Annual Report 2013

Notes to the consolidated statement of
financial position

(21) Financial instruments report

Financial instruments explained by category

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Within the Henkel Group, financial instruments are reported under trade accounts receivable, trade accounts payable, borrowings, other financial assets and other financial liabilities, and also cash and cash equivalents within the statement of financial position.

Financial instruments are recognized once Henkel becomes a party to the contractual provisions of the financial instrument. The recognition of financial assets takes place at the settlement date, with the exception of derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments, which are recognized on the transaction date. All financial instruments are initially reported at their fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
. Incidental acquisition costs are only capitalized if the financial instruments are not subsequently remeasured to fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
through profit or loss. For subsequent remeasurement, financial instruments are divided into the following classes in accordance with IAS 39:

     

  • Financial instruments measured at amortized cost
  •  

  • Financial instruments measured at fair valuefair value
    Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
  •  

Different valuation categories are allocated to these two classes. Financial instruments assigned to the valuation categories "Fair valueFair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option," "Available for sale" and "Held for trading" are generally measured at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
. In the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option, we include fixed-interest bonds, which are recognized in other financial assets under securities and time deposits and for which we have concluded interest rate swaps in order to convert the fixed interest rate into a floating interest. Other securities and time deposits as well as other investments which are not measured at equity, both part of other financial assets in the statement of financial position, are categorized as "Available for sale." Only the derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments held by the Henkel Group which are not included in hedge accountinghedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
are designated as "Held for trading." We recognize all other financial instruments including the financial assets categorized as "Loans and receivables" at amortized cost using the effective interest method. The measurement category "Held to maturity" is not used within the Henkel Group.

The financial instruments in the measurement category "Loans and receivables" are non-derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments. They are characterized by fixed or determinable payments and are not traded in an active market. Within the Henkel Group, this category is mainly comprised of trade accounts receivable, cash and cash equivalents, and other financial assets with the exception of investments, derivatives, securities and time deposits. The carrying amounts of the financial instruments categorized as "Loans and receivables" closely approximate their fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
due to their predominantly short-term nature. If there are doubts as to the realizability of these financial instruments, they are recognized at amortized cost less appropriate valuation allowances.

Financial instruments are recognized in the "Fair valueFair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option" if this classification conveys more relevant information by eliminating or significantly reducing inconsistencies in the measurement or in the recognition that result from the valuation of assets or liabilities or the recognition of gains and losses on a different basis. Financial instruments classified in the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option are recognized at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
through profit or loss.

Financial instruments in the category “Available for sale” are non-derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial assets and are recognized at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
, provided that this is reliably determinable. If the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
cannot be reliably determined, they are recognized at cost. Value changes between the reporting dates are essentially recognized in comprehensive income (revaluation reserve) without affecting profit or loss, unless the cause lies in permanent impairmentimpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
. ImpairmentImpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
losses are recognized through profit or loss. When the asset is derecognized, the amounts recognized in the revaluation reserve are released through profit or loss. In the Henkel Group, the securities and time deposits recognized under other financial assets, and not classified under the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option, and also other investments, are categorized as “Available for sale.” The fair values of the securities and time deposits are based on quoted market prices, or derived from market data. As the fair values of the financial investments not recognized at equity cannot be reliably determined, they are measured at amortized cost. The sale or disposal of these financial instruments is currently not intended.

The derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments not included in a designated hedging relationship and therefore categorized as "Held for trading" are essentially recognized at their fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
. All fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
changes are recognized through profit or loss. Hedge accountingHedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
is applied in individual cases – where possible and economically sensible – in order to avoid profit and loss variations arising from fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
changes in derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments. Depending on the type of underlying and the risk being hedged, fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
and cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedges are designated within the Group. Details relating to the hedging contracts transacted within the Group and how the fair values of the derivatives are determined are provided here.

All financial liabilities – with the exception of derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments – are essentially recognized at amortized cost using the effective interest method.

Borrowings for which a hedging transaction has been concluded that meets the requirements of IAS 39 with respect to hedge accountinghedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
are recognized in hedge accountinghedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
.

In addition to the disclosures provided in this note with respect to offsetting financial assets and financial liabilities for derivatives (here), further offsetting disclosures can be found in Note 17 ("Borrowings").

