NOTE 41
With respect to financial risks, the Group observes a uniform financing policy that has been approved by the company Board of Directors. Compliance with this policy and developments in the Group’s financial situation are monitored by the Board’s Audit Committee. Group Treasury is centrally responsible for Group funding, liquidity management, relations with providers of finance, and the management of financial risks. In the main, the Group’s financial resources are obtained through the parent company, and Group Treasury arranges financial resources for subsidiaries in their functional currencies. For companies with significant external ownership, the Group has not guaranteed financial liabilities in excess of its ownership interest.
The Kesko Group operates in eight countries and makes purchases from numerous countries. As a result, the Group is exposed to various foreign exchange risks arising from net investments in foreign operations (translation-related risks), foreign currency assets, liabilities and forecast transactions (transaction risks).
The Group companies’ financial resources are arranged in their functional currencies. The parent company bears the ensuing currency risk and hedges it by using derivatives or foreign currency loans. In the 2010 financial year, the hedging cost arising from subsidiary funding, i.e. the interest rate differential between the euro and the hedged currencies, narrowed significantly and was €1.8 million (€17.9 million).
The Group’s balance sheet is exposed to foreign currency translation risks relating to net investments in subsidiaries outside the euro area. During the first part of the year, this balance sheet exposure has been hedged by loans denominated in the relevant foreign currencies and forward foreign exchange contracts. During the second quarter, net investment hedging was discontinued. The risk is hedged if equity is repatriated, or if the currency is expected to be exposed to a significant devaluation risk. The most significant translation exposures are in the Estonian kroon, Norwegian krone, Swedish krona, Russian ruble, Lithuanian litas and Latvian lat. The exposure does not include the non-controlling interest. In proportion to the Group's volume of operations and the balance sheet total, the translation risk is small.
The functional currency of the real estate companies operating in St. Petersburg and Moscow in Russia has been determined to be the euro, which is why net investments in these companies are not exposed to translation risk, and they are not included in the translation exposure.
International purchasing activities and foreign currency denominated financial resources arranged by the parent to subsidiaries expose the Group to transaction risks relating to several currencies. The currency-specific transaction risk consists of receivables and liabilities denominated in foreign currencies in the balance sheet, forecasted cash flows in foreign currencies, and foreign subsidiaries’ liabilities and receivables with respect to the parent. The risk is commercially managed by, e.g., transferring exchange rate changes to selling prices, or by replacing suppliers. The remaining exposures are hedged by currency derivative instruments. The level of hedging in commercial transactions is decided by each relevant subsidiary within the limits of documented hedging policies. The subsidiaries report their currency exposures to Group Treasury on a monthly basis.
In the main, the subsidiaries carry out their hedging operations with Group Treasury, which hedges risk exposures by using market transactions within the limits confirmed for each currency. Intra-Group derivatives are allocated to the segments in segment reporting.
The Group does not apply hedge accounting in accordance with IAS 39 to the hedging of transaction risks relating to purchases and sales. In initial measurement, derivative instruments are recognised at cost and at subsequent measurement they are recognised at fair value. The value changes of currency derivatives used to hedge purchases and sales are recognised in other operating income or expenses.
The Group monitors transaction risk in respect of the existing and projected cash flows. The accompanying table analyses the transaction exposure excluding future cash flows. The presentation does not illustrate the Group’s actual currency risk after hedgings. Forecasted amounts included in the transaction exposure, the most significant differences from the table below are in the USD and LTL exposures. At 31 December 2010, the exposure to USD risk was €-14.5 million, and the exposure to LTL risk was €5.2 million.
