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28 FINANCIAL RISK MANAGEMEnt

28.1 INTRODUCTION

The Group’s activities expose it to a variety of financial risks: credit risk, market risk (including interest rate risk and foreign currency risk) and liquidity risk. The Group’s risk management focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to economically hedge certain risk exposures. 

 

Financial risk management is carried out by a central treasury department (Group Treasury) under policies approved by the Board of Directors (Treasury Policy). Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The ‘Treasury Policy’ provides principles for specific areas, such as credit risk, interest rate risk, foreign currency risk, use of derivative financial instruments and investment of excess liquidity. 

 

This note presents information about the Group’s exposure to each of the risks arising from financial instruments and the Group’s objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these consolidated financial statements.

 

28.2 CLASSES OF FINANCIAL INSTRUMENTS

 

 

Cash and cash ­equivalents

Other ­current financial assets

Trade and other receivables

Non-current financial assets

Total 

assets

2020

Current financial liabilities

Trade 
and other payables/accrued expenses

Non-current financial liabilities

Total 

liabilities

2020

CHF 1,000

 

 

 

 

 

 

 

 

 

Derivatives not designated

as hedging instruments

 

 

 

 

 

 

 

 

 

Currency forwards and options

 - 

 2,478 

 - 

 - 

 2,478 

 (694) 

 - 

 - 

 (694) 

 

 

 

 

 

 

 

 

 

 

Financial instruments measured

at fair value through OCI (FVOCI)

 

 

 

 

 

 

 

 

 

Unquoted equity investment

 - 

 - 

 - 

 4,325 

 4,325 

 - 

 - 

 - 

 - 

 

 

 

 

 

 

 

 

 

 

Financial instruments measured at amortized costs

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 128,440 

 - 

 - 

 - 

 128,440 

 - 

 - 

 - 

 - 

Time deposits

 20,000 

320,000 

 - 

 - 

 340,000 

 

 

 

 - 

Receivables

 - 

 - 

 122,911 

 - 

 122,911 

 - 

 - 

 - 

 - 

Rent and other deposits

 - 

 - 

 600 

 1,026 

 1,626 

 - 

 - 

 - 

 - 

Payables and accrued expenses

 - 

 - 

 - 

 - 

 - 

 - 

 (88,600) 

 - 

 (88,600) 

Bank loans

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 (734) 

 (734) 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Lease liabilities

 - 

 - 

 - 

 - 

 - 

 (10,416) 

 - 

 (27,575) 

 (37,991) 

 

 

 

 

 

 

 

 

 

 

Total financial instruments

 148,440 

 322,478 

 123,511 

 5,351 

 599,780 

 (11,110) 

 (88,600) 

 (28,309) 

(128,019) 

 

 

 

 

 

 

 

 

 

 

Reconciling items1

 - 

 - 

 11,936 

 - 

 11,936 

 - 

 (16,981) 

 - 

 (16,981) 

 

 

 

 

 

 

 

 

 

 

Balance at December 31

 148,440 

 322,478 

 135,447 

 5,351 

 611,716 

 (11,110) 

 (105,581) 

 (28,309) 

(145,000) 

1 Receivables/payables arising from VAT/other non-income taxes and social security 

 

 

Cash and cash ­equivalents

Other ­current financial assets

Trade and other receivables

Non-current financial assets

Total 

assets

2021

Current financial liabilities

Trade 
and other payables/accrued expenses

Non-current financial liabilities

Total 

liabilities

2021

CHF 1,000

 

 

 

 

 

 

 

 

 

Derivatives not designated

as hedging instruments

 

 

 

 

 

 

 

 

 

Currency forwards and options

 - 

 908 

 - 

 - 

 908 

 (562) 

 - 

 - 

 (562) 

 

 

 

 

 

 

 

 

 

 

Financial instruments measured

at fair value through OCI (FVOCI)

 

 

 

 

 

 

 

 

 

Unquoted equity investment

 - 

 - 

 - 

 4,223 

 4,223 

 - 

 - 

 - 

 - 

 

 

 

 

 

 

 

 

 

 

Financial instruments measured at amortized costs

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

121,006 

121,006 

-

Time deposits

120,000 

120,000 

-

-

-

 - 

Receivables

128,491 

128,491 

-

Rent and other deposits

2,357 

1,320 

3,677 

-

Payables and accrued expenses

(124,924) 

(124,924)

Bank loans

(654) 

(654)

Bond

-

(249,507) 

(249,507)

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Lease liabilities

(13,053) 

(50,445) 

(63,498)

 

 

 

 

 

 

 

 

 

 

Total financial instruments

121,006 

120,908 

130,848 

5,543 

378,305 

(13,615) 

(124,924) 

(300,606) 

(439,145)

 

 

 

 

 

 

 

 

 

 

Reconciling items1

10,648 

10,648

(16,239) 

(16,239)

 

 

 

 

 

 

 

 

 

 

Balance at December 31

121,006 

120,908 

141,496 

5,543 

388,953 

(13,615) 

(141,163) 

(300,606) 

(455,384)

1 Receivables/payables arising from VAT/other non-income taxes and social security .

 

28.3 CREDIT RISKS

Credit risk is the risk of financial loss to the Group if a customer or counterparty to financial instruments fails to meet its contractual obligations, and arises principally from cash and cash equivalents, time deposits, derivatives and trade accounts receivable.

 

All domestic and international bank relationships are selected by the CFO and Group Treasury. Only banks and financial institutions that are ranked in the top class of the respective country are accepted.

 

The credit risk with trade accounts receivable (see note 16) is limited, as the Group has numerous clients located in various geographical regions. The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. For the purpose of risk control, the customers are grouped as follows (risk groups): governmental organizations, listed public limited companies, and other customers. Credit limits are established for each customer, whereby the credit limit represents the maximum open amount without requiring payments in advance or letters of credit; these limits are reviewed regularly (credit check).

 

The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. There are no commitments that could increase this exposure to more than the carrying amounts.

28.4 MARKET RISKS

Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and other prices will affect the Group’s result or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

 

28.4.1 Interest rate risks

At the reporting date the Group had the following interest-bearing financial instruments: cash and cash equivalents, time deposits, rent deposits, bond and bank liabilities. All cash and cash equivalents mature or reprise in the short-term, no longer than three months.

 

Borrowings mainly bear interest at fixed rates. Cash and cash equivalents and borrowings issued at variable rates expose the Group to cash flow interest rate risk. For the interest rate profile of the Group’s interest-bearing financial liabilities refer to note 22.

 

The Group does not account for any fixed rate borrowings at fair value through profit or loss. Therefore a change in interest rates at the reporting date would not affect profit or loss.

 

The Group Treasury manages the interest rate risk in order to reduce the volatility of the financial result as a consequence of interest rate movements. For the decision whether new borrowings shall be arranged at a variable or fixed interest rate, the Group Treasury focuses on an internal long-term benchmark interest rate and considers the amount of cash and cash equivalents held at a variable interest rate. Currently the interest rate exposure is not hedged.

 

At December 31, 2021, if interest rates had been 50 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been CHF 0.4 million (2020: CHF 0.5 million) higher/lower, mainly as a result of cash positions held at variable rates.

 

28.4.2 Foreign currency risks

The Group incurs foreign currency risks on sales, purchases and borrowings denominated in a currency other than the functional currency of the respective Group companies. On a consolidated basis, the Group is also exposed to currency fluctuations between the Swiss franc (CHF) and the functional currencies of its Group companies. The two major currencies giving rise to currency risks are the Euro (EUR) and the US dollar (USD).

 

The Group centralizes its foreign currency exposure in a few locations only. The hedging policy of the Group is to cover the foreign currency exposure to a certain percentage of the operating activities (forecast sales and purchases). The Group uses forward exchange contracts, currency options and swaps to hedge its foreign currency risk on specific future foreign currency cash flows. These contracts have maturities of up to 18 months.

 

The Group does not hedge its net investment in foreign entities and the related foreign currency translation of local earnings. 

 

The Group’s exposure to foreign currency risk arising on financial instruments denominated in a currency different from the functional currency of the entity holding the instruments is as follows:

 

 

31.12.2020

31.12.2021

 

CHF

EUR

USD

Other

CHF

EUR

USD

Other

CHF 1,000

 

 

 

 

 

 

 

 

Derivatives

 - 

 - 

 1,981 

 (197) 

206 

140

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 408 

 5,703 

 22,215 

 3,241 

269 

16,902 

2,355 

4,279

Receivables

 225 

 3,461 

 10,465 

 902 

(88) 

2,770 

1,494 

1,523

Rent and other deposits

 - 

 118 

 - 

 - 

41 

-

Payables and accrued expenses

 (213) 

 (3,124) 

 (1,925) 

 (456) 

(84) 

(1,068) 

(3,271) 

(3,915)

Lease liabilities

 - 

 - 

 - 

 (15) 

(35)

 

 

 

 

 

 

 

 

 

Total net exposure to currency

 420 

 6,158 

 32,736 

 3,475 

97 

18,645 

784 

1,992

 

At December 31, if the CHF had moved against the USD and EUR with all other variables held constant, post-tax profit and other comprehensive income (OCI) for the year would have been:

 

 

31.12.2020

31.12.2021

 

Impact on profit

Impact on OCI1

Impact on profit

Impact on OCI1

 

higher/(lower)

higher/(lower)

CHF 1,000

 

 

 

 

If CHF had weakened against EUR by 10%

 328 

 1,606 

1,489 

697

If CHF had strengthened against EUR by 10%

 (328) 

 (1,606) 

(1,489) 

(697)

If CHF had weakened against USD by 10%

 (3,142) 

 2,378 

(8,709) 

1,077

If CHF had strengthened against USD by 10%

 3,142 

 (2,378) 

8,717 

(1,077)

1 Other comprehensive income

 

Foreign currency risks from financial instruments with impact on post-tax profit primarily relate to CHF/USD forwards and options.

 

The derivative financial instruments used as economic hedges of foreign currencies are summarized in the table below:

 

 

 Fair value

 Contract value 

 

Positive

Negative

Total

 Due within

 

 

 

 

1 and 90 days

91 and 360 days

1 and 2 years

CHF 1,000

 

 

 

 

 

 

Foreign currency forwards

 

 

 

 

 

 

 Sell USD

2,478 

78,065 

45,545 

32,520 

-

 Buy USD

(497) 

(10,899) 

(5,405) 

(5,494) 

-

 Sell GBP

(167) 

8,355 

8,355 

-

 Sell SEK

(8) 

404 

404 

-

 Sell JPY

(10) 

4,198 

4,198 

-

 Sell AUD

(12) 

579 

579 

-

 

 

 

 

 

 

 

Balance at December 31, 2020

2,478 

(694) 

80,702 

53,676 

27,026 

-

 

 

Fair value

 Contract value 

 

Positive

Negative

Total

 Due within

 

 

 

 

1 and 90 days

91 and 360 days

1 and 2 years

CHF 1,000

 

 

 

 

 

 

Foreign currency forwards

 

 

 

 

 

 

 Sell USD

722 

(438) 

110,826 

48,749 

62,077 

-

 Buy USD

(78) 

(12,416) 

(6,208) 

(6,208) 

-

 Sell GBP

(46) 

7,054 

7,054 

-

 Sell SEK

655 

655 

-

 Sell JPY

183 

8,776 

8,776 

-

 

 

 

 

 

 

 

Balance at December 31, 2021

908 

(562) 

114,895 

59,026 

55,869 

-

 

28.4.3 Hedge accounting

In connection with the acquisition of Paramit, the Group entered into a deal contingent forward agreement to purchase USD 677 million and two normal plain vanilla forwards to purchase another USD 350 million (total USD 1’027 million). The hedging agreements with an average forward rate of 0.92305 CHF/USD have matured at the day of the closing of the acquisition (August 2, 2021). On this day the purchase price in USD was transferred to the seller and a bridge loan in CHF was granted to the Group by a bank until the final financing structure of the transaction would be ready. 

