Annual Report 2011

Adecco Group –
Notes to consolidated financial statements
in millions, except share and per share information

Note 11 – Financial instruments

Risk and use of derivative instruments

The Company conducts business in various countries and funds its subsidiaries in various currencies, and is therefore exposed to the effects of changes in foreign currency exchange rates. In order to mitigate the impact of currency exchange rate fluctuations, the Company assesses its exposure to currency risk and hedges certain risks through the use of derivative instruments. The Company has also issued fixed rate long-term notes. Accordingly, the Company manages exposure to changes in fair value of fixed interest long-term debt through the use of derivative instruments.

The main objective of holding derivative instruments is to minimise the volatility of earnings arising from these exposures in the absence of natural hedges. The responsibility for assessing exposures as well as entering into and managing derivative instruments is centralised in the Company’s treasury department. The activities of the treasury department are covered by corporate policies and procedures approved by the Board of Directors, which generally limit the use of derivative instruments for trading and speculative purposes. Group management approves the hedging strategy and monitors the underlying market risks.

Fair value of non-derivative financial instruments

The following table shows the carrying value and the fair value of non-derivative financial instruments as of December 31, 2011 and December 31, 2010:

 

31.12.2011

31.12.2010

in EUR

Carrying value

Fair value

Carrying value

Fair value

 

 

 

 

 

Non-derivative financial instruments

 

 

 

 

Current assets:

 

 

 

 

• Cash and cash equivalents

532

532

549

549

• Short-term investments

2

2

5

5

• Trade accounts receivable, net

3,725

3,725

3,541

3,541

Current liabilities:

 

 

 

 

• Accounts payable

541

541

546

546

• Short-term debt

160

160

168

168

• Current maturities of long-term debt

76

76

49

50

Non-current liabilities:

 

 

 

 

• Long-term debt

1,190

1,236

1,088

1,158

The Company uses the following methods and assumptions to estimate the fair value of each class of non-derivative financial instruments:

  • Cash equivalents, trade accounts receivable, net, accounts payable, and short-term debt
    The carrying amount approximates the fair value given the short maturity of such instruments.
  • Short-term investments
    The fair value for these instruments is based on quoted market prices.
  • Long-term debt, including current maturities
    The fair value of the Company’s publicly-traded long-term debt is estimated using quoted market prices. The fair value of other long-term debt is estimated by discounting future cash flows using interest rates currently available for similar debt with identical terms, similar credit ratings, and remaining maturities. Refer to Note 7 for details of debt instruments.

Fair value of derivative financial instruments

The following table shows the notional amount and the fair value of derivative financial instruments as of December 31, 2011 and December 31, 2010:

 

 

Notional amount

Fair value

in EUR

Balance sheet location

31.12.2011

31.12.2010

31.12.2011

31.12.2010

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

Derivatives designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Interest rate swaps

Other assets

425

375

13

18

Derivatives not designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Foreign currency contracts

Other current assets

1,071

373

48

14

• Cross-currency interest rate swaps

Other current assets

209

 

16

 

• Cross-currency interest rate swaps

Other assets

42

244

4

20

• Interest rate swaps

Other assets

50

 

2

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

Derivatives designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Interest rate swaps

Other liabilities

 

50

 

(1)

Derivatives not designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Foreign currency contracts

Other accrued expenses

787

1,133

(38)

(49)

• Interest rate swaps

Other liabilities

50

 

(1)

 

• Interest rate swaption

Other liabilities

50

50

(1)

 

 

 

 

 

 

 

Total net derivatives

 

 

 

43

2

In addition, accrued interest receivable on interest rate swaps of EUR 10 was recorded in other current assets as of December 31, 2011 and December 31, 2010. Accrued interest payable on cross-currency interest rate swaps and interest rate swaps of EUR 2 and EUR 1 was recorded in other accrued expenses as of December 31, 2011 and December 31, 2010.

The fair value of interest rate swaps, foreign currency contracts, cross-currency interest rate swaps, and interest rate swaption is calculated by using the present value of future cash flows based on quoted market information. The Company adds an adjustment for non-performance risk in the recognised measure of fair value of derivative instruments as well as a liquidity charge represented by the bid-ask spread of the outstanding derivatives. The non-performance adjustment reflects the Credit Default Swap (“CDS”) applied to the exposure of each transaction. The Company uses the counterparty CDS spread in case of an asset position and its own CDS spread in case of a liability position. As of December 31, 2011 and December 31, 2010, the total impact of non-performance risk and liquidity risk was a loss of EUR 4 and EUR 3, respectively.

Fair value hedges

Interest rate swaps with a notional amount of EUR 300 that contain a receipt of fixed interest rate payments and payment of floating interest rate payments have been designated as fair value hedges of the EUR 333 fixed rate guaranteed notes due 2013 issued by Adecco International Financial Services BV. The outstanding contracts have an original contract period of four to seven years and expire in 2013.

Interest rate swaps with a notional amount of EUR 125 that contain a receipt of fixed interest rate payments and payment of floating interest rate payments have been designated as fair value hedges of the EUR 356 5-year guaranteed Euro medium-term notes due 2014 issued by Adecco International Financial Services BV. The contracts have an original contract period of three to five years and expire in 2014.

