Pioneer 2016 Annual Report Download - page 46

(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 of a similar nature. The Group raises funds by
bank loans and/or from capital markets through bonds.
Derivatives are used, not for speculative purposes, but
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 alliances,
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 Tokyo Interbank Offered
Rate.
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 16
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 inter-
nal guidelines, which include monitoring of payment
terms and balances of major customers by each busi-
ness administration department to identify the default
risk of customers in the early stages. With respect to
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 16 for more
details about derivatives.
The maximum credit risk exposure of financial
assets is limited to their carrying amounts as of March
31, 2016 and 2015.
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 ex-
change risk in the Company and certain consolidated
subsidiaries is hedged principally by forward foreign
currency contracts in accordance with internal guide-
lines. Currency swaps are used to manage exposure
to future market risks from changes in foreign cur-
rency 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 busi-
ness 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
discussed among the president, and directors who
are responsible for finance and other related divisions,
and then determined by the president. Outstanding
positions and fair value of derivatives are reported to
the directors in charge on a regular basis.
15. Financial Instruments and Related Disclosures
44 Pioneer Corporation Annual Report 2016