Carrying amounts and fair values of financial instruments
December 31, 2012
in million euros
Valuation according to IAS 39
Carrying amount
December 31
Amortized
cost
Fair value,
through other
comprehensive
income
Fair value,
through profit or
loss
Fair value
December 31
Assets
Loans and receivables 3,433 3,433 3,433
Trade accounts receivable 2,021 2,021 2,021
Other financial assets 174 174 174
Receivables from associated companies 1 1 1
Financial receivables from third parties 59 59 59
Receivables from Henkel Trust e.V. 20 20 20
Sundry financial assets 94 94 94
Cash and cash equivalents 1,238 1,238 1,238
Fair value option 537 537 537
Other financial assets 537 537 537
Fixed-interest securities (level 1) 248 248 248
Fixed-interest securities (level 2) 289 289 289
Available for sale 1,726 18 1,708 1,726
Other financial assets 1,726 18 1,708 1,726
Other investments 18 18 18
Floating-interest securities and time deposits (level 1) 1,654 1,654 1,654
Floating-interest securities (level 2)
Fixed-interest securities (level 1) 50 50 50
Financial collateral provided 4 4 4
Held for trading (level 2) 14 14 14
Derivative financial instruments not included in a designated
hedging relationship
14 14 14
Derivative financial instruments included in a designated hedging
relationship (level 2)
244 244 244
Total 5,954 3,451 1,708 795 5,954
           
Liabilities
Amortized cost 6,496 6,496 6,498
Trade accounts payable 2,647 2,647 2,647
Borrowings with no financial statement hedging relationship 241 241 241
Borrowings with a financial statement hedging relationship 3,533 3,533 3,535
Other financial liabilities 75 75 75
Held for trading (level 2) 33 33 33
Derivative financial instruments not included in a designated
hedging relationship
33 33 33
Derivative financial instruments included in a designated hedging
relationship (level 2)
19 19 19
Total 6,548 6,496 19 33 6,550

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Carrying amounts and fair values of financial instruments
December 31, 2013
in million euros
Valuation according to IAS 39
Carrying amount
December 31
Amortized
cost
Fair value,
through other
comprehensive
income
Fair value,
through profit or
loss
Fair value
December 31
Assets
Loans and receivables 3,652 3,652 3,652
Trade accounts receivable 2,370 2,370 2,370
Other financial assets 231 231 231
Receivables from associated companies
Financial receivables from third parties 32 32 32
Receivables from Henkel Trust e.V. 120 120 120
Sundry financial assets 79 79 79
Cash and cash equivalents 1,051 1,051 1,051
Fair value option 619 619 619
Other financial assets 619 619 619
Fixed-interest securities (level 1) 245 245 245
Fixed-interest securities (level 2) 374 374 374
Available for sale 1,805 18 1,787 1,805
Other financial assets 1,805 18 1,787 1,805
Other investments 18 18 18
Floating-interest securities and time deposits (level 1) 1,720 1,720 1,720
Floating-interest securities (level 2) 22 22 22
Fixed-interest securities (level 1) 19 19 19
Financial collateral provided 26 26 26
Held for trading (level 2) 17 17 17
Derivative financial instruments not included in a designated
hedging relationship
17 17 17
Derivative financial instruments included in a designated hedging
relationship (level 2)
135 135 135
Total 6,228 3,670 1,787 771 6,228
           
Liabilities          
Amortized cost 5,543 5,543 5,543
Trade accounts payable 2,872 2,872 2,872
Borrowings with no financial statement hedging relationship 186 186 186
Borrowings with a financial statement hedging relationship 2,430 2,430 2,430
Other financial liabilities 55 55 55
Held for trading (level 2) 31 31 31
Derivative financial instruments not included in a designated
hedging relationship
31 31 31
Derivative financial instruments included in a designated hedging
relationship (level 2)
3 3 3
Total 5,577 5,543 3 31 5,577

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The following hierarchy is applied in order to determine and disclose the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of financial instruments:

  • Level 1: Fair values which are determined on the basis of quoted, unadjusted prices in active markets.
  • Level 2: Fair values which are determined on the basis of parameters for which either directly or indirectly derived market prices are available.
  • Level 3: Fair values which are determined on the basis of parameters for which the input factors are not derived from observable market data.

The fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of securities and time deposits classified as level 1 is based on the quoted market prices on the reporting date. Observable market data were used to measure the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of level 2 securities.

We did not perform any reclassifications between the valuation categories or transfers within the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hierarchy either in fiscal 2013 or in the previous year.

Net gains and losses from financial instruments by category

The net gains and losses from financial instruments can be allocated to the following categories:

Net results of the measurement categories and reconciliation to financial result
in million euros 2012 2013
Loans and receivables 55 47
Fair value option 3 7
Financial assets available for sale 11 10
Financial assets and liabilities held for trading including
derivatives in a designated hedging relationship
9 –35
Financial liabilities measured at amortized cost –203 –109
Total net results –125 –80
     
Foreign exchange effects –6 –1
Interest expense of pension provisions less interest
income from plan assets and reimbursement rights1
–38 –24
Other financial result (not related to financial instruments) –12 –8
Financial result –181 –113

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The net result of “Loans and receivables” is allocated in full to interest income. Net expenses arising from additions and releases of valuation allowances amounting to 17 million euros (previous year: 30 million euros) and income from payments on financial instruments already written off and derecognized amounting to 4 million euros (previous year: 3 million euros) were recognized in operating profit.

