24 Financial risk management (IFRS 7)

24.1 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.

24.2 Carrying amounts of financial instruments by category

The following table shows the carrying amounts of financial instruments by category at the end of December:

CHF 1,000

2012

2013

Financial assets held for trading

   

Derivatives

1,554

3,360

   

Loans and receivables

   

Cash and cash equivalents

144,528

150,377

Trade accounts receivable1

77,950

74,384

Other accounts receivable1

2,511

1,414

Non-current financial assets

811

728

Total

225,800

226,903

   

Financial liabilities held for trading

   

Derivatives

1,707

691
   

Financial liabilities measured at amortized cost

   

Bank liabilities and loans

3,189

6,910

Trade accounts payable

10,691

10,292

Other accounts payable1

34

9

Accrued expenses

36,849

32,967

Total

50,763

50,178

1 Excluding receivables and payables arising from POC, VAT/other non-income taxes and social security

24.3 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 and trade accounts receivable.

All domestic and international bank relationships are selected by 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 14) 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.

24.4 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.

24.4.1 Interest rate risks

At the reporting date the Group had the following interest bearing financial instruments: cash and cash equivalents, time deposits, rent deposits 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 19.

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, 2013, 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 0.6 million (2012: CHF 0.5 million) higher/lower, mainly as a result of cash positions held at variable rates.

24.4.2 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 euro (EUR) and 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 was as follows:

 

2012

2013

CHF 1,000

CHF

EUR

USD

Other

CHF

EUR

USD

Other

Net exposure to currency at December 31

2,263

5,691

8,385

4,839

3,656

7,253

17,664

1,759

Cash and cash equivalents

88

6,180

8,123

3,772

406

8,111

14,765

3,733

Trade accounts receivable1

2,175

1,387

981

1,045

3,262

1,074

929

99

Other accounts receivable1

–

–

–

–

–

–

–

–

Non-current financial assets

–

30

–

–

–

30

–

–

Current bank liabilities

–

–

–

–

–

–

–

(1,997)

Trade accounts payable

–

(1,647)

(517)

(45)

(12)

(1,892)

(769)

(53)

Other accounts payable1

–

–

–

–

–

–

–

–

Accrued expenses

–

(215)

–

(27)

–

–

–

(23)

Non-current bank liabilities

–

–

–

–

–

–

–

–

         

Foreign currency forwards

–

–

(202)

94

–

–

2,739

–

Foreign currency options

–

(44)

–

–

–

(70)

–

–

         

1 Excluding receivables and payables arising from POC, VAT/other non-income taxes and social security

At the end of December, if the CHF had moved against the USD and EUR with all other variables held constant, post-tax profit for the year would have been:

CHF 1,000

2012
higher/ (lower)

2013
higher/ (lower)

If CHF had weakened against EUR by 10%

(356)

(9)

If CHF had strengthened against EUR by 10%

525

(386)

If CHF had weakened against USD by 10%

(3,934)

(3,588)

If CHF had strengthened against USD by 10%

3,942

3,593

Foreign currency risks from financial instruments primarily relate to CHF/EUR and 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

CHF 1,000

Positive

Negative

Total

Due within
    

Between 1
and 90 days

Between 91
and 360 days

Between 1
and 2 years

Balance at December 31, 2012

1,554

(1,707)

55,839

–

32,039

23,800

Foreign currency forwards

       

   Sale GBP

–

(7)

1,487

–

1,487

–

   Purchase GBP

13

–

(1,487)

–

(1,487)

–

   Sale USD

1,109

(1,073)

70,486

8,239

38,447

23,800

   Purchase USD

3

(240)

(14,647)

(8,239)

(6,408)

–

   Sale JPY

338

–

2,638

–

2,638

–

   Purchase JPY

–

(250)

(2,638)

–

(2,638)

–

       

Foreign currency options

       

   Call short EUR

–

(137)

4,831

–

4,831

–

   Put long EUR

91

–

(4,831)

–

(4,831)

–

       
 

Fair value

Contract value

CHF 1,000

Positive

Negative

Total

Due within
    

Between 1
and 90 days

Between 91
and 360 days

Between 1
and 2 years

Balance at December 31, 2013

3,360

(691)

66,854

6,137

31,251

29,466

Foreign currency forwards

       

   Sale USD

3,350

(54)

85,718

13,393

42,859

29,466

   Purchase USD

10

(567)

(25,001)

(13,393 )

(11,608)

–

       

Foreign currency options

 

 

 

 

 

 

   Call short EUR

–

(70)

6,137

6,137

–

–

       

24.5 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 line in the amount of 10 % of its annual sales third 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:

CHF 1,000

Carrying amount

Contractual
cash flows

Between 1
and 90 days

Between 91
and 360 days

Between 1
and 2 years

Over 2 years

Balance at December 31, 2012

52,470

54,451

31,284

19,861

2,727

579

Non-derivative financial liabilities

       

Current bank liabilities

66

66

66

–

–

–

Trade accounts payable

10,691

10,691

10,550

141

–

–

Other accounts payable1

34

34

34

–

–

–

Accrued expenses

36,849

38,742

19,937

18,805

–

–

Non-current bank liabilities

3,123

3,234

–

57

2,598

579

       

Derivative financial liabilities

      

Foreign currency forwards

1,570

     

   Outflow

  

50,364

16,660

30,042

3,662

–

   Inflow

 

(48,680)

(15,963)

(29,184)

(3,533)

–

Foreign currency options

137

     

   Outflow

  

–

–

–

–

–

   Inflow

 

–

–

–

–

–

       

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

CHF 1,000

Carrying amount

Contractual
cash flows

Between 1
and 90 days

Between 91
and 360 days

Between 1
and 2 years

Over 2 years

Balance at December 31, 2013

50,869

50,826

32,335

16,435

2,056

–

Non-derivative financial liabilities

       

Current bank liabilities

4,908

4,951

2,087

2,864

–

–

Trade accounts payable

10,292

10,292

10,069

223

–

–

Other accounts payable1

9

9

9

–

–

–

Accrued expenses

32,967

32,967

19,704

13,263

–

–

Non-current bank liabilities

2,002

2,051

–

18

2,033

–
       

Derivative financial liabilities

      

Foreign currency forwards

621

      

   Outflow

  

20,115

13,860

4,469

1,786

–

   Inflow

 

(19,575)

(13,394)

(4,418)

(1,763)

–

Foreign currency options

70

      

   Outflow

  

6,137

–

6,137

–

–

   Inflow

  

(6,121)

–

(6,121)

–

–
       

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

Unused lines of credit amounting to CHF 43.0 million were available to the Group at December 31, 2013 (2012: CHF 44.5 million).