Group's translation exposure at 31 Dec. 2010 |
|||||||
| € million | LVL | NOK | EEK | SEK | RUB | LTL | BYR |
| Net investment | 7.3 | 24.9 | 61.4 | 17.7 | 29.2 | 37.2 | 2.0 |
| Hedging derivatives | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Hedging loans | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Exposure | 7.3 | 24.9 | 61.4 | 17.7 | 29.2 | 37.2 | 2.0 |
| Group's translation exposure at 31 Dec. 2009 | |||||||
| € million | LVL | NOK | EEK | SEK | RUB | LTL | BYR |
| Net investment | 2.7 | 32.4 | 63.8 | 24.3 | 28.3 | 45.8 | 1.6 |
| Hedging derivatives | 0.0 | 0.0 | -44.7 | -10.5 | -19.2 | -26.6 | 0.0 |
| Hedging loans | -2.8 | -18.8 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Exposure | -0.1 | 13.6 | 19.1 | 13.8 | 9.1 | 19.1 | 1.6 |
The following table shows how a 10% change in the Group companies’ functional currencies would affect the Group’s equity. Sensitivity has been calculated from net exposure, in other words, the effects of hedging derivative instruments or loans have been calculated in addition to the hedged exposure.
Sensitivity analysis, effect on equity, at 31 Dec. 2010 |
|||||||
| € million | LVL | NOK | EEK | SEK | RUB | LTL | BYR |
| Change + / -10% | 0.7 | 2.5 | 6.1 | 1.8 | 2.9 | 3.7 | 0.2 |
Sensitivity analysis, effect on equity, at 31 Dec. 2009 |
|||||||
| € million | LVL | NOK | EEK | SEK | RUB | LTL | BYR |
| Change + / -10% | 0.0 | 1.4 | 1.9 | 1.4 | 0.9 | 1.9 | 0.2 |
Interest rate movements affect the Group’s interest expense. The interest rate hedging policy is aimed at equalising the effects of interest rate movements on the profits for different accounting periods.
The interest rate risk is centrally managed by Group Treasury, which adjusts interest rate duration by using interest rate derivative instruments. The target duration is three years, which is allowed to vary between one and a half and four years. The realised duration during the period was 3.5 (3.5) years on average.
On 10 June 2004, Kesko Corporation issued in the United States a total of USD 120 million USD private placement notes in three tranches; split USD 60 million for a ten year term, USD 36 million for a 12 year term and USD 24 million for a 15 year term. The credit facility qualifies for hedge accounting against both currency and interest rate risk and it has been hedged by using currency swaps and interest rate swaps with the same maturities as the loan. As a result, the loan has been fully hedged against currency and interest rate risk. During the financial year, there has been no ineffectiveness to be recorded in the income statement from this credit facility.
A sensitivity analysis for commercial paper liabilities realised during the period used average balance values. At the balance sheet date of 31 December 2010, the effect of variable rate borrowings on the pre-tax profit would have been €-/+2.6 million, if the interest rate level had risen or fallen by 1 percentage point (€-/+3.3 million).
Liquidity risk management aims at maintaining sufficient liquid assets and borrowing facilities in order to ensure the availability of sufficient financial resources for the Group’s operating activities at all times.
The aim is to invest liquidity consisting of financial assets in the money market by using efficient combinations of return and risk. At regular intervals, the Group’s management approves the instruments and limits for each counterparty among those analysed by Group Treasury. The risks and actual returns of investments are monitored regularly.
A sensitivity analysis for variable-rate receivables uses average annual balance values of invested assets. The receivables include customer financing receivables, finance lease receivables, other interest-bearing receivables, and within investments, commercial papers and money market funds. The sensitivity of money market funds has been determined based on duration. At the balance sheet date, the effect of these items on the pre-tax profit would have been €+/-6.5 million (€+/-4.0 million), and +/-€2.2 million (€+/-1.5 million) on equity, if the interest rate level had changed by +/-1 percentage point.
At the balance sheet date, the total of undrawn committed long-term borrowing facilities was €151.5 million (€227 million). The committed borrowing facilities mature at the end of 2012. In addition, the Group’s uncommitted financial resources available contain commercial paper programmes denominated in euros to a total equivalent of €359 million (€329 million).
The terms and conditions of the private placement notes and the committed facility include ordinary financial covenants. The requirements of these covenants have been met. The loan terms include a financial covenant defining the ratio between net debt and EBITDA, which remained well below the maximum throughout the accounting period.
Group's transaction exposure at 31 Dec. 2010 |
||||||||
| € million | USD | SEK | NOK | EEK | LVL | LTL | RUB | BYR |
| Group's transaction risk | -0.7 | 104.9 | 59.8 | -32.9 | 21.8 | -4.6 | 38.5 | 0.1 |
| Hedging derivatives | 26.2 | -87.7 | -25.6 | 0.0 | -11.4 | -8.7 | -31.7 | 0.0 |
| Hedging loans | 0.0 | 0.0 | -25.6 | 0.0 | -7.0 | 0.0 | 0.0 | 0.0 |
| Exposure | 25.5 | 17.2 | 8.5 | -32.9 | 3.4 | -13.3 | 6.8 | 0.1 |
Group's transaction exposure at 31 Dec. 2009 |
||||||||
| € million | USD | SEK | NOK | EEK | LVL | LTL | RUB | BYR |
| Group's transaction risk | -4.5 | 69.7 | 43.5 | -23.9 | 39.8 | -20.4 | 32.1 | -2.3 |
| Hedging derivatives | 10.1 | -68.9 | -37.8 | 25.8 | -13.5 | -3.8 | -38.8 | 0.0 |
| Hedging loans | 0.0 | 0.0 | -5.3 | 0.0 | -18.3 | 0.0 | 0.0 | 0.0 |
| Exposure | 5.6 | 0.8 | 0.4 | 1.9 | 7.9 | -24.2 | -6.7 | -2.3 |
A sensitivity analysis of the transaction exposure shows how a +/-10% exchange rate change in internal receivables and liabilities denominated in foreign currencies and hedging foreign currency derivatives and loans would affect the Group’s profit.
Sensitivity analysis, effect on pre-tax profit at 31 Dec. 2010 |
||||||||
| € million | USD | SEK | NOK | EEK | LVL | LTL | RUB | BYR |
| Change +/-10% | 2.6 | 1.7 | 0.9 | 3.3 | 0.3 | 1.3 | 0.7 | 0.0 |
Sensitivity analysis, effect on pre-tax profit at 31 Dec. 2009 |
||||||||
| € million | USD | SEK | NOK | EEK | LVL | LTL | RUB | BYR |
| Change +/-10% | 0.6 | 0.1 | 0.0 | 0.2 | 0.8 | 2.4 | 0.7 | 0.2 |
The Group’s liquid assets have mainly been invested in the debt instruments of major Finnish companies, in certificates of deposit and in deposits in banks operating in Kesko’s market area, in Finnish government bonds, and in the bonds of selected companies. The return on these investments for 2010 was 1.5% (2.2%). The maximum credit risk is the fair value of these investments in the balance sheet at the balance sheet date as presented below.
The companies of the business divisions are responsible for the management of credit risk associated with customer receivables. Each company has a credit policy and its implementation is monitored. The aim is to secure the payment of receivables by carefully assessing customers’ creditworthiness, by reviewing customer credit terms and collateral requirements, by effective credit control and credit insurances as applicable. In Finland, the main part of the Group’s business activities is carried out in cooperation with retailers. According to the retailer agreements, retailers lodge bank overdrafts as collateral against their trade payables to the relevant Kesko subsidiary.
The Group companies apply a uniform practice to measuring past due receivables. A receivable is written down when there is objective evidence of impairment. The ageing analysis of trade receivables at 31 December was as follows:
Ageing analysis of trade receivables |
||
| € million | 2010 | 2009 |
| Trade receivables fully performing | 579.1 | 550.0 |
| 1–7 days past due | 12.3 | 14.5 |
| 8–30 days past due | 12.3 | 9.2 |
| 31–60 days past due | 3.6 | 4.8 |
| Over 60 days past due | 12.4 | 15.1 |
| Total | 619.6 | 593.6 |
The analysis includes impaired receivables in a total amount of €27.0 million.