The net result of the securities and time deposits classified under the “Fair valueFair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option” includes interest income of 7 million euros (previous year: 1 million euros) and valuation gains of 0 million euros (previous year: 2 million euros).

The net result from securities and time deposits classified as “Available for sale” amounts to 10 million euros (previous year: 10 million euros) for interest income and 0 million euros (previous year: 1 million euros) for income from other investments. The measurement of these financial instruments at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
led to a gain of 1 million euros (previous year: gain of 3 million euros) which we have recognized in the reserve for “Financial instruments available for sale” in equity.

The net result from “Held for trading” financial instruments and derivatives in a designated hedging relationship includes, in addition to the outcome of measurement of these derivatives at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
amounting to – 94 million euros (previous year: –46 million euros), an expense of 1 million euros arising from additions to the valuation allowance made for counterparty credit risk (previous year: income from the release of the valuation allowance in the amount of 4 million euros). Moreover 60 million euros of interest income from interest rate derivatives and amounts recycled from cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedges recognized in equity are also included under this heading (previous year: 51 million euros).

The net result from “Financial liabilities measured at amortized cost” is essentially derived from the interest expense for borrowings amounting to 184 million euros (previous year: 215 million euros). Also included are valuation gains of 81 million euros ( previous year: 17 million euros) from borrowings in a fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hedge relationship. Fees amounting to 6 million euros for procuring money and loans were also recognized under this heading (previous year: 5 million euros).

The realization and valuation of financial assets and liabilities in foreign currencies (without derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments) resulted in an expense of – 1 million euros (previous year: –6 million euros).

Derivative financial instruments

DerivativeDerivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments are measured at their fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
at the reporting date. Recognition of the gains and losses arising from fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
changes of derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments is dependent upon whether the requirements of IAS 39 are fulfilled with respect to hedge accountinghedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
.

Hedge accountingHedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
is not applied to the large majority of derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments. We recognize through profit or loss the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
changes in these derivatives which, in economic terms, represent effective hedges within the framework of Group strategy. These are largely compensated by fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
changes in the hedged items. In hedge accountinghedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
, derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments are qualified as instruments for hedging the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of a recognized underlying (“fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hedge”), as instruments for hedging future cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
(“cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedge”) or as instruments for hedging a net investment in a foreign entity (“hedge of a net investment in a foreign entity”). The following table provides an overview of the derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments utilized and recognized within the Group, and their fair values:

Derivative financial instruments
At December 31
in million euros
Nominal value Positive fair value2 Negative fair value2
2012 2013 2012 2013 2012 2013
Forward exchange contracts1 1,985 2,118 14 17 –17 –20
(of which: for hedging loans within the Group) (1,628) 1,671 (12) 12 (–16) (–19)
(of which: designated as cash flow hedge) (56) (1)
Foreign exchange options 62 1
Interest rate swaps 4,734 3,424 244 134 –35 –14
(of which: designated as fair value hedge) (3,300) (2,300) (244) (134) (–) (–)
(of which: designated as cash flow hedge) (910) (508) (–) (–) (–19) (–3)
(of which: to hedge financial instruments in the fair value option) (524) (616) (–) (–) (–16) (–11)
Commodity futures1 1 1
(of which: designated for hedge accounting) (–) (–) (–) (–) (–) (–)
Total derivative financial instruments 6,720 5,605 258 152 –52 –34

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For forward exchange contracts, we determine the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
on the basis of the reference exchange rates of the European Central Bank prevailing at the reporting date, taking into account forward premiums/forward discounts for the remaining term of the respective contract versus the contracted foreign exchange rate. Foreign exchange options are measured using price quotations or recognized models for the determination of option prices. We measure interest rate hedging instruments on the basis of discounted cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
expected in the future, taking into account market interest rates applicable for the remaining term of the contracts. These are indicated for the two most important currencies in the following table. It shows the interest rates quoted on the interbank market in each case on December 31.

Interest rates in percent p. a.
At December 31
Term
Euro US dollar
2012 2013 2012 2013
1 month 0.07 0.24 0.23 0.16
3 months 0.18 0.25 0.42 0.25
6 months 0.25 0.41 0.48 0.38
1 year 0.48 0.52 0.88 0.59
2 years 0.38 0.54 0.39 0.48
5 years 0.77 1.26 0.85 1.79
10 years 1.60 2.22 1.82 3.17

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Due to the complexities involved, financial derivatives for hedging commodity price risks are primarily measured on the basis of simulation models, which are derived from market quotations. We perform regular plausibility checks in order to safeguard valuation correctness.

In measuring derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments, counterparty credit risk is taken into account with a lump-sum adjustment to the fair values concerned, determined on the basis of credit risk premiums. The adjustment relating to fiscal 2013 amounts to 2 million euros (previous year: 1 million euros). We recognized the addition in profit and loss under financial result.

Depending on their fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
and their maturity on the reporting date, derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments are included in financial assets (positive fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
) or in financial liabilities (negative fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
).