 

As the targeted transaction was considered as highly probable and all other conditions were met, the Group applied cash flow hedge accounting. The proportion of the resulting loss on the hedging instruments that was determined to be effective (CHF 13.2 million) was recognized in other comprehensive income and allocated to the cash flow hedge reserve. Upon the closing of the transaction the amount of the cash flow hedge reserve was transferred to goodwill. The remaining loss of the hedging instruments was considered as hedge ineffectiveness (CHF 4.4 million, mainly the contingent charge of the deal contingent forward) that was recognized in profit or loss. 

 

28.5 LIQUIDITY RISK

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Group Treasury manages the Group’s liquidity to ensure sufficient liquidity to meet all liabilities when due, under both normal and stressed conditions, without facing unacceptable losses or risking damage to the Group’s reputation.

 

It is the Group’s target to have a cash reserve or committed credit lines in the amount of 10% of its annual sales budget centralized at Tecan Group Ltd. and Tecan Trading AG. Changes to this target are subject to the Board of Directors’ approval. All cash in Tecan Group Ltd. and Tecan Trading AG, which does not count against such a cash reserve, is considered as excess liquidity. Excess liquidity can be invested in instruments such as time deposits, government and corporate bonds, shares of publicly listed companies and capital protected instruments. 

 

The following are the contractual maturities of financial liabilities, including interest payments:

 

 

Carrying amount

Contractual cash flows

Between 1 
and 90 days

Between 91 and 360 days

Between 1 
and 2 years

Over 2 years

CHF 1,000

 

 

 

 

 

 

Derivative financial liabilities 

 

 

 

 

 

 

Foreign currency forwards

694

 

 

 

 

 

Outflow

 

24,900 

16,074 

8,826 

-

Inflow 

 

(24,200) 

(15,724) 

(8,476) 

-

 

 

 

 

 

 

 

Non-derivative financial liabilities

 

 

 

 

 

 

Payables and accrued expenses1

88,600 

88,600 

30,025 

58,575 

-

Bank loans

734 

749 

739

Lease liabilities

37,991 

38,646 

2,848 

7,895 

9,367 

18,536

 

 

 

 

 

 

 

Balance at December 31, 2020

128,019 

128,695 

33,223 

66,825 

9,372 

19,275

  1. Excluding reconciling items (see note 28.2)

 

 

Carrying amount

Contractual cash flows

Between 1 
and 90 days

Between 91 and 360 days

Between 1 
and 2 years

Over 2 years

CHF 1,000

 

 

 

 

 

 

Derivative financial liabilities 

 

 

 

 

 

 

Foreign currency forwards

562

 

 

 

 

 

Outflow

 

53,914 

27,477 

26,437 

-

Inflow 

 

(53,290) 

(27,054) 

(26,237) 

-

 

 

 

 

 

 

 

Non-derivative financial liabilities

124,924 

124,926 

75,383 

49,499 

19 

25

Payables and accrued expenses1

654 

663 

658 

-

Bank loans

249,507 

250,500 

125 

125 

250,250

Lease liabilities

63,498 

65,762 

3,534 

10,206 

12,725 

39,297

 

 

 

 

 

 

 

Balance at December 31, 2021

439,145 

442,475 

79,340 

60,035 

13,527 

289,572

  1. Excluding reconciling items (see note 28.2)

Unused lines of credit amounting to CHF 40.0 million (2020: CHF 440.0 million) are available to the Group at December 31, 2021. In addition, the Group has uncommitted lines of credit amounting to CHF 340.0 million (2020: CHF 94.9 million) for the purpose of financing possible future business combinations.

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