Within trade receivables, €346.5 million (€319.5 million) were from chain retailers and €24.3 million (€38.0 million) were credit card receivables. The collateral for chain retailer receivables is an overdraft facility granted by a Kesko associate, Vähittäiskaupan Takaus Oy, with the maximum always limited to the realisable value of the counter collateral given by the K-retail company and entrepreneur to Vähittäiskaupan Takaus. At the end of the financial year, the aggregate value of counterparty collaterals was €224.3 million. In addition, the collateral for receivables includes other collaterals, such as business mortgages and other pledged assets.
The trade receivable impairments provided for were €14.2 million (€19.9 million). An aggregate amount of €3.6 million (€12.6 million) in credit losses and impairments has been recognised in the net profit for the period.
At 31 December 2010, the amount of receivables with renegotiated terms amounted to €4.6 million (€13.0 million).
Financial instruments involve the risk of counterparties failing to settle their obligations. Kesko only makes currency and interest rate derivative contracts with banks that have good creditworthiness. Liquid funds are invested, within the limits confirmed annually for each counterparty, in instruments with good creditworthiness. Company and bank-specific limits in terms of euros and time are set for interest investments. The utilisation of these limits is reviewed during the year depending on the market situation.
Undiscounted cash flows from financial liabilities and related finance costs at 31 Dec. 2010 |
|||||||
| € million | 2011 | 2012 | 2013 | 2014 | 2015 | 2016- | Total |
| Loans from financial institutions | 3.3 | 10.7 | 0.9 | 0.7 | 26.3 | 1.7 | 43.5 |
| Finance costs | 1.5 | 1.3 | 1.2 | 1.2 | 1.2 | 0.1 | 6.6 |
| Private placement notes (USD) | 44.9 | 44.9 | 89.8 | ||||
| Finance costs | 5.6 | 5.6 | 5.6 | 4.2 | 2.8 | 4.9 | 28.7 |
| Pension loans | 2.9 | 5.8 | 5.8 | 5.8 | 5.8 | 20.4 | 46.7 |
| Finance costs | 1.9 | 1.7 | 1.4 | 1.2 | 1.0 | 1.6 | 8.8 |
| Finance lease liabilities | 14.6 | 9.3 | 9.0 | 11.7 | 8.2 | 13.4 | 66.1 |
| Finance costs | 3.2 | 1.9 | 1.8 | 1.7 | 1.5 | 0.2 | 10.3 |
| Liabilities to K-retailers | 128.9 | 128.9 | |||||
| Finance costs | 0.2 | 0.2 | |||||
| Other interest-bearing liabilities | 90.9 | 90.9 | |||||
| Finance costs | 0.6 | 0.6 | |||||
| Commercial papers | |||||||
| Finance costs | |||||||
| Non-current non-interest-bearing liabilities | 2.1 | 0.3 | 0.0 | 0.0 | 0.0 | 2.5 | |
| Current non-interest-bearing liabilities | |||||||
| Trade payables | 838.3 | 838.3 | |||||
| Accrued liabilities | 245.4 | 245.4 | |||||
| Other non-interest-bearing liabilities | 162.2 | 162.2 | |||||
Undiscounted cash flows from financial liabilities and related financial expenses at 31 Dec. 2009 |
|||||||
| € million | 2010 | 2011 | 2012 | 2013 | 2014 | 2015- | Total |
| Loans from financial institutions | 8.2 | 1.2 | 17.8 | 0.9 | 0.7 | 26.7 | 55.5 |
| Finance costs | 4.6 | 3.4 | 2.2 | 1.1 | 1.1 | 1.3 | 13.7 |
| Private placement notes (USD) | 41.6 | 41.6 | 83.3 | ||||
| Finance costs | 5.2 | 5.2 | 5.2 | 5.2 | 3.9 | 7.2 | 31.8 |
| Pension loans | 2.9 | 5.8 | 5.8 | 5.8 | 26.3 | 46.7 | |
| Finance costs | 1.9 | 1.9 | 1.7 | 1.4 | 1.2 | 2.6 | 10.6 |
| Finance lease liabilities | 17.3 | 23.4 | 10.8 | 10.5 | 13.3 | 10.5 | 85.7 |
| Finance costs | 3.6 | 1.9 | 1.6 | 1.5 | 1.5 | 0.4 | 10.6 |
| Liabilities to K-retailers | 109.7 | 109.7 | |||||