Most of the forward exchange contracts serve to hedge risks arising from trade accounts receivable and payable, and those pertaining to Group financing.

Interest rate hedges serve to manage the interest rate risks arising from the fixed-interest bonds issued by Henkel AG & Co. KGaAKGaA
Abbreviation for “Kommanditgesellschaft auf Aktien.” A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlimited liability with respect to the company’s creditors (personally liable partner), while the liability for such debts of the other partners participating in the share-based capital stock is limited to their share capital (limited shareholders).
and the floating-interest bank liabilities of Henkel of America, Inc. See also the following explanations relating to fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hedges and cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedges and to the interest rate risk in the Henkel Group. In addition, interest rate derivatives are entered into to hedge the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the fixed-interest securities classified in the “Fair valueFair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option.”

To a small extent, we use commodity derivatives to hedge uncertainties in future commodity price developments. See also the explanations relating to other price risks here.

Fair valueFair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hedges:
A fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hedge hedges the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of recognized assets and liabilities. The change in the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the derivatives and the change in the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the underlying relating to the hedged risk are simultaneously recognized in profit or loss.

Receiver interest rate swaps are used to hedge the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
risk of the fixed-interest bonds issued by Henkel AG & Co. KGaAKGaA
Abbreviation for “Kommanditgesellschaft auf Aktien.” A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlimited liability with respect to the company’s creditors (personally liable partner), while the liability for such debts of the other partners participating in the share-based capital stock is limited to their share capital (limited shareholders).
. The fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of these interest rate swaps is 95 million euros (previous year: 180 million euros) excluding accrued interest. The changes in fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the receiver interest rate swaps arising from market interest rate risks amounted to –85 million euros (previous year: –19 million euros). The corresponding changes in fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the hedged bonds amounted to 81 million euros (previous year: 17 million euros). In determining the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
change in the bonds (see also Note 17), only that portion is taken into account that relates to the interest rate risk.

The following table provides an overview of the gains and losses arising from fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
hedges (valuation allowance made for the counterparty credit risk not included):

Gains and losses from fair value hedges
in million euros20122013
Gains (+)/losses (–) from hedged items1781
Gains (+)/losses (–) from hedging instruments–1985
Net–2–4

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Cash flowCash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedges:
A cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedge hedges fluctuations in future cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
from recognized assets and liabilities (in the case of interest rate risks), and also transactions that are either planned or highly probable, or firmly contracted unrecognized financial commitments, from which a currency risk arises. The effective portion of a cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedge is recognized in the hedge reserve in equity. Ineffective portions arising from the change in value of the hedging instrument are recognized through profit or loss in the financial result. The gains and losses associated with the hedging measures initially remain in equity and are subsequently recognized through profit or loss in the period in which the hedged transaction influences the results for that period. If the hedging of a contracted item subsequently results in the recognition of a non-financial asset, the gains and losses recognized in equity are usually assigned to the asset on its addition (basis adjustment).

Cash flow hedges (after tax)
in million eurosInitial
balance
Addition
(recognized
in equity)
Disposal
(recognized
through
profit or
loss)
End balance
2013–234 7 10 –217
2012–347 10310–234

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The initial value of the cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedges recognized in equity reflects firstly the fair values of the payer interest swaps used to hedge the cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
risks arising from the floating-interest US dollar liabilities at Henkel of America, Inc. Secondly, it relates to forward exchange contracts for acquisitions in prior years and to one already contracted transaction.

Of the addition in the amount of 7 million euros, 5 million euros relates to interest rate hedging of US dollar liabilities at Henkel of America, Inc. The remaining increase of 2 million euros after taxes on income relates to the contracted transaction. The amortization of the amounts recognized in equity for the US dollar liabilities resulted in a disposal of 10 million euros after tax (15 million euros before tax). The fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the interest rate swaps for the US dollar liabilities of Henkel of America, Inc. amounted to –3 million euros (previous year: –18 million euros) excluding accrued interest. The fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the currency hedges for the contracted transaction amounted to 1 million euros. In the fiscal year under review, ineffective portions amounting to less than 1 million euros (as in the previous year) were recognized in profit or loss under financial result. Both the cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
arising from hedging and the hedged cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
of the US dollar liabilities of Henkel of America, Inc. are expected in 2014 and will be recognized through profit or loss in the period concerned as interest expense. The hedged cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
relating to acquisitions of previous years will only be recognized in operating profit with disposal or in the event of an impairmentimpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
loss on the goodwillgoodwill
Amount by which the total consideration for a company or a business exceeds the netted sum of the fair values of the individual, identifiable assets and liabilities.
attributable to the acquisition of these businesses. The cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
relating to currency hedging and the hedged cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
from the contracted transaction are expected to arise in 2014 and will only be recognized in operating profit with disposal or in the event of an impairmentimpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
loss on the hedged items.

