Additional Disclosures for Financial Instruments
Measurement of Financial Instruments Based on Categories
ALTANA employs different financial instruments. In accordance with accounting regulations for financial instruments, these financial instruments are classified based on their nature and function into several valuation categories. The following tables provide reconciliation from the items of the statement of financial position to the different categories of financial instruments, their carrying amounts and their fair values at December 31, 2015 and 2014.
The carrying amounts of cash and cash equivalents as well as of trade accounts receivable approximate their fair values due to the short-term maturities of these instruments.
The carrying amounts of marketable securities and equity investments equal their fair values, provided that the fair values can be determined reliably. For marketable securities and investments traded on the stock exchange the fair values correspond to the quotation on the stock exchange (hierarchy level 1) at the reporting date. Investments not traded on the stock exchange are measured at cost, because their future estimated cash flows cannot be determined reliably. A sale of these investments is currently not planned.
The carrying amounts of derivative financial assets and liabilities equal their fair values.
The fair values of interest bearing other non-derivative financial assets and liabilities measured at amortized cost and of lease obligations equal the present values of their future estimated cash flows. The present values are calculated taking the currency, interest rates and duration parameters at each reporting date into consideration.
Trade accounts payable and other non-interest bearing non-derivative liabilities generally have a short-term remaining maturity; therefore, their carrying amount approximates their fair value.
The fair value of loan receivables, other financial assets and liabilities, bank debt, lease obligations, and derivative financial assets and liabilities is measured at the present value of the expected cash inflows or cash outflows of the related financial instruments and is therefore allocated to hierarchy level 2.
Income Effect According to Valuation Categories
The following table provides the net result from financial instruments according to the measurement categories. The net financial result contains interest income, interest expense, gains and losses from the sale of financial instruments, dividends received and additionally, changes in the fair value of derivative financial instruments not designated in a hedging relationship. The net financial result reported only includes income and expense related to financial instruments and their categories. Interest expense from employee benefit and lease obligations as well as changes in the fair values and interest recognized in connection with hedge accounting are therefore not included. The net operating result includes impairments of trade accounts receivable.
The net financial result includes interest income generated by financial instruments measured at amortized cost amounting to € 2.1 million and € 1.8 million in 2015 and 2014, respectively. Total interest expense amounts to € 8.0 million and € 8.8 million in 2015 and 2014, respectively. Interest income and interest expense are measured by applying the effective interest method.
Liquidity Risk: To assure the solvency and financial flexibility of ALTANA, the Company retains a liquidity reserve through cash and cash equivalents and lines of credit.
The following tables show the contractual amortization including the undiscounted interest payments for non-derivative and derivative financial instruments with a positive and a negative fair value. All non-derivative and derivative financial instruments as of December 31, 2015 and 2014, respectively, for which contractual payments had already been agreed, are included in the table. Variable interest payments resulting from non-derivative financial instruments were estimated based on the interest rates applicable at the respective reporting dates. For interest derivative financial instruments, the cash flows were calculated by applying the respective forward interest rates. Budgeted amounts for future expected liabilities were not considered. Foreign currency amounts were translated based on the exchange rates as of the reporting dates. The cash flows attached to the foreign currency derivatives were calculated based on the respective forward rates.
Credit Risk: The Company is exposed to credit risk if business partners do not fulfill their obligations. ALTANA continuously analyses the creditworthiness of significant debtors. Based on its international operations and a diversified customer structure ALTANA has no concentration of credit risk. The Company does not generate sales of more than 3 % with one single customer and less than 20 % with its ten most significant customers combined. Receivables are monitored locally in the operating subsidiaries on an ongoing basis. Financing transactions are mainly carried out with contractual partners that have a credit rating of “Investment Grade”. Furthermore, rate-dependent credit limits are assigned to each contracting party that ALTANA invests with, depending on their membership of a deposit protection fund.
The carrying amount of all receivables (see also note 18), loan receivables, marketable securities and cash and cash equivalents represents the maximum credit risk of ALTANA. At the reporting date, there were no significant arrangements which reduced the maximum credit risk.
Currency Risk: The Company is subject to currency risk associated with its international operations. Currency risk occurs for financial instruments which are denominated in another than the functional currency. Foreign currency translation risk resulting from the consolidation of foreign subsidiaries is not considered. For hedging instruments used by the Company to limit the exposure to foreign currency rate fluctuations see “Hedging”.
The main currency fluctuation risks relate to exchange rate changes of the U.S. Dollar and the Japanese Yen.
The following table provides the effects of a 10 % quantitative change of currency exchange rates on profit or loss and on the item “Derivative financial instruments” in other comprehensive income (see table “Foreign Currency” in note 2):
Interest Rate Risk: The Company is exposed to changes in interest rates. The majority of the interest-sensitive assets and liabilities are marketable securities (money market funds) and debt. For those assets or liabilities that are variable rate instruments, changes in the interest rate will result in changes of the expected cash flows and will affect profit or loss. The fair value of fixed interest rate financial assets classified as available-for-sale and measured at fair value is affected by changes in the interest rate and the resulting change in the fair value is reported in other comprehensive income.