| Finance costs | 0.5 | 0.5 | |||||
| Other interest-bearing liabilities | 56.6 | 56.6 | |||||
| Finance costs | 0.1 | 0.1 | |||||
| Commercial papers | |||||||
| Finance costs | |||||||
| Non-current non-interest-bearing liabilities | 0.0 | 0.0 | 0.0 | 0.1 | |||
| Current non-interest-bearing liabilities | |||||||
| Trade payables | 703.5 | 703.5 | |||||
| Accrued liabilities | 245.0 | 245.0 | |||||
| Other non-interest-bearing liabilities | 161.6 | 161.6 | |||||
Undiscounted cash flows from derivative instruments at 31 Dec. 2010 |
|||||||
| € million | 2011 | 2012 | 2013 | 2014 | 2015 | 2016- | Total |
| Payables | |||||||
| Forward foreign exchange contracts hedging net investment | |||||||
| Forward foreign exchange contracts outside hedge accounting | 222.9 | 222.9 | |||||
| Net settlement of payables | |||||||
| Interest rate derivatives | 0.2 | 0.1 | 0.0 | 0.0 | 0.2 | ||
| Electricity derivatives | 0.0 | 0.1 | 0.0 | 0.0 | 0.0 | 0.1 | |
| Derivatives relating to private placement notes* | |||||||
| Foreign currency derivatives | 0.7 | 0.7 | 0.7 | 5.8 | 0.3 | 5.9 | 14.0 |
| Receivables | |||||||
| Forward foreign exchange contracts hedging net investment | |||||||
| Forward foreign exchange contracts outside hedge accounting | 218.7 | 218.7 | |||||
| Net settlement of receivables | |||||||
| Interest rate derivatives | |||||||
| Electricity derivatives | 9.0 | 3.2 | 1.1 | 0.2 | 0.0 | 13.5 | |
| Derivatives relating to private placement notes* | |||||||
| Interest rate derivatives | 0.9 | 0.9 | 0.9 | 0.7 | 0.4 | 0.8 | 4.5 |
Undiscounted cash flows from derivative instruments at 31 Dec. 2009 |
|||||||
| € million | 2010 | 2011 | 2012 | 2013 | 2014 | 2015- | Total |
| Payables | |||||||
| Forward foreign exchange contracts hedging net investment | 141.8 | 141.8 | |||||
| Forward foreign exchange contracts outside hedge accounting | 296.4 | 296.4 | |||||
| Net settlement of payables | |||||||
| Interest rate derivatives | 0.3 | 0.2 | 0.1 | 0.0 | 0.0 | 0.6 | |
| Electricity derivatives | 3.1 | 2.1 | 0.6 | 0.2 | 0.0 | 6.0 | |
| Derivatives relating to private placement notes* | |||||||
| Foreign currency derivatives | 1.1 | 1.1 | 1.1 | 1.1 | 9.4 | 10.0 | 23.6 |
| Receivables | |||||||
| Forward foreign exchange contracts hedging net investment | 138.0 | 138.0 | |||||
| Forward foreign exchange contracts outside hedge accounting | 293.4 | 293.4 | |||||
| Net settlement of receivables | |||||||
| Interest rate derivatives | |||||||
| Electricity derivatives | 0.2 | 0.4 | 0.3 | 0.0 | 0.0 | 0.9 | |
| Derivatives relating to private placement notes* | |||||||
| Interest rate derivatives | 0.9 | 0.9 | 0.9 | 0.9 | 0.7 | 1.2 | 5.4 |
*The cash flows from private placement notes and related foreign currency derivatives and interest rate derivatives are settled on a net basis. |
|||||||
The private placement notes and part of the loans from financial institutions, €226.1 million in aggregate, have fixed rates, and their effective interest cost was 4.8%. At the end of the financial year, the average rate of variable-interest-rate loans from financial institutions, liabilities to retailers and other interest-bearing liabilities was 2.3%. Some of the loans are eurodenominated, the private placement notes are USD-denominated, and the loans from financial institutions include NOK-denominated loans in the total of €25.6 million (€24.1 million) and LVL-denominated loans in the total of €7.0 million (€21.1 million).
Maturity analysis for liabilities 2010 |
||||||||
€ million |
31 Dec. 2010 | Available | Total | 2011 | 2012 | 2013 | 2014 | 2015 and later |
| Loans from financial institutions | 43.4 | 43.4 | 3.3 | 10.7 | 0.9 | 0.7 | 27.8 | |
| Private placement notes | 100.1 | 100.1 | 50.1 | 50.1 | ||||
| Pension loans | 46.4 | 46.4 | 2.9 | 5.8 | 5.8 | 5.8 | 26.0 | |
| Finance lease liabilities | 66.1 | 66.1 | 14.6 | 9.3 | 9.0 | 11.7 | 21.6 | |
| Liabilities to K-retailers | 128.9 | 128.9 | 128.9 | |||||
| Other interest-bearing liabilities | 91.8 | 91.8 | 91.8 | |||||
| Trade payables | 838.4 | 838.4 | 838.3 | 0.1 | ||||
| Accrued liabilities | 311.1 | 311.1 | 311.1 | |||||
| Other non-interest-bearing liabilities | 200.8 | 200.8 | 196.3 | 3.1 | 1.4 | 0.0 | ||
| Committed borrowing facilities | * | 151.5 | 153.6 | 151.5 | ||||
| Commercial paper programmes | 359.0 | 359.0 | ||||||
| Financial guarantees | 28.6 | 28.6 | 17.2 | 1.5 | 9.8 | |||
| Total | 1,855.6 | 510.5 | 2,368.2 | 1,604.4 | 182.0 | 17.1 | 68.3 | 135.2 |
*The amount withdrawn from committed borrowing facilities is included in loans from financial institutions. |
||||||||
Maturity analysis for liabilities 2009 |
||||||||
€ million |
31 Dec. 2009 | Available | Total | 2010 | 2011 | 2012 | 2013 | 2014 and later |
| Loans from financial institutions | 55.3 | 55.3 | 8.2 | 1.2 | 17.8 | 0.9 | 27.3 | |
| Private placement notes | 100.0 | 100.0 | 100.0 | |||||
| Pension loans | 46.4 | 46.4 | 2.9 | 5.8 | 5.8 | 31.8 | ||
| Finance lease liabilities | 85.7 | 85.7 | 17.3 | 23.4 | 10.8 | 10.5 | 23.8 | |
| Liabilities to K-retailers | 109.7 | 109.7 | 109.7 | |||||
| Other interest-bearing liabilities | 56.6 | 56.6 | 56.6 | |||||
| Trade payables | 703.6 | 703.6 | 703.5 | 0.0 | ||||
| Accrued liabilities | 254.1 | 254.1 | 254.1 | |||||
| Other non-interest-bearing liabilities | 185.5 | 185.5 | 179.9 | 3.0 | 1.5 | 1.1 | 0.0 | |
| Committed borrowing facilities | * | 225.0 | 227.0 | 76.0 | 0.9 | 150.0 | ||
| Commercial paper programmes | 0.0 | 329.0 | 329.0 | |||||
| Financial guarantees | 23.3 | 23.3 | 0.2 | 1.5 | 0.0 | 0.0 | 21.6 | |
| Total | 1,620.3 | 554.0 | 2,176.2 | 1,405.5 | 33.0 | 185.9 | 18.3 | 204.6 |
*The amount withdrawn from committed borrowing facilities is included in loans from financial institutions. |
||||||||
The financial guarantees given do not include guarantees relating to an item presented as a liability in the consolidated balance sheet or as a lease liability in note 34.
Liabilities to K-retailers consist of two types of interest-bearing receivables payable by Kesko to K-retailers: retailers’ prepayments to Kesko and Kesko’s chain rebate liabilities to retailers. Chain rebates are subsequent discounts given to retailers and the terms vary from one chain to another. The private placement notes include the fair value change of currency derivative instruments.