Hedges of a net investment in a foreign entity: The accounting treatment of hedges of a net investment in a foreign entity against translation risk is similar to that applied to cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
hedges. The gain or loss arising from the effective portion of the hedging instrument is recognized in equity through other comprehensive income; the gain or loss of the ineffective portion is recognized directly through profit or loss. The gains or losses recognized directly in equity remain there until disposal or partial disposal of the net investment.

The items recognized in equity relate to translation risks arising from net investments in Swiss francs and US dollars for which the associated hedges were entered into and settled in previous years.

As in the previous year, no hedges of a net investment in a foreign entity were entered into in the past fiscal year. We did not transfer any amounts from equity to profit or loss in the course of the year.

Hedges of a net investment in a foreign entity (after tax)
in million eurosInitial balanceAddition
(recognized
in equity)
Disposal
(recognized
through
profit or
loss)
End balance
201335 35
201269 –3435

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Risks arising from financial instruments, and risk management

As a globally active corporation, Henkel is exposed in the course of its ordinary business operations to credit risks, liquidity risks and market risks (currency translation, interest rate and commodity price risks). The purpose of financial risk management is to restrict the exposure arising from operating activities through the use of selective derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
and non-derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
hedges. Henkel uses derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments exclusively for the purposes of risk management. Without these instruments, Henkel would be exposed to higher financial risks. Changes in exchange rates, interest rates or commodity prices can lead to significant fluctuations in the fair values of the derivatives used. These variations in fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
should not be regarded in isolation from the hedged items, as derivatives and the underlying constitute a unit in terms of countervailing fluctuations.

Management of currency, interest rate and liquidity risks is based on the treasury guidelines introduced by the Management Board, which are binding on the entire corporation. They define the targets, principles and competences of the Corporate Treasury organizational unit. These guidelines describe the fields of responsibility and establish the distribution of these responsibilities between Corporate Treasury and Henkel’s subsidiaries. The Management Board is regularly and comprehensively informed of all major risks and of all relevant hedging transactions and arrangements. Our description of the objectives and fundamental principles adopted in capital management can be found in the Group management report here. There were no major risk clusters in the year under review.

Credit risk

In the course of its business activities with third parties, the Henkel Group is exposed to global credit risk arising from both its operating business and its financial investments. This risk derives from the possibility of a contractual party not fulfilling its obligations.

The maximum credit risk is represented by the carrying value of the financial assets recognized in the statement of financial position (excluding financial investments recognized at equity), as indicated in the following table:

Maximum risk position
in million euros20122013
Trade accounts receivable 2,021 2,370
Derivative financial instruments not included in a designated hedging relationship1417
Derivative financial instruments included in a designated hedging relationship244135
Other financial assets 2,437 2,655
Cash and cash equivalents 1,238 1,051
Total carrying values 5,9546,228

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In its operating business, Henkel is confronted by progressive concentration and consolidation on the customer side, reflected in the receivables from individual customers.

A credit risk management system operating on the basis of a globally applied credit policy ensures that credit risks are constantly monitored and bad debts minimized. This policy, which applies to both new and existing customers, governs the allocation of credit limits and compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
with those limits, individual analyses of customers' creditworthiness based on both internal and external financial information, risk classification, and continuous monitoring of the risk of bad debts at the local level. We also monitor our key customer relationships at the regional and global level. In addition, safeguarding measures are implemented on a selective basis for particular countries and customers inside and outside the eurozone.

Collateral received and other safeguards include country-specific and customer-specific protection afforded by credit insurance, confirmed and unconfirmed letters of credit in export business, as well as warranties, guarantees and cover notes.

We make valuation allowances with respect to financial assets so that the assets are recognized at their fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
at the reporting date. In the case of impairmentimpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
losses that have already occurred but have not yet been identified, we make global valuation allowances on the basis of empirical evidence, taking into account the overdue structure of the trade accounts receivable. Receivables and loans that are more than 180 days overdue are, following the impairmentimpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
test, generally written off.

The decision as to whether a credit risk is accounted for through a valuation allowance account or by derecognition of the impaired receivable depends upon the probability of incurring a loss. For accounts receivable classified as irrecoverable, we report the credit risk directly through derecognition of the impaired receivable or the relevant amount in the valuation allowance account. If the basis for the original impairmentimpairment
Impairments of assets are recorded when the recoverable amount is lower than the carrying amount at which the asset is recognized in the statement of financial position. The recoverable amount is calculated as the higher of fair value less costs to sell (net realizable value) and value in use.
is eliminated, we recognize a reversal through profit and loss.

In all, we recognized valuation allowances on loans and receivables in 2013 in the amount of 17 million euros (previous year: 30 million euros).

The carrying amount for loans and receivables, the term of which was renegotiated because they would have otherwise fallen overdue or been impaired, was 1 million euros (previous year: 1 million euros).

Based on our experience, we do not expect the necessity for any further valuation allowances, other than those described above, on non-overdue, non-impaired financial assets.

