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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 Classes of financial instruments

 

 

 

CHF 1,000

Cash and cash equivalents

Current derivatives

Trade and other receivables

Non-current 
financial assets

Total 

assets

Current financial 
liabilities

Trade and other payables/accrued expenses

Non-current 
financial liabilities

Total 

liabilities

Financial instruments 

 measured at fair value

 

 

 

 

 

 

 

 

 

Currency forwards and options

3,038

36

3,074

(5,721)

(1,101)

(6,822)

Contingent consideration2

(9,273)

(9,273)

 

 

 

 

 

 

 

 

 

 

Financial instruments 

 measured at amortized costs

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

246,744

246,744

Receivables

95,763

95,763

Rent and other deposits

341

656

997

Current bank liabilities

(1,103)

(1,103)

Bank loans

(956)

(704)

(1,660)

Payables and accrued expenses

(50,329)

(50,329)

 

 

 

 

 

 

 

 

 

 

Total financial instruments

246,744

3,038

96,104

692

346,578

(7,780)

(50,329)

(11,078)

(69,187)

 

 

 

 

 

 

 

 

 

 

Reconciling items1

10,725

10,725

(14,177)

(14,177)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

246,744

3,038

106,829

692

357,303

(7,780)

(64,506)

(11,078)

(83,364)

  1. Receivables/payables arising from POC, VAT/other non-income taxes and social security
  2. See note 3.2

 

 

 

CHF 1,000

Cash and cash equivalents

Current derivatives

Trade and other receivables

Non-current 
financial assets

Total 

assets

Current financial 
liabilities

Trade and other payables/accrued expenses

Non-current 
financial liabilities

Total 

liabilities

Financial instruments 

 measured at fair value

 

 

 

 

 

 

 

 

 

Currency forwards

 – 

1,017 

 – 

157 

1,174 

 (949) 

 – 

 (334) 

 (1,283) 

Contingent consideration2

 – 

 – 

 – 

 – 

 – 

 (4,872) 

 – 

 (6,767) 

 (11,639) 

 

 

 

 

 

 

 

 

 

 

Financial instruments 

 measured at amortized costs

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

309,412 

 – 

 – 

 – 

309,412 

 – 

 – 

 – 

 – 

Receivables

 – 

 – 

112,382 

 – 

112,382 

 – 

 – 

 – 

 – 

Rent and other deposits

 – 

 – 

433 

674 

1,107 

 – 

 – 

 – 

 – 

Current bank liabilities

 – 

 – 

 – 

 – 

 – 

 (4,329) 

 – 

 – 

 (4,329) 

Bank loans

 – 

 – 

 – 

 – 

 – 

 – 

 – 

 (1,229) 

 (1,229) 

Payables and accrued expenses

 – 

 – 

 – 

 – 

 – 

 – 

 (59,193) 

 – 

 (59,193) 

 

 

 

 

 

 

 

 

 

 

Total financial instruments

309,412 

1,017 

112,815 

831 

424,075 

 (10,150) 

 (59,193) 

 (8,330) 

 (77,673) 

 

 

 

 

 

 

 

 

 

 

Reconciling items1

 – 

 – 

11,878 

 – 

11,878 

 – 

 (16,597) 

 – 

 (16,597) 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

309,412 

1,017 

124,693 

831 

435,953 

 (10,150) 

 (75,790) 

 (8,330) 

 (94,270) 

  1. Receivables/payables arising from POC, VAT/other non-income taxes and social security
  2. See note 3.2

 

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, 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 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, 2017, 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 1.2 million (2016: CHF 0.9 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 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 was as follows: 

 

2016

2017

CHF 1,000

CHF

EUR

USD

Other

CHF

EUR

USD

Other

Derivatives

 – 

 – 

 (3,831) 

83 

 – 

 – 

 (79) 

 (30) 

Contingent consideration

 – 

 – 

 – 

 – 

 – 

 (2,090) 

 – 

 – 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

674 

12,811 

1,048 

2,364 

568 

9,336 

2,009 

687 

Receivables

12 

2,076 

1,452 

950 

717 

1,670 

2,411 

2,584 

Rent and other deposits

 – 

42 

 – 

 – 

 – 

42 

 – 

 – 

Current bank liabilities 

 – 

 – 

 – 

 (1,103) 

 – 

 – 

 – 

 (4,322) 

Bank loans

 – 

 – 

 – 

 – 

 – 

 – 

 – 

 – 

Payables and accrued expenses

11 

 (3,035) 