An analysis of financial instruments recognised at fair value by valuation technique is set out below.
Measurement hierarchy of financial assets and liabilities at fair value |
||||
| Fair value at 31 Dec. 2010 | ||||
| € million | Level 1 | Level 2 | Level 3 | Total |
| Financial assets at fair value through profit or loss | ||||
| Commercial papers | 15.8 | 15.8 | ||
| Bank certificates of deposit and deposits | 215.9 | 215.9 | ||
| Money market funds | 10.4 | 10.4 | ||
| Total | 10.4 | 231.7 | 242.1 | |
| Derivative instruments at fair value through profit or loss | ||||
| Derivative receivables | 18.4 | 18.4 | ||
| Derivative liabilities | 16.4 | 16.4 | ||
| Available-for-sale financial assets | ||||
| Private equity funds | 4.4 | 4.4 | ||
| Commercial papers (maturing in less than 3 months) | 172.0 | 172.0 | ||
| Bank certificates of deposit and deposits (maturing in less than 3 months) | 281.3 | 281.3 | ||
| Bonds | 95.7 | 95.7 | ||
| Total | 95.7 | 453.3 | 4.4 | 553.4 |
Measurement hierarchy of financial assets and liabilities at fair value |
||||
| Fair value at 31 Dec. 2009 | ||||
| € million | Level 1 | Level 2 | Level 3 | Total |
| Financial assets at fair value through profit or loss | ||||
| Commercial papers | 0.0 | |||
| Bank certificates of deposit and deposits | 202.9 | 202.9 | ||
| Money market funds | 10.1 | 10.1 | ||
| Total | 10.1 | 202.9 | 213.1 | |
| Derivative instruments at fair value through profit or loss | ||||
| Derivative receivables | 3.5 | 3.5 | ||
| Derivative liabilities | 31.9 | 31.9 | ||
| Available-for-sale financial assets | ||||
| Commercial papers (maturing in less than 3 months) | 214.1 | 214.1 | ||
| Bank certificates of deposit and deposits (maturing in less than 3 months) | 3.8 | 199.6 | 203.4 | |
| Bonds | 10.2 | 10.2 | ||
| Total | 14.0 | 413.7 | 427.7 | |
Level 1 instruments are traded in active markets and their fair values are directly based on the market price. The fair values of level 2 instruments are derived from market data, but these instruments are not so actively traded. The fair values of level 3 instruments are not based on observable market data (unobservable input).
The table below presents movements in level 3 instruments for 1 Jan.–31 Dec. 2010 |
|
| € million | Equity funds |
| Opening balance at 1 Jan. 2010 | 0.0 |
| Purchases | 4.4 |
| Gains and losses recognised profit or loss | - |
| Total | 4.4 |
The private equity funds purchased during the financial year have been classified as available-for-sale financial assets. Private equity funds are measured based on valuation calculations obtained from fund management companies. Profits or losses from private equity funds have not been recorded for the 2010 financial year.
According to the terms of Kesko Corporation’s USD-denominated private placement notes, in a situation involving a change of control, Kesko is obligated to offer a repayment of the whole loan capital to all noteholders. The noteholders have the right to accept or refuse the repayment.
According to the terms of Kesko Corporation’s syndicated borrowing facility, the syndicate has the right to call in the loan facility and any withdrawn loan amounts.
According to the terms of both loan agreements, a transfer of ownership to retailers or a retailers’ association shall not be considered a change of control.
For the present, Kesko Corporation has not applied for a credit rating, because it has not been considered necessary in the company’s present financial situation.
The Group uses electricity derivatives to level out energy costs. The electricity price risk is evaluated for five-year periods. The value changes of derivatives hedging the price of electricity supplied during the period are recognised within the adjustment items of purchases. Hedge accounting is applied to contracts hedging future purchases. The effective portion of derivatives that qualify for hedge accounting are recognised in the revaluation reserve of equity and the ineffective portion in the income statement within other operating income or expenses. The change in the revaluation reserve recognised in equity is presented in the statement of comprehensive income under ‘Revaluation of cash flow hedge’.
