KONE operates internationally and is thus exposed to risks arising from foreign exchange rate fluctuations related to currency flows from revenues and expenses (transaction risk) and from the translation of income statement and statement of financial position items of foreign subsidiaries into euros (translation risk).
Transaction risks
A substantial part of KONE operations, especially the maintenance business, are denominated in local functional currencies. The sales and installations of new equipment and modernizations typically take place in the functional currency of the selling subsidiary. Component and material deliveries or production may occur in other currencies than the sales currency, which exposes KONE to transaction risks. The KONE policy is to hedge the foreign exchange exposure of orders received and highly probable future sales and purchases with foreign exchange forward contracts. The profitability of business operations is hedged by fixing the exchange rates using foreign exchange forward contracts. The subsidiaries are responsible for evaluating and hedging the transaction risks in their operations according to the foreign exchange policy. The most significant transaction risk exposures are in US dollars, Chinese renminbis, British pounds and Swedish crowns. The majority of the currency forward contracts expire within one year.
Hedge accounting is applied in subsidiaries, where there are significant revenues or expenses in foreign currency. When hedge accounting is applied the gains and losses from the hedges are recognized in the income statement at the same time as the exchange rate gains and losses for the hedged items are recognized.
Group internal loans and deposits are primarily initiated in the local currencies of the subsidiaries in which case the possible foreign exchange risks are hedged using foreign exchange swap contracts.
Translation risks
Changes in consolidation exchange rates affect KONE’s income statement, cash flow statement and statement of financial position values in euros. As more than 50 percent of KONE’s revenues occur in functional currencies other than the euro, the translation risk is significant for KONE. A change of five percent in the annual average foreign exchange rates would have caused a 3.2 (3.0) percent change in 2011 in the consolidated sales in euros. Such a change would not have had a significant impact on KONE’s operating income margin. The translation of the subsidiaries’ balance sheets into euros caused translation differences of EUR 29.0 (45.5) million in 2011. The translation risk is not hedged as a rule with financial instruments as KONE’s business consists of continuous operations in various currency areas. The most significant translation risk exposures are in US dollars, Chinese renminbis, Australian dollars and British pounds.
Foreign exchange risk sensitivity analysis of financial assets and liabilities
The foreign exchange risk sensitivity analysis according to IFRS 7 for the most important currency pairs has been calculated for the KONE companies’ foreign currency nominated financial assets and liabilities including foreign exchange forward contracts outstanding on the balance sheet date. The order book or forecasted cash flows are not included. The exposures in the most important currency pairs are disclosed in the table below. The foreign exchange risk sensitivity analysis represents the impact of a change in the foreign exchange rates of 10 percent to the statement of income and to the equity on the balance sheet date. Changes in the equity are caused by foreign exchange forwards designated in cash flow hedge accounting. The sensitivity analysis is calculated before taxes. A 10 percent change in the foreign exchange rates (strengthening of the euro and US dollar) on the balance sheet date would have resulted in an impact of EUR 5.5 (2.7) million to the statement of income and an impact of EUR 19.5 (5.8) million to the equity.