The following table shows the profit or loss effect as well as changes in other comprehensive income on interest-bearing assets, liabilities and interest rate swaps resulting from a change in the average market rate of interest of 50 basis points. The sensitivity analysis was performed under the assumption that the interest rate may decrease to below zero percent. Due to the market situation in 2014, negative interest rates had been precluded for the sensitivity analysis. The interest payments from the hedged items and the hedging instruments (cash flow hedge) are presented separately.
ALTANA has established policies and procedures for assessing risks related to derivative financial instruments activities and uses derivative financial instruments exclusively for hedging purposes.
Forward Foreign Exchange Contracts: The Company uses forward foreign exchange contracts to hedge foreign currency exchange risks resulting from expected transactions of subsidiaries. Hedging instruments with terms of up to 18 months are used to hedge U.S. Dollar and Japanese Yen sales transactions of subsidiaries. In accordance with the hedging strategy of the Company, 75 % of the forecast transactions of the first six months, 60 % of the second six months, and 30 % of the last six months of the forecast transactions are hedged. Forecast transactions are only hedged to the extent that the risk related to the transaction is not neutralized by offsetting items. The volume of the hedged transactions as described above is reduced when the occurrence of the transactions is not highly probable. Currently, the maturity dates of these contracts are less than two years. Furthermore, forward foreign exchange contracts are used to hedge the foreign exchange risk attached to intercompany loans denominated in foreign currencies.
Interest Rate Swaps: The Company uses interest rate swaps to limit the cash flow risk from interest rate fluctuations of the variable interest rate tranche of the promissory note loan (German Schuldschein) taken up in 2012.
Cash Flow Hedges
Hedging of Anticipated Sales Denominated in Foreign Currencies: ALTANA has entered into forward foreign exchange contracts for forecast sales transactions denominated in U.S. Dollar and Japanese Yen for its subsidiaries and has designated them as cash flow hedges. At December 31, 2015 and 2014, the fair values are as follows:
Amounts relating to forward foreign exchange contracts are reclassified from accumulated other comprehensive income into income when the hedged item is realized. In 2015, a change in fair value amounting to € 6.6 million (decrease) was recognized in other comprehensive income and € 5.7 million were reclassified to net sales (reduction in net sales). In 2014, a change in fair value of € 4.5 million (increase) was recognized in other comprehensive income and € 3.7 million were reclassified to net sales (increase in net sales).
The following table shows the forecast cash flows of the hedged transactions which correspond to the maturities of the forward foreign exchange transactions.
Hedging of External Debt: ALTANA entered into interest rate swaps for external loans which exchange variable to fixed-interest payments. The interest rate swaps were designated as cash flow hedges. Interest payments are due semi-annually. At December 31, 2015 and 2014, respectively, the fair values of these interest rate swaps are as follows:
The interest rate swaps mature in 2016 and 2018, corresponding to the terms of the respective hedged item.
In 2015 and 2014, respectively, a change in fair value of € - 0.2 million and € - 0.8 million was recognized in other comprehensive income. Additionally, in 2015 and 2014, expenses amounting to € 0.6 million and € 0.5 million were recognized in the financial result.
Fair Value Hedges
Hedging of Contracted Sales Denominated in Foreign Currencies: At December 31, 2015 and 2014, ALTANA entered into forward foreign exchange contracts with a nominal value of U.S. Dollar 8.6 million and U.S. Dollar 7.4 million and of Japanese Yen 803.0 million and Japanese Yen 840.0 million, respectively. These contracts relate to sales transactions denominated in U.S. Dollar and Japanese Yen with subsidiaries and are classified as fair value hedges. At December 31, 2015 and 2014 the fair values are as follows:
In 2015 and 2014, the effect of the fair value hedge on profit or loss amounted to € 5.5 million and € - 4.6 million, respectively, and thereby offset the effect of the measurement of the hedged transactions.
Hedging of Intercompany Foreign Currency Loans
In 2015, ALTANA entered into forward foreign exchange contracts with a nominal value of U.S. Dollar 173.5 million (2014: U.S. Dollar 191.3 million), of Japanese Yen 1.4 billion (2014: Japanese Yen 1.0 billion), of Swiss Franc 8.5 million (2014: none) and of British Pound 1.0 million (2014: British Pound 3.0 million), to hedge intercompany foreign currency loans for which no offsetting items existed. These forward foreign exchange contracts which serve as economic hedge of the foreign currency exchange rate risk are not designated in a hedging relationship that qualifies for hedge accounting and consequently, changes in their fair values are recognized in the financial result.
Offsetting of Financial Instruments
Under the German Master Agreement for Financial Futures all derivative financial instruments that ALTANA has concluded are subject to offsetting agreements, which allow for offsetting in event of default by one party. The amounts reported in trade accounts receivable and trade accounts payable result from credit notes issued and received. The following tables present the amounts actually offset in the statements of financial position as well as potential offsetting amounts under global netting and other offsetting agreements: