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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
(A) Currency risk
REC operates internationally and is exposed to currency risk. The
Group is primarily exposed to fluctuations in US Dollar (USD), Euro
(EUR), Singapore Dollar (SGD) and Norwegian Krone (NOK), arising
from commercial transactions in currencies other than the entities’
functional currencies, recognized assets and liabilities, and net
investments in foreign operations.
REC’s primary focus is hedging the currency risk of external net cash
flowof the Group in currencies other than NOK. NOK is the functional
currency of the parent company RECASA and the reporting currency
for the RECGroup. Net cash flow is defined as the consolidated
external cash flows fromoperations, finance costs and capital
expenditure. The RECGroup’s policy is to hedge between 50 and
100 percent of forecasted consolidated external net cash flowon a
24month rolling basis. The purpose is to reduce the currency risk of
the expected future net cash flows for the Groupmeasured in NOK.
To manage currency risk arising from commercial transactions,
REC entities use various forward contracts or options. In addition
REC swaps parts of the currency exposure of interest bearing debt
fromNOK to EUR and USD since future cash flows are estimated to
arise from these currencies. REC ASAmanages the currency risk on
an overall REC Group level and establishes external foreign
exchange rate contracts with banks.
See note 30 for currency sensitivities of derivatives and other
financial assets and liabilities. Entering into currency derivative
contracts increase currency risk fromfinancial instruments related
to the financial statements even if the purpose is to reduce the
currency risk of estimated future cash flows in relation to NOK.
This is because by entering into currency derivative contracts
REC establishes financial instruments and consequently exposes
itself for changes in the fair value or cash flows of the financial
instruments. In addition, recognized financial assets and liabilities
(especially internal receivables and payables and external interest
bearing liabilities) in currencies other than the separate entities
functional currencies are affected by changes in currency rates.
In 2010 and 2011, REC has not used hedge accounting according to
IAS 39
Financial Instruments Recognition andMeasurement
for
currency hedges.
Currency developments will also affect translation of the statement
of income and financial position of foreign entities, as well as other
financial items in foreign currencies such as cash equivalents,
receivables, debt and derivatives.
(B) Credit risk
REC has historically realized limited losses on trade receivables, but
in 2010 it increased provisions for loss on trade receivables and
realized these losses in 2011. Policies are in place to ensure that
sales of products aremade to customers with an appropriate credit
history in combinationwith requirements for various payment
guarantees or prepayments and to some extent credit insurance.
However, the difficult market conditions have increased credit risks
related to counterparties. REC has also experienced some disputes
when it has been necessary to call on bank guarantees from
customers. Credit riskmay also increase by abrupt changes inmarket
conditions by changes in government incentives. See note 30 for
further discussion of credit risk related to receivables. Due to the
close down of parts of RECWafer’s production capacity, RECSilicon
ismore exposed to spot sales. Thismay increase the credit risk.
Generally amore challenging and competitivemarket environment
may increase credit risk through sales to financially weaker
customers, extended payment terms and sales into new and
immaturemarkets.
Derivative counterparties and cash transactions are limited to high-
credit-quality financial institutions. For derivatives tradedwith banks,
the credit risk is regarded as limited to any positivemarket value, as
ISDA (International Swaps and Derivatives Association) or master
netting agreements are in place and some interest rate derivative
instruments are settled net. REC only enters into derivative contracts
with a defined group of banks. All the banks currently used as
derivative counterparties have credit ratings in the A or higher
categories assigned by Standard&Poor’s orMoody’s.
Any positive fair values in embedded derivatives relate to
contractually committed future sales of wafers. Parts of these long
term contracts are secured by bank guarantees from high-credit-
quality banks. Some of RECWafer’s prices for deliveries in 2010,
2011 and some future years were originally pre-defined in long-
term contracts. However, due to the market developments,
RECWafer has had to make downward adjustments compared to
the original amounts in sales contracts and in some cases called on
bank guarantees to protect its interest. In some circumstances
REC is involved in legal proceedings with its customers. Any legal
proceedings in relation to the contracts and bank guarantees
encounter procedural risk and may take time to resolve. RECWafer
has also entered into agreements for contract settlements, of which
some contracts contained embedded derivatives. REC had
insignificant positive fair values in embedded derivatives at
December 31, 2011 and 2010.
(C) Liquidity risk
According to the finance policy, REC shall ensure as far as possible
given the market situation that sufficient liquidity is available for
periods with volatility in operating cash flows, and maintain
flexibility for possible new investments by keeping one or more
long-term committed revolving credit facilities and/or cash on
deposit.
Prudent liquidity risk management implies maintaining sufficient
cash and cash equivalents and having availability to funding due to
the dynamic nature of the underlying businesses.
The liquidity risk has increased in the second half of 2011, due to
the difficult financial market and the future market uncertainty and
risk related to REC’s products.
For further details regarding the financing of REC ASA and available
liquidity (see notes 3.3, 17 and 33). It should be noted the maturity
schedules of REC’s borrowings, with significant maturities in 2013
and 2014. REC will work on reducing these maturity risks, primarily
through refinancing of debt.