technicolor - 2018 Registration document

6 FINANCIAL STATEMENTS

NOTE 8 FINANCIAL ASSETS, FINANCING LIABILITIES & DERIVATIVE FINANCIAL INSTRUMENTS

MARKET RISK MANAGEMENT 8.2.2 Operational foreign exchange risk 8.2.2.1 Translation Risk The Group’s consolidated financial statements are presented in euro. Thus, assets, liabilities, revenues and expenses denominated in currencies other than euro must be translated into euro at the applicable exchange rate to be included in the consolidated financial statements. The fluctuation of exchange rates can have an impact on the value of the assets, liabilities, revenues and expenses in the consolidated financial statements, even if the value of these items has not changed in their original currency. The Group’s policy is not to hedge translation risk. Translation risk is measured by doing sensitivity analyses on the main exposures in the subsidiaries where the functional currency is different from the euro (see below). Transaction Risk Foreign currency transaction risk occurs when purchases and sales are made by Group entities in currencies other than their functional currencies. The Group’s main transaction risk is its U.S. dollar exposure versus euro. After offsetting the U.S. dollar revenues of its European activities with the U.S. dollar costs related to purchases of finished goods and components by its European affiliates, the net U.S. dollar exposure versus euros for continuing operations was net costs of U.S.$82 million in 2018 (net costs of U.S.$116 million in 2017). The policy of the Group is to have its subsidiaries: to the extent possible denominate their costs either in the same • currencies as their sales; regularly report their projected foreign currency needs and receipts to • the Group Treasury Department which then nets purchases and sales in each currency on a global basis. Exposures that remain after this process are generally hedged with banks using foreign currency forward contracts.

For products with a short business cycle which represent the majority of the exposures, the Group’s policy is to hedge on a short-term basis up to six months. For products and services which are sold on a longer-term basis, hedges may be put in place for periods greater than six months. Regardless of the term of the hedging, the Treasury department uses short-term foreign currency derivatives (maturity of several days to several months) that it rolls over as a function of is global exposure which is monitored on a daily basis. The derivative instruments used are described in note 8.6. Transaction risk on commercial exposures is measured by consolidating the Group’s exposures and doing sensitivity analyses on the main exposures (see below). Risk on investments in Foreign Subsidiaries The Group’s general policy is to examine and hedge on a case by case basis the currency risk on its investments in foreign subsidiaries. The variations in the euro value of investments in foreign subsidiaries are booked under “Cumulative translation adjustment” in the Group’s consolidated statement of financial position. At December 31, 2018, no hedges of this type were outstanding. Sensitivity Analysis The Group’s main exposure is the fluctuation of the U.S. dollar against the euro. The Group believes a 10% fluctuation in the U.S. dollar versus the euro is reasonably possible in a given year and thus the table below shows the impact of a 10% increase in the U.S. dollar versus the euro on the Group’s Profit from continuing operations before tax and net finance costs and on the currency translation adjustment component of equity. A 10% decrease in the U.S. dollar versus the euro would have a symmetrical impact in the opposite amount. These calculations assume no hedging is in place.

Total

2018 (in million euros)

Transaction

Translation

(16)

(7)

(9)

Profit from continuing operations before tax and net finance costs (1)

89

Equity Impact (cumulative translation adjustment) (2)

Profit impact: (1) transaction impact calculated before hedging by applying a 10% increase in the U.S. dollar/euro exchange rate to the net U.S. dollar exposure (sales minus purchases) of affiliates - which have the euro as functional currency. translation impact calculated before hedging by applying a 10% increase in the U.S. dollar/euro exchange rate to the profits of the affiliates with the U.S. dollar as functional - currency. Equity impact: calculated by applying a 10% increase in the U.S. dollar/euro exchange rate to the unhedged net investments in foreign subsidiaries that are denominated in U.S. (2) dollar.

214

TECHNICOLOR REGISTRATION DOCUMENT 2018