Age analysis of non-impaired overdue loans and receivables

Analysis
in million euros Less than 30 days 30 to 60 days 61 to 90 days More than 91 days Total
At December 31, 2013 165 52 20 5 242
At December 31, 2012 151 46 14 4 215

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Credit risks also arise from monetary investments such as cash at bank, securities and the positive fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of derivatives. Such exposure is limited by our Corporate Treasury specialists through the selection of counterparties with strong credit ratings, and limitations on the amounts allocated to individual investments. In financial investments and derivatives trading with German and international banks, we only enter into transactions with counterparties of high financial standing. We invest exclusively in securities from issuers with an investment grade ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
. Our cash deposits can be liquidated at short notice. Our financial investments are broadly diversified across various counterparties and various financial assets. To minimize the credit risk, we agree netting arrangements to offset bilateral receivables and obligations with counterparties. We additionally enter into collateral agreements with selected banks, on the basis of which reciprocal sureties are established twice a month to secure the fair values of contracted derivatives and other claims and obligations. The netting arrangements only provide for a contingent right to offset transactions conducted with a contractual party. Accordingly, associated amounts can be offset only under certain circumstances, such as the insolvency of one of the contractual parties. Thus, the netting arrangements do not meet the offsetting criteria under IAS 32 “Financial Instruments: Presentation.” The following table provides an overview of financial assets and financial liabilities from derivatives that are subject to netting, collateral, or similar arrangements:

Financial assets and financial liabilities from derivatives subject to netting, collateral, or similar arrangements
At December 31
in million euros
Gross amount recognized in
the statement of financial
position1
Amount eligible for
offsetting
 Financial collateral
received/provided
Net amount
2012 2013 2012 2013 2012 2013 2012 2013
Financial assets 258 154 46 19 66 54 146 81
Financial liabilities 52 34 46 19 4 6 11

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In addition to netting and collateral arrangements, investment limits are set, based on the ratings of the counterparties, in order to minimize credit risk. These limits are monitored and adjusted regularly. When determining the limits, we also apply certain other indicators, such as the pricing of credit default swaps (CDS) by banks. A valuation allowance of 2 million euros exists to cover the remaining credit risk from the positive fair values of derivatives (previous year: 1 million euros).

Liquidity risk

Liquidity risk is defined as the risk of an entity failing to meet its financial obligations at any given time.

We minimize this risk by deploying long-term financing instruments in the form of issued bonds. With the help of our existing debt issuance program in the amount of 6 billion euros, this is also possible on a short-term and flexible basis. In order to ensure the financial flexibility of the Henkel Group at any time, the liquidity within the Group is extensively centralized and managed through the use of cash pools. We predominantly invest cash in financial assets traded in a liquid market in order to ensure that they can be sold at any time to procure liquid funds. In addition, the Henkel Group has at its disposal confirmed credit lines of 1.5 billion euros to ensure its liquidity and financial flexibility at all times. These credit lines have terms until 2018. The individual subsidiaries of the Henkel Group additionally have at their disposal committed bilateral loans of 0.1 billion euros with a revolving term of up to one year. Our credit ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
is regularly assessed by the ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
agencies Standard & Poor’s and Moody’s.

Our liquidity risk can therefore be regarded as very low.

The maturity structure of the original and derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial liabilities within the scope of IFRS 7 based on cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
is shown in the following table.

Cash flows from financial liabilities
in Mio EuroRemaining term
December
31, 2012
Carrying
amounts
Up to
1 year
Between
1 and 5
years
More than
5 years
December
31, 2012
Total cash
flow
Bonds1 3,624 1,250 2,486 3,736
Commercial papers2
Liabilities to banks 146 147 147
Trade accounts payable 2,647 2,647 2,647
Sundry financial instruments3 79 74 2 3 79
Original financial instruments 6,496 4,118 2,488 3 6,609
Derivative financial instruments 52 38 15 53
Total 6,548 4,156 2,503 3 6,662

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Cash flows from financial liabilities
in million euros Remaining term
December
31, 2013
Carrying
amounts
Up to
1 year
Between
1 and 5
years
More than
5 years
December
31, 2013
Total cash
flow
Bonds1 2,461 1,146 1,370 2,516
Commercial papers2 35 35 35
Liabilities to banks 117 117 117
Trade accounts payable 2,872 2,872 2,872
Sundry financial instruments3 58 53 2 3 58
Original financial instruments 5,543 4,223 1,372 3 5,598
Derivative financial instruments 34 28 6 34
Total 5,577 4,251 1,378 3 5,632

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Market risk

Market risk exists where the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
or future cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
of a financial instrument may fluctuate due to changes in market prices. Market risks primarily take the form of currency risk, interest rate risk and various price risks (particularly the commodity price risk).

The Corporate Treasury department manages currency exposure and interest rates centrally for the Group and is therefore responsible for all transactions with financial derivatives and other financial instruments. Trading, Treasury Controlling and Settlement (front, middle and back offices) are separated both physically and in terms of organization. The parties to the contracts are German and international banks which Henkel monitors regularly, in accordance with Corporate Treasury guidelines, for creditworthiness and the quality of their quotations. Financial derivatives are used to manage currency exposure and interest rate risks in connection with operating activities and the resultant financing requirements, again in accordance with the Corporate Treasury guidelines. Financial derivatives are entered into solely for hedging purposes.

The currency and interest rate risk management of the Group is supported by an integrated treasury system which is used to identify, measure and analyze the Group's currency exposure and interest rate risks. In this context, "integrated" means that the entire process from the conclusion of financial transactions to their entry in the accounts is covered. Much of the currency trading takes place on internet-based, multibank dealing platforms. These foreign currency transactions are automatically transferred into the treasury system. The currency exposure and interest rate risks reported by all subsidiaries under standardized reporting procedures are integrated into the treasury system by data transfer. As a result, it is possible to retrieve and measure at any time all currency and interest rate risks across the Group and all derivatives entered into to hedge the exposure to these risks. The treasury system supports the use of various risk concepts.

Market risk is monitored on the basis of sensitivity analyses and value-at-riskvalue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
computations. Sensitivity analyses enable estimation of potential losses, future gains, fair values or cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
of instruments susceptible to market risks arising from one or several selected hypothetical changes in foreign exchange rates, interest rates, commodity prices or other relevant market rates or prices over a specific period. Sensitivity analyses are used in the Henkel Group because they enable reasonable risk assessments to be made on the basis of direct assumptions (e.g. an increase in interest rates). Value-at-riskValue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
computations reveal the maximum potential future loss of a certain portfolio over a given period that, based on a specified probability level, will not be exceeded.

Currency risk

The global nature of our business activities results in a huge number of cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
in different currencies. The resultant currency risk breaks down into two categories, namely transaction and translation risks.

Transaction risks arise from possible exchange rate fluctuations causing changes in the value of future foreign currency cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
. The hedging of the resultant exchange rate risks forms a major part of our central risk management activity. Transaction risks arising from our operating business are partially avoided by the fact that we largely manufacture our products in those countries in which they are sold. Residual transaction risks on the operating side are proactively managed by Corporate Treasury. This includes the ongoing assessment of the specific currency risk and the development of appropriate hedging strategies. The objective of our currency hedging is to fix prices based on hedging rates so that we are protected from future adverse fluctuations in exchange rates. Because we limit our potential losses, any negative impact on profits is restricted. The transaction risk arising from major financial payables and receivables is, for the most part, hedged. In order to manage these risks, we primarily utilize forward exchange contracts and currency swaps. The derivatives are designated as "Held for trading" and are recognized at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
through profit or loss. The currency risk that exists within the Group in the form of transaction risk therefore has a direct effect on income rather than being recognized in equity.

The value-at-riskvalue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
pertaining to the transaction risk of the Henkel Group as of December 31, 2013 amounted to 74 million euros after hedging (previous year: 21 million euros). The value-at-riskvalue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
shows the maximum expected risk of loss in a year as a result of currency fluctuations. Starting in fiscal 2013, our value-at-riskvalue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
analysis has been extended to one year in our internal risk reports as it provides a more comprehensive representation of the risk associated with a fiscal year. The risk arises from imports and exports by Henkel AG & Co. KGaAKGaA
Abbreviation for “Kommanditgesellschaft auf Aktien.” A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlimited liability with respect to the company’s creditors (personally liable partner), while the liability for such debts of the other partners participating in the share-based capital stock is limited to their share capital (limited shareholders).
and its foreign subsidiaries. Due to the international nature of its activities, the Henkel Group has a portfolio with more than 50 different currencies. In addition to the US dollar, the main influence on currency risk is exerted by the Russian ruble, the Mexican peso, the Ukrainian hryvnia and the Turkish lira. The value-at-riskvalue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
analysis assumes a time horizon of one year and a unilateral confidence interval of 95 percent. We adopt the variance-covariance approach as our basis for calculation. Volatilities and correlations are determined using historical data. The value-at-riskvalue-at-risk
Method, based on fair value, used to calculate the maximum likely or potential future loss arising from a portfolio.
analysis is based on the operating book positions and budgeted positions in foreign currency, normally with a forecasting horizon of nine months.

Translation risks emanate from changes caused by foreign exchange fluctuations to items on the statement of financial position and the income statement of a subsidiary, and the effect these changes have on the translation of individual company financial statements into Group currency. However, unlike transaction risk, translation risk does not necessarily impact future cash flowscash flows
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
. The Group's equity reflects the changes in carrying value resulting from foreign exchange influences. The risks arising from the translation of the earnings results of subsidiaries in foreign currencies and from net investments in foreign entities are only hedged in exceptional cases.