At the end of the year, the ineffective portion of hedge accounting was €0.0 million (€-0.4 million).
At the balance sheet date, a total quantity of 1,131,120 MWH (995,344 MWH) of electricity had been purchased with electricity derivatives, and the 1–12 month hedging rate was 79.5% (70.2%), the 13–24 month rate was 67.0% (47.3%), the 25–36 month rate was 39.7% (29.6%), the 37–48 month rate was 5.8% (9.6%) and the 49–60 month rate was 0.0% (0.0%).
A sensitivity analysis for electricity derivatives assumes that derivatives maturing in less than 12 months have an impact on profit. If the market price of electricity derivatives changed by +/-20 percentage points from the balance sheet date 31 December 2010, it would contribute €+/-6.0 million (€+/-3.4 million) to the 2011 profit and €+/-6.4 million (€+/-4.4 million) to equity. The impact has been calculated before tax.
Fair values of derivative contracts |
||||||
| € million | 31.12.2010 Positive fair value (balance sheet value) |
31.12.2010 Negative fair value (balance sheet value) |
31.12.2010 Net fair value |
31.12.2009 Net fair value |
||
| Interest rate derivatives | 3.7 | * | -0.1 | 3.6 | 0.6 | |
| Currency forwards | 1.4 | -16.2 | * | -14.8 | -24.0 | |
| Electricity derivatives | 13.3 | -0.1 | 13.2 | -5.0 | ||
| Notional principal amounts of derivative contracts | ||||||
| € million | 31.12.2010 Notional principal amount |
31.12.2009 Notional principal amount |
||||
| Interest rate derivatives | 205.4 | * | 206.7 | |||
| Currency forwards | 324.8 | * | 541.7 | |||
| Electricity derivatives | 63.2 | 40.1 | ||||
* Derivative contracts include interest rate swaps relating to a foreign currency borrowing facility with a gross notional principal amount of €200.8 million and a fair value of €3.7 million (€0.6 million), and currency swaps with a notional principal amount of €100.4 million and a fair value of €-10.6 million (€-17.2 million). |
||||||
The maximum credit risk of derivatives is the fair value of the balance sheet at the reporting date.
The Kesko Group’s capital management objectives include targets set for the Group’s solvency and liquidity. The Group’s capital structure (equity-to-debt ratio) is optimised at the Group level. The objectives for the Group’s solvency and liquidity are set with the purpose of securing the Group’s liquidity in all market situations, enabling the implementation of investment programmes based on the Group’s strategy, and maintaining the shareholder value. Objectives have been set for the indicators ‘equity ratio’ and ‘interest-bearing net debt/EBITDA’. Some of the Group’s interest-bearing liabilities include covenants, whose terms and conditions have been taken into account in the above target levels. The Group does not have a credit rating given by any external credit rating institution.
The target levels set for the Group’s financial indicators are approved by the Board of Directors. On 4 February 2009, the Board approved the following values for the indicators equity ratio and interest-bearing net debt/EBITDA.
Target level |
Level achieved in 2010 |
Level achieved in 2009 |
|
| Equity ratio | 40–50% | 53.4% | 54.1% |
| Interest-bearing net debt /EBITDA | < 3 | -0.9 | -0.7 |
| Equity ratio | 2010 | 2009 | |
| Shareholders' equity | 2,209.9 | 2,069.4 | |
| Balance sheet total | 4,176.5 | 3,841.8 | |
| - Prepayments received | 35.0 | 17.3 | |
| Total | 4,141.5 | 3,824.6 | |
| Equity ratio | 53.4% | 54.1% | |
| Interest-bearing net debt | |||
| Interest-bearing debt | 476.8 | 456.2 | |
| Financial assets | 847.2 | 714.7 | |
| Interest-bearing net debt | -370.5 | -258.5 | |
| EBITDA | 427.6 | 363.6 | |
| Interest-bearing net debt /EBITDA | -0.9 | -0.7 | |