Pioneer 2010 Annual Report Download - page 46

(2) Nature and extent of risks arising from financial instruments
Receivables such as trade receivables are exposed to
customer credit risk. Although receivables in foreign
currencies are exposed to the market risk of fluctuation in
foreign currency exchange rates, the position, net of
payables in foreign currencies, is hedged by using forward
foreign currency contracts. Investment securities, mainly
equity instruments in the companies with which the
Company has business and capital alliance, are exposed to
the risk of market price fluctuations.
Payment terms of payables, such as trade payables, are
less than one year. Part of payables in foreign currencies
accompanied with imports of raw materials and finished
products are exposed to the market risk of fluctuation in
foreign currency exchange rates.
Long-term loans bear floating interest rates, and are
exposed to variable interest rate risk based on the short-
term prime rate.
Derivatives include forward foreign currency contracts
which are used to manage exposure to market risks from
changes in foreign currency exchange rates of receivables
and payables and currency swaps which are used to
manage exposure to market risks from changes in foreign
currency exchange rates of bank loans. Please see Note 16
for more detail about derivatives.
(3) Risk management for financial instruments
Credit risk management
Credit risk is the risk of economic loss arising from a
counterparty’s failure to repay or service debt according to
the contractual terms. The Group manages its credit risk
from receivables on the basis of internal guidelines, which
include monitoring of payment terms and balances of
major customers by each business administration depart-
ment to identify the default risk of customers in early
stage. With respect to the derivative transactions, the
Group manages its exposure to credit risk by limiting its
transactions to high credit, major financial institutions in
accordance with its internal guidelines. Please see Note 16
for more detail about derivatives.
The maximum credit risk exposure of financial assets is
limited to their carrying amounts as of March 31, 2010.
Market risk management (foreign exchange risk and
interest rate risk)
Foreign currency trade receivables and payables are
exposed to market risk resulting from fluctuations in foreign
currency exchange rates. Such foreign exchange risk is
hedged principally by forward foreign currency contracts in
accordance with internal guidelines in the Company and a
part of consolidated subsidiaries. Currency swaps are used
to manage exposure to future market risks from changes in
foreign currency exchange rate of bank loans payables in
foreign currencies based on the internal guidelines.
Investment securities, mainly equity instruments in the
companies with which the Company has business alliances,
are monitored for their market values on a regular basis.
Execution and management of derivative transactions
related to currency and interest rates are managed by the
corporate treasury department based on the internal
guidelines. Hedging policies are discussed and determined
among the president, other directors who are responsible
for finance, business strategy, and each of business
segments, based on the internal guidelines. Outstanding
positions and fair value of derivatives are reported to the
directors in charge on a regular basis.
Liquidity risk management
Liquidity risk comprises the risk that the Group cannot meet
its contractual obligations in full on maturity dates. The
Company manages its liquidity risk by holding adequate
volumes of liquid assets, along with adequate financial
planning by the corporate treasury department based on
the liquidity requirement schedule from each department.
(4) Fair value of financial instruments
Fair values of financial instruments are based on quoted
price in active markets. If quoted price is not available,
other rational valuation techniques are used instead.
Different assumptions may lead to different fair values,
since the varying elements are incorporated in calculating
the fair value. As for contract amount or any other informa-
tion disclosed in Note 16, the amount itself does not show
the market risk in relation to derivative transactions.
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PIONEER CORPORATION Annual Report 2010