Saab 2015 Annual Report Download - page 108

FINANCIAL INFORMATION – FINANCIAL STATEMENTS
Note 38, cont.
rates are calculated with the help of current forward rates. These implicit inte-
rest payments are discounted to the valuation date using current market rates.
The market value of interest rate swaps is obtained by contrasting the discoun-
ted variable interest payments with the discounted present value of fixed inte-
rest payments.
Level 3
According to accepted principles, e.g. for venture capital firms:
• Unlisted shares and participations
As of 31 December 2015, the Group had the following financial assets and
liabilities at fair value:
Assets at fair value
MSEK 2015 Level 1 Level 2 Level 3
Bonds and interest-bearing securi-
ties 2,995 2,995 - -
Forward exchange contracts 1,043 - 1,043 -
Currency options 4 - 4 -
Interest rate swaps 5 - 5 -
Cross currency basis swaps 1 - 1 -
Electricity derivatives 5 5 - -
Shares and participations 49 - - 49
Total 4,102 3,000 1,053 49
Liabilities at fair value
MSEK 2015 Level 1 Level 2 Level 3
Forward exchange contracts 1,505 - 1,505 -
Currency options 1 - 1 -
Interest rate swaps 83 - 83 -
Cross currency basis swaps 5 - 5 -
Electricity derivatives 20 20 - -
Total 1,614 20 1,594 -
FINANCIAL RISK MANAGEMENT
Foreign currency risk
Foreign currency risk refers to the risk that fluctuations in exchange rates will
negatively affect income or net assets.
Economic exposure
Income is affected when sales and the cost of goods and services sold are in
currencies other than the functional currency. Foreign currency risk also arises
when fixed-price tenders are issued in foreign currency.
The following table shows outstanding nominal net hedges by currency as of
year-end.
Net hedges
(million)
Forward
contracts
1) Options 2) Total hedge
2015 2014 2015 2014 2015 2014
USD -21 -242 -40 389 -61 147
EUR -6 -52 -20 -63 -26 -115
GBP -4 -18 - -3 -4 -21
DKK 7 - - - 7 -
TWD -231 - - - -231 -
HKD - -96 - - - -96
1) Also contains sold call and put options.
2) Refers to the net of purchased call and put options.
Outstanding fixed-price tenders in foreign currency are usually managed in a
special portfolio, the tender portfolio. The tender portfolio’s external hedges
are measured in relation to the benchmark in order to allocate VaR. If the two
correspond, the tender portfolio will by definition be risk-neutral – i.e. its VaR
measure will be zero.
In 2015, about MSEK 34, expressed as VaR, was allocated to the tender portfo-
lio, and at year-end VaR amounted to MSEK 4 (7). Hedge accounting is not applied
to the portfolio’s hedges, due to which the Group’s result is affected by the out-
come of the tenders and the exchange rate for the underlying currency pair. The
portfolio’s effect on the Group’s result in 2015 was MSEK -118 (-5).
Translation exposure
Comprehensive income is affected when the results and net assets of foreign
subsidiaries are translated to SEK. The value of net assets exposed to transaction
exposure amounted to MSEK 4,041 (4,072) at year-end; see the following table.
Net assets translated to SEK
MSEK 2015-12-31 2014-12-31
USD 2,041 1,826
EUR 357 650
AUD 531 472
ZAR 175 361
Other currencies 937 763
Total 4,041 4,072
The effect on net assets of a change in exchange rates of +/- 10 per cent would be
a change in value of MSEK 404.
Foreign currency risk due to translation effects on the net assets of foreign subsi-
diaries is not hedged.
Transaction exposure
Contracted flows in the order backlog are exposed to transaction exposure. Saab
hedges the entire order backlog with currency derivatives (mainly forward
exchange contracts), which means that changes in exchange rates do not affect
the Group’s future results with respect to the current order backlog. To reduce the
transaction exposure, amounts in foreign currency are netted as well. Hedges are
normally arranged for each specific contract. The average forward rate is then used
as the contract’s rate for revenue recognition.
In 2015, countries outside Sweden accounted for 58 per cent (55) of Saab’s
sales. Since a large share of production takes place in Sweden with expenses
denominated in SEK, Saab has a large net exposure in foreign currencies.
The predominant contract currencies in the order backlog of SEK 113.8 billion
(60.1) are SEK, USD, EUR and GBP. Of the total order backlog, 69 per cent (47) is
in fixed prices with or without indexing, while the remaining 31 per cent (53) con-
tains variable prices with index and/or currency clauses.
In the event the cash flow is far in the future, an extension strategy can be app-
lied, the currency hedge can be shifted to an earlier date than when the cash flow is
expected and hedge accounting for that time period is then applied to changes in
the spot price.
Impairment of unprofitable contracts in foreign currency that are not hedged
against foreign currency risk is based on the valuation of future cash flows at the
spot rate. These contracts mainly refer to anticipated future orders as part of long-
term commercial aircraft programmes in USD.
Framework agreements contain both transaction and economic exposure and
mainly apply to the various commercial aircraft programmes.
Hedge accounting according to IAS 39 is applied to derivatives intended to
hedge the transaction exposure. The market value of existing hedges of the order
backlog and framework agreements amounted to MSEK -495 (-792). Currency
sensitivity, i.e. the effect of a change in exchange rates of +/- 10 per cent, would
affect the market value of derivatives by +/- MSEK 765. The inefficiency in the cash
flow hedges that affected net income for the year amounted to MSEK 0 (0).
104 – SAAB ANNUAL REPORT 2015