Delhaize Group is exposed to interest rate
risk due to working capital financing and
the overall financing strategy. Daily working
capital requirements are financed with
operational cash flows and through the
use of various committed and uncommitted
lines of credit and a treasury note program.
The interest rate on these short and
medium term borrowing arrangements is
generally determined either as the inter-
bank offering rate at the borrowing date
plus a pre-set margin or based on market
quotes from banks.
Delhaize Group’s interest rate risk
management objective is to achieve an
optimal balance between borrowing cost
and management of the effect of interest
rate volatility on earnings and cash flows.
The Group manages its debt and overall
financing strategies using a combination of
short, medium, long-term debt and interest
rate derivatives.
Delhaize Group reviews its interest rate risk
exposure on a quarterly basis and at the
inception of any new financing operation.
As part of its interest rate risk management
efforts, Delhaize Group enters into interest
rate swap agreements when appropriate
(see Note 19 ”Derivative Financial