Pioneer 2014 Annual Report Download - page 47

(1) Group policy for financial instruments
The Group has a policy to invest cash surplus, if any,
only in short-term deposits or other financial instru-
ments which have a similar nature. The Group raises
funds by bank loans and/or from capital markets
through bonds. Derivatives are used, not for specula-
tive purposes, to manage exposure to financial risks
as described in (2) below.
(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 securi-
ties, 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 pay-
ables, are less than one year. Payables in foreign
currencies arising from 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 and TIBOR.
Derivatives include forward foreign currency con-
tracts 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 loan
receivables and bank loans. Please see Note 15 for
more details 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 accord-
ing 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 department to identify the default risk
of customers in the early stage. With respect to the
derivative transactions, the Group manages its expo-
sure to credit risk by limiting its transactions to high
credit, major financial institutions in accordance with
its internal guidelines. Please see Note 15 for more
details about derivatives.
The maximum credit risk exposure of financial
assets is limited to their carrying amounts as of
March 31, 2014 and 2013.
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 in the Company and certain consolidated
subsidiaries is hedged principally by forward foreign
currency contracts in accordance with internal
guidelines. Currency swaps are used to manage
exposure to future market risks from changes in foreign
currency exchange rate of loan receivables and 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 trans-
actions related to currency and interest rates are
managed by the corporate treasury department based
on the internal guidelines. Hedging policies are dis-
cussed and determined among the president, other
directors who are responsible for finance, business
strategies, 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 require-
ment schedule from each department.
(4) Fair values of financial instruments
Fair values of financial instruments are based on
quoted prices in active markets. If quoted prices are
not available, other rational valuation techniques are
used instead. Different assumptions may lead to
different fair values, since varying elements are incor-
porated in calculating the fair value. As for contract
amount or any other information disclosed in Note 15,
the amount itself does not show the market risk in
relation to derivative transactions.
14. Financial Instruments and Related Disclosures
45
Pioneer Corporation
Annual Report 2014