Interest rate risk

The interest rate risk encompasses those potentially negative influences on profits, equity or cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
in current or future reporting periods arising from changes in interest rates. In the case of fixed-interest financial instruments, changing capital market interest rates result in a fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
risk, as the attributable fair values fluctuate depending on capital market interest rates. In the case of floating interest financial instruments, a cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
risk exists because the interest payments may be subject to future fluctuations.

The Henkel Group obtains and invests the majority of the cash it requires from and in the international money and capital markets. The resulting financial liabilities and our cash deposits may be exposed to the risk of changes in interest rates. The aim of our centralized interest rate management system is to manage this risk through our choice of interest commitments and the use of derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments. Only those derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments that can be modeled, monitored and assessed in the risk management system may be used to hedge the interest rate risk.

Henkel's interest management strategy is essentially aligned to optimizing the net interest result for the Group. The decisions made in interest management relate to the bonds issued to secure Group liquidity, the securities and time deposits used for cash investments, and the other financial instruments. The financial instruments and interest rate derivatives exposed to interest rate risk are primarily denominated in euros and US dollars.

Depending on forecasts with respect to interest rate developments, Henkel enters into derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
financial instruments, primarily interest rate swaps, in order to optimize the interest rate lockdown structure. The coupon interest on the euro-denominated bonds issued by Henkel has been converted from fixed to floating with the aid of interest rate swaps. In the event of an expected rise in interest rate levels, Henkel protects its positions by transacting additional interest rate derivatives as an effective means of guarding against interest rates rising over the short term. A major portion of the financing in US dollars has been converted from floating to fixed interest rates through interest rate swaps. The fixed interest period expires at the end of the first quarter 2014. As a result, the net interest position primarily comprises a structured mix of fixed US dollar and floating euro interest rates.

Our exposure to interest rate risk at the reporting dates was as follows:

Interest rate exposure
in million euros Carrying amounts
2012 2013
Fixed-interest financial instruments  
Euro
US dollar 910 508
Others
910 508
     
Floating-interest financial instruments  
Euro –260 – 827
US dollar 42 168
Chinese yuan –228 – 364
Russian ruble –129 – 106
Others –250 – 338
–825 – 1,467

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The calculation of the interest rate risk is based on sensitivity analyses. The analysis of cash flowcash flow
Inflows and outflows of cash and cash equivalents divided within the statement of cash flows into cash flows from ordinary activities, from investing and acquisition activities, and from financing activities.
risk examines all the main floating-interest financial instruments as of the reporting date. Net debtNet debt
Borrowings less cash and cash equivalents and readily monetizable financial instruments classified as “available for sale” or in the “fair value option,” less positive and plus negative fair values of hedging transactions.
is defined as borrowings less cash and cash equivalents and readily monetizable financial instruments classified as “Available for sale” or according to the “Fair valueFair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
option,” less positive and plus negative fair values of hedging transactions. The interest rate risk figures shown in the table are based on this calculation at the relevant reporting date. When analyzing fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
risk, we assume a parallel shift in the interest curve of 100 basis points, and calculate the hypothetical loss or gain of the relevant interest rate derivatives at the reporting date accordingly. The fixed-interest financial instruments exposed to fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
risk are essentially the fixed-interest rate bank liabilities denominated in US dollars.

The risk of interest rate fluctuations with respect to the earnings of the Henkel Group is shown in the basis point value (BPV) analysis in the following table.

Interest rate risk
in million euros20122013
Based on an interest rate change of
100 basis points
–2 –15
of which:  
Cash flow through profit and loss–8 –15
Fair value recognized in equity through comprehensive
income
6

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Other price risks (commodity price risk)

Uncertainty with respect to raw material price development impacts the Group. Purchase prices for raw materials can affect the net assets, financial position and results of operations of the corporation. The risk management strategy put in place by the Group management for safeguarding against procurement market risk is described in more detail in the risk and opportunities report here .

As a small part of the risk management strategy, cash-settled commodity futures are entered into on the basis of forecasted purchasing requirements in order to hedge future uncertainties with respect to commodity prices. Cash-settled commodity derivatives are only used at Henkel where there is a direct relationship between the hedging derivativederivative
Financial instrument, the value of which changes in response to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment.
and the physical underlying. Henkel does not practice hedge accountinghedge accounting
Method for accounting for hedging transactions whereby the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income.
and is therefore exposed to temporary price risks when holding commodity derivatives. Such price risks arise due to the fact that the commodity derivatives are measured at fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
whereas the purchasing requirement, as a pending transaction, is not measured or recognized. This can lead to losses being recognized in profit or loss and equity. Developments in fair values and the resultant risks are continuously monitored.

The influence of negative commodity price developments on the valuation of the derivatives employed is immaterial to the financial position of the Henkel Group due to the low volume of derivatives used. In the event of a change in commodity prices of 10 percent, the resultant loss from the derivatives would be less than 1 million euros.