Notes to the consolidated financial statements continued
Report of the
Report of the
Financial
Other
Contents
Overview
Executive Board
Supervisory Board
statements
information
32. Financial risk management and financial instruments
The total carrying amount and contractual cash flows of derivatives are included in trade and other receivables (refer to note 20), other
investments (refer to note 17), trade and other payables (refer to note 31) and non-current non-interest-bearing liabilities (refer to note 25).
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, commodity prices and eguity prices, will
adversely affect HEINEKEN's income or the value of its holdings of financial instruments. The objective of market risk management is to
manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
HEINEKEN uses derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. Generally,
HEIN EKEN seeks to apply hedge accounting or make use of natural hedges in order to minimise the effects of foreign currency fluctuations
in profit or loss.
Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, commodity swaps, spot and forward exchange
contracts and options. Transactions are entered into with a limited number of counterparties with strong credit ratings. Foreign currency,
interest rate and commodity hedging operations are governed by internal policies and rules approved and monitored by the Executive Board.
Foreign currency risk
HEINEKEN is exposed to foreign currency risk on (future) sales, (future) purchases, borrowings and dividends that are denominated in a currency
other than the respective functional currencies of HEINEKEN entities. The main currencies that give rise to this risk are the US dollar, Euro and
British pound.
In managing foreign currency risk, HEINEKEN aims to reduce the impact of short-term fluctuations on earnings. Over the longer term,
however, permanent changes in foreign exchange rates would have an impact on profit.
HEINEKEN hedges up to 90 per cent of its mainly intra-HEINEKEN US dollar cash flows on the basis of rolling cash flow forecasts in respect
to forecast sales and purchases. Cash flows in other foreign currencies are also hedged on the basis of rolling cash flow forecasts. HEINEKEN
mainly uses forward exchange contracts to hedge its foreign currency risk. The majority of the forward exchange contracts have maturities
of less than one year after the balance sheet date.
HEINEKEN has a clear policy on hedging transactional exchange risks, which postpones the impact on financial results. Translation exchange
risks are hedged to a limited extent, as the underlying currency positions are generally considered to be long term in nature. The result of the
net investment hedging is recognised in the translation reserve, as can be seen in the consolidated statement of comprehensive income.
It is HEINEKEN's policy to provide intra-HEINEKEN financing in the functional currency of subsidiaries where possible to prevent foreign currency
exposure on a subsidiary level. The resulting exposure at Group level is hedged by means of forward exchange contracts. Intra-HEINEKEN
financing in foreign currencies is mainly in British pounds, US dollars, Swiss francs and Polish zloty. In some cases, HEINEKEN elects to treat
intra-HEINEKEN financing with a permanent character as eguity and does not hedge the foreign currency exposure.
The principal amounts of HEINEKEN's US dollar, British pound, Nigerian naira, Singapore dollar bank loans and bond issues are used to hedge
local operations, which generate cash flows that have the same respective functional currencies or have functional currencies that are closely
correlated. Corresponding interest on these borrowings is also denominated in currencies that match the cash flows generated by the
underlying operations of HEINEKEN. This provides an economic hedge without derivatives being entered into.
In respect of other monetary assets and liabilities denominated in currencies other than the functional currencies of the Company and the
various foreign operations, HEINEKEN ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot
rates when necessary to address short-term imbalances.
118
Heineken N.V. Annual Report 2014