The gain and loss on the hedged fixed rate notes attributable to the hedged benchmark interest rate risk and the offsetting loss and gain on the related interest rate swaps, both reported as interest expense for 2011 and 2010 are as follows:

in EUR

Location of gain/(loss)
on derivative recognised
in earnings

Gain/(loss) on derivative
recognised in earnings

     Hedged item

Location of gain/(loss)
on related hedged item
recognised in earnings

Gain/(loss) on related hedged
item recognised in earnings

Derivative

2011

2010

2011

2010

 

 

 

 

 

 

 

 

Interest rate
swaps

Interest expense

(5)

2

     Long-term
     debt

Interest expense

5

(2)

In addition, the net swap settlements that accrue each period are also reported in interest expense. No significant gains or losses were recorded in 2011, 2010, and 2009, due to ineffectiveness in fair value hedge relationships. No significant gains or losses were excluded from the assessment of hedge effectiveness of the fair value hedges in 2011, 2010, or 2009.

Cash flow hedges

The effective portion of gains on cash flow hedges that was recognised in other comprehensive income/(loss), net, amounted to EUR 3 for 2011. No significant gain or loss was recognised in other comprehensive income/(loss), net, in 2010 in connection with cash flow hedges. As of December 31, 2011 and December 31, 2010, the gain relating to cash flow hedges included as a component of accumulated other comprehensive income/(loss), net, amounts to EUR 2 and below EUR 1, respectively. No significant gains or losses were recorded in 2011, 2010, and 2009, due to ineffectiveness in cash flow hedge relationships. In 2011, 2010, and 2009, no significant gains or losses were excluded from the assessment of hedge effectiveness of the cash flow hedges. No significant reclassifications into earnings of gains and losses that are reported in accumulated other comprehensive income/(loss), net, are expected within the next 12 months.

Net investment hedges

As of December 31, 2011 and December 31, 2010, the net loss relating to net investment hedges included as a component of accumulated other comprehensive income/(loss), net, amounted to EUR 74 and EUR 72, respectively, resulting from net investment hedges terminated in 2005. No reclassifications of losses reported in accumulated other comprehensive income/(loss), net, into earnings are expected within the next 12 months.

Other hedge activities

The Company has entered into certain derivative contracts that are not designated or do not qualify as hedges under ASC 815. Forward foreign currency contracts and cross-currency interest rate swaps are used to hedge the net exposure of subsidiary funding advanced in the local operations’ functional currency. Contracts are entered into in accordance with the written treasury policies and procedures and represent economic hedges. Gains and losses on these contracts are recognised in earnings and are included in other income/(expenses), net, in the accompanying consolidated statements of operations.

In connection with these activities, the Company recorded a net loss of EUR 1 in 2011 and a net loss of EUR 3 in 2010, as follows:

in EUR

Location of gain/(loss) on derivative recognised
in earnings

Gain/(loss) on derivative recognised in earnings

     Hedged item

Location of gain/(loss)
on related hedged item recognised in earnings

Gain/(loss) on related hedged item recognised in earnings

Derivative

2011

2010

2011

2010

 

 

 

 

 

 

 

 

Cross-currency
interest rate
swaps

Other income/
(expenses), net

(6)

20

     Loans and
     receivables to/
     from subsidiaries

Other income/
(expenses), net

4

(21)

Foreign currency   
contracts

Other income/
(expenses), net

(11)

(80)

     Cash, loans and
     receivables to/
     from subsidiaries   

Other income/
(expenses), net

12

78

In addition, in 2011 the Company recorded in other income/(expenses), net, a gain of EUR 3 in connection with not designated interest rate swaps and a release of fair value adjustment on part of the debt tendered in April 2011 and a loss of EUR 1 in connection with not designated interest rate swaption. No significant amounts were included in other income/(expenses), net, for 2010 and 2009 in relation to interest rate swaps and swaption not designated as hedging instruments under ASC 815.

In 2009, the Company recorded a net expense of EUR 2 in connection with the forward-starting foreign currency swaps and forward-starting cross-currency interest rate swaps entered into in 2009 to hedge the US Dollar to the Swiss Franc exchange rate over the period between the announcement and the closing of the MPS acquisition in January 2010. The contracts consummated at the closing of the MPS acquisition in January 2010 to hedge the US Dollar loans advanced to the US subsidiary to finance the acquisition.

Credit risk concentration

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash investments, short-term investments, trade accounts receivable, and derivative financial instruments. The Company places its cash and short-term investments in major financial institutions throughout the world, which management assesses to be of high credit quality, in order to limit the exposure of each investment.

Credit risk with respect to trade accounts receivable is dispersed due to the international nature of the business, the large number of customers, and the diversity of industries serviced. The Company’s receivables are well diversified and management performs credit evaluations of its customers and, where available and cost-effective, utilises credit insurance.

To minimise counterparty exposure on derivative instruments, the Company enters into derivative contracts with several large multinational banks and limits the exposure in combination with the short-term investments with each counterparty.