(26) Financial Risk Management
We are exposed to various financial risks, including changes in currency exchange rates, interest rates, equity prices and the creditworthiness of our counterparties.
SAP manages and, if necessary hedges against Groupwide credit, liquidity, interest, equity price and foreign exchange risks. Financial risk management is conducted centrally and is regulated by internal guidelines.
Foreign Exchange Risk
As a global enterprise, we are subject to risks associated with fluctuations in foreign currencies with regard to our ordinary operations. This includes foreign currency-denominated receivables, payables, debt, and other balance sheet positions as well as future cash flows resulting from anticipated transactions including intragroup transactions as described in Note 25.
We regularly quantify the risk positions from the exchange
rates of key currencies mentioned in
Note 3 and Note 25, using the value-at-risk (VAR) concept. VAR represents an
expected loss calculated by computing the exposures of
relevant unhedged foreign exchange positions to foreign
exchange risk factors. We calculate the expected loss of
income from foreign currency influences for an assumed
holding period of 10 days and a confidence level of 99%.
The following table shows the value-at-risk calculated on
the basis of unhedged foreign currency denominated balance
sheet positions and forecasted inter-company license
payments at the end of the fiscal year and the yearly averages
for fiscal years 2007 and 2006. The yearly averages
are calculated using the figures at the end of each of the
quarters.
| € millions |
2007 | 2006 | ||
| 12/31 | Yearly average |
12/31 | Yearly average |
|
| Value at risk | 12 | 14 | 4 | 9 |
Interest Rate Risk
Due to the short maturities of our investments and insignificant financial liabilities, we did not have any significant interest rate risk related to financial assets or financial liabilities see Note 13 and Note18 in all years presented. The average remaining maturity of our debt securities classified as noncurrent is approximately 1.5 years.
Due to the acquisition of Business Objects S.A. in early 2008, SAP will be exposed to cash flow risk resulting from the variability in future interest payments related to the syndicated term loan facility. For information about SAP’s related hedging activities, see Note 25.
Equity Price Risk
Our investments consist of securities in listed and non-listed companies held for purposes other than trading. The equity investments in listed companies are monitored based on the current market value, which is affected by the volatility of stock markets worldwide. An assumed 20% decline in equity prices as at December 31, 2007 would reduce the value of our investments in marketable securities by €1 million (2006: €3 million).
The equity investments in non-listed companies are monitored individually. Those securities are recognized at cost, because market values are generally not observable. These cost-method investments are subject to an annual impairment test.
Credit Risk
We are exposed to the risk of credit-related losses through our operating and certain financing activities in the event of nonperformance by counterparties to financial instruments. We manage this risk through diversification of our counterparties and use of counterparty credit limits which are mainly based on the counterparty’s external rating. Following our internal guidelines for financial risk management, we conduct all of our business related to financial investments with major financial institutions. This approach is assured by detailed guidelines for the management of financial risks. We do not have significant exposure to any individual counterparty.
The credit risk of our operating business is managed separately, mainly based on external ratings and our historical experience with respective customers. Outstanding debts are frequently monitored locally and credit risks are taken into account through recognized impairments. Credit risk exposures from individual customers are limited due to our large customer base and its distribution across many different industries and countries worldwide.
The maximum exposure to credit risk is limited to the carrying amounts of the financial assets. No significant agreements reducing the maximum exposure to credit risk had been concluded as at the reporting date.
