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

Note 5 • Financial instruments

In accordance with Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), all derivative instruments are initially recorded at cost as either other current assets, other assets, accounts payable and accrued expenses, or other liabilities in the accompanying consolidated balance sheets and subsequently remeasured to fair value, regardless of the purpose or intent for holding the derivative instruments. For derivative instruments designated and qualifying as fair value hedges, changes in the fair value of the derivative instruments as well as the changes in the fair value of the hedged item attributable to the hedged risk are recognised within the same line item in earnings. Any cash flow impact on settlement of these contracts is classified within the consolidated statements of cash flows according to the nature of the hedged item. For derivative instruments designated and qualifying as cash flow hedges, the effective portion of the changes in the fair value of derivative instruments is initially recorded as a component of accumulated other comprehensive income/(loss), net, in shareholders’ equity and reclassified into earnings in the same period during which the hedged transaction impacts earnings. The ineffective portion of the change in fair value of the derivative instruments is immediately recognised in earnings. The cash flow impact on settlement of these contracts is classified according to the nature of the hedged item. For derivative instruments designated and qualifying as net investment hedges, changes in the fair value of the derivative instruments are recorded as a component of accumulated other comprehensive income/(loss), net, in shareholders’ equity to the extent they are considered effective. These gains or losses will remain in equity until the related net investment is sold or otherwise disposed. The cash flow impact on settlement of these contracts is classified as cash flows from investing activities.

For derivative instruments that are not designated or that do not qualify as hedges under ASC 815, the changes in the fair value of the derivative instruments are recognised in other income/(expenses), net, within the consolidated statements of operations. Any cash flow impact on settlement of these contracts is classified as cash flows from investing activities.

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, including the US Dollar, the British Pound, the Japanese Yen, and the Euro against the Swiss Franc. 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 fixed interest rates 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 June 30, 2011 and December 31, 2010:

 

30.06.2011

31.12.2010

in EUR

Carrying value

Fair value

Carrying value

Fair value

 

 

 

 

 

Non-derivative financial instruments

 

 

 

 

Current assets:

 

 

 

 

• Cash and cash equivalents

383

383

549

549

• Short-term investments

3

3

5

5

• Trade accounts receivable, net

3,842

3,842

3,541

3,541

Current liabilities:

 

 

 

 

• Accounts payable

488

488

546

546

• Short-term debt

311

311

168

168

• Current maturities of long-term debt

51

52

49

50

Non-current liabilities:

 

 

 

 

• Long-term debt

1,209

1,272

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.

Fair value of derivative financial instruments

The following table shows the notional amount and the fair value of derivative financial instruments as of June 30, 2011 and December 31, 2010:

 

 

Notional amount

Fair value

in EUR

Balance sheet location

30.06.2011

31.12.2010

30.06.2011

31.12.2010

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

Derivatives designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Interest rate swaps

Other assets

375

375

9

18

Derivatives not designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Foreign currency contracts

Other current assets

584

373

16

14

• Cross currency interest rate swaps

Other current assets

209

 

36

 

• Cross currency interest rate swaps

Other assets

42

244

7

20

• Interest rate swaps

Other assets

50

 

2

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

Derivatives designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Interest rate swaps

Other liabilities

50

50

 

(1)

Derivatives not designated as hedging
instruments under ASC 815:

 

 

 

 

 

• Foreign currency contracts

Accounts payable and
accrued expenses

1,155

1,133

(54)

(49)

• Interest rate swaps

Other liabilities

50

 

 

 

• Interest rate swaption

Other liabilities

50

50

 

 

 

 

 

 

 

 

Total net derivatives

 

 

 

16

2

In addition, accrued interest receivable on interest rate swaps of EUR 2 and EUR 10 was recorded in other current assets as of June 30, 2011 and December 31, 2010, respectively. Accrued interest payable on cross currency interest rate swaps and interest rate swaps of EUR 1 was recorded in accounts payable and accrued expenses as of June 30, 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 June 30, 2011 and December 31, 2010, the total impact of non-performance risk and liquidity risk was a loss of EUR 1 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. These contracts have an original contract period of three to five years and expire in 2014.

For the six months ended June 30, 2011 and June 30, 2010, 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, were 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

(8)

7

   Long-term debt  

Interest expense

8

(7)

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

In relation to the exchange and tender of the 5-year guaranteed Euro medium-term notes due 2014 and fixed rate guaranteed notes due 2013 (for further details refer to Note 2), fair value hedges of the exchanged and tendered part of the notes have been discontinued proportionally. The gain from the fair value adjustment to the debt balance of EUR 2 for the tendered notes has been considered in the calculation of the loss on the tender transaction, included in other income/(expenses), net. The gain from the fair value adjustment to the debt balance of EUR 2 for the exchanged notes has been deferred and is considered in the calculation of the effective interest rate of the 7-year notes.

Cash flow hedges

The effective portion of gains on cash flow hedges that was recognised in other comprehensive income/(loss), net, amounted to EUR 2 as of June 30, 2011. No gain or loss was recognised in other comprehensive income/(loss), net, as of June 30, 2010 in connection with cash flow hedges. As of June 30, 2011 and December 31, 2010, the gain relating to cash flow hedges included as a component of accumulated other comprehensive income/(loss), net, amounted to EUR 2 and less than EUR 1, respectively. No significant gains or losses were recorded in the first six months of 2011 and the first six months of 2010, due to ineffectiveness in cash flow hedge relationships. In the first six months of 2011 and the first six months of 2010, 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 June 30, 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. These are mainly forward foreign currency contracts and cross-currency interest rate swaps 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 loss of EUR 1 and a gain of less than EUR 1 for the six months ended June 30, 2011 and the six months ended June 30, 2010, respectively, 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

21

(13)

    Loans to
    subsidiaries

Other income/
(expenses), net

(22)

13

Foreign currency
contracts

Other income/
(expenses), net

(46)

(8)

    Cash, loans, and
    receivables to/
    from subsidiaries  

Other income/
(expenses), net

46

8

No significant amounts were included in other income/(expenses), net, for the six months ended June 30, 2011 and June 30, 2010 in relation to interest rate swaps and swaption not designated as hedging instruments under ASC 815.

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.