 (861) 

 (496) 

 (115) 

 (3,849) 

 (1,278) 

 (231) 

 

 

 

 

 

 

 

 

 

Net exposure to currency at December 31

697 

11,894 

 (2,192) 

1,798 

1,170 

5,109 

3,063 

 (1,312) 

At December 31, 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

2016

higher/(lower)

2017

higher/(lower)

If CHF had weakened against EUR by 10%

945 

373 

If CHF had strengthened against EUR by 10%

(945)

 (373) 

If CHF had weakened against USD by 10%

(8,067)

 (8,131) 

If CHF had strengthened against USD by 10%

8,078

8,194 

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 

 

Positive

Negative

Total

Due within

CHF 1,000

 

 

 

1 and 90 days

91 and 360 days

1 and 2 years

Foreign currency forwards

 

 

 

 

 

 

 Sell USD

212

(5,175)

130,433

40,760

52,479

37,194

 Buy USD

1,174

(42)

(37,194)

(21,399)

(15,795)

 Sell CNY

108

7,164

7,164

 Buy CNY

(25)

(7,164)

(7,164)

Foreign currency options

 

 

 

 

 

 

 Sell USD

(1,580)

35,665

35,665

 Buy USD

1,580

(35,665)

(35,665)

 

 

 

 

 

 

 

Balance at December 31, 2016

3,074

(6,822)

93,239

19,361

36,684

37,194

 

 

Fair value

Contract value 

 

Positive

Negative

Total

Due within

CHF 1,000

 

 

 

1 and 90 days

91 and 360 days

1 and 2 years

Foreign currency forwards

 

 

 

 

 

 

 Sell USD

760 

 (1'099) 

134'941 

49'202 

50'177 

35'562 

 Buy USD

413 

 (152) 

 (35'562) 

 (20'460) 

 (15'102) 

 - 

 Sell CNY

 - 

 (32) 

7'315 

7'315 

 - 

 - 

 Buy CNY

 - 

 (3'112) 

 (3'112) 

 - 

 - 

 

 

 

 

 

 

 

Balance at December 31, 2017

1'174 

 (1'283) 

103'582 

32'945 

35'075 

35'562 

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 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:

 

 

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

Derivative financial liabilities 

 

 

 

 

 

 

Foreign currency forwards

5,242

 

 

 

 

 

 Outflow

 

104,423

18,826

52,479

33,118

 Inflow 

 

(97,365)

(17,081)

(49,269)

(31,015)

Foreign currency options

1,580

 

 

 

 

 

 Outflow

 

35,665

35,665

 Inflow

 

(34,076)

(34,076)

 

 

 

 

 

 

 

Non-derivative financial liabilities

 

 

 

 

 

 

Current bank liabilities 

1,103

1,104

1,104

Payables and accrued expenses1

50,329

50,330

31,768

18,524

38

Bank loans

1,660

1,679

957

6

5

711

Contingent consideration

9,273

10,190

 – 

5,095

5,095

 

 

 

 

 

 

 

Balance at December 31, 2016

69,187

71,950

37,163

21,740

7,203

5,844

  1. Excluding reconciling items (see note 24.2)

 

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

Derivative financial liabilities 

 

 

 

 

 

 

Foreign currency forwards

1,283 

 

 

 

 

 

 Outflow

 

77,465 

27,776 

29,229 

20,460 

 – 

 Inflow 

 

 (74,939) 

 (27,108) 

 (28,386) 

 (19,445) 

 – 

 

 

 

 

 

 

 

Non-derivative financial liabilities

 

 

 

 

 

 

Current bank liabilities 

4,329 

4,329 

4,329 

 – 

 – 

 – 

Payables and accrued expenses1

59,193 

59,193 

36,546 

22,647 

 – 

 – 

Bank loans

1,229 

1,275 

19 

22 

1,231 

Contingent consideration

11,639 

11,639 

4,872 

 – 

6,767 

 – 

 

 

 

 

 

 

 

Balance at December 31, 2017

77,673 

78,962 

46,418 

23,509 

7,804 

1,231 

  1. Excluding reconciling items (see note 24.2)

 

Unused lines of credit amounting to CHF 140.7 million were available to the Group at December 31, 2017 (2016: CHF 44.8 million). In addition, the Group had uncommitted lines of credit amounting to CHF 90.0 million for the purpose of financing possible future business combinations.

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