Note 22

The Group’s risk management policy aims to identify and analyze the financing risks affecting the Group, set appropriate risk levels and controls, and monitor the realization of risks in relation to the risk levels. The purpose of managing financing risks is to reduce the volatility of earnings, the balance sheet, and cash flows while ensuring that the Group has sufficient liquidity, as well as effective and competitive financing. The Board of Directors is responsible for approving the Group’s general risk management principles. The risk management principles and methods are reviewed regularly to ensure that they describe the market conditions and the Group’s operating models.

The main financing risks that the Group is exposed to are market risk (currency risk), liquidity risk, and credit risk. The Group’s management assesses the risks and purchases appropriate hedging instruments. The Group’s risk management methods include foreign subsidiaries contracts and credit insurance for trade receivables. The Group does not have any risk concentrations related to financing risks.

MARKET RISK

Currency risk

Currency risk refers to the cash flow, income, and balance sheet uncertainty resulting from changes in exchange rates. The Group operates internationally and, therefore, is exposed to risks arising from fluctuations in various exchange rates. In addition, the Group is exposed to translation difference risks when the net investments in foreign subsidiaries are translated into the parent company’s operating currency (the euro).

The Group’s currency risk management policy aims to limit the uncertainty due to exchange rate changes in the Group’s income, balance sheet, and cash flows. The Group’s business is exposed to foreign exchange risks as the Group’s sales and purchases and other transactions take place in the companies’ local currencies and in U.S. dollars, in addition to the Group’s operating currency. The most important currencies for the Group are the U.S. dollar, the Swedish krona, the Danish krone, and the Norwegian krone. In the 2018 financial period, 30.0% of the Group’s sales were denominated in foreign currencies, and 63.1% of purchases, including fixed and variable expenses, were denominated in foreign currencies. The Group hedges its foreign exchange risk using foreign subsidiaries contracts. IFRS 9 hedge accounting is not applied to these derivatives; instead, changes in the fair value are recognized through profit or loss. The fair values and nominal values of derivatives are described in Note 19.

The following table shows the transaction risk for each currency and a sensitivity analysis of exchange rate changes.

In addition, the Group is exposed to currency risks from its net investments in foreign subsidiaries (translation difference risk). Foreign net investments are translated into the Group parent company’s operating currency (the euro). The Group’s risk management principle is not to hedge currency risks on net investments made in foreign units as these are considered minor risks.

CREDIT RISK

Credit risk is the risk that a counterparty to a financial instrument is unable to meet its contractual obligations and, therefore, gives rise to a financial loss for the Group. The Group’s credit risk mainly arises due to the credit risk associated with trade receivables from customers. This credit risk is determined on the basis of the open position and the counterparty’s creditworthiness. As the Group’s customer base is diverse and distributed over a wide geographic area, the Group has no credit risk concentrations related to any specific customer segment.

The Group’s credit risk policy specifies the creditworthiness requirements for customers and the counterparties to other financial contracts. The Group assesses its customers’ creditworthiness regularly and monitors its customers’ payment behavior. The Group reduces and manages its credit risk by taking out credit insurance from Euler Hermes to covers trade receivables from customers. Credit insurance covers potential credit loss risks for individual customers, so the Group’s financial management organization assesses the need for credit insurance cover for each customer and insures the receivables from each customer on the basis of this assessment. The age distribution of trade receivables is described in Note 15.

In addition, the Group is exposed to credit risk when it invests its cash assets in financial institutions and when it uses derivative instruments. Credit risk is managed by making agreements with well-established financial institutions in accordance with the Group’s risk management policy.

Determining expected credit losses

The Group determines its expected credit losses using the simplified approach permitted by IFRS 9, whereby the accounting of expected credit losses on trade receivables may be based on a provision matrix. In such cases, the credit loss provision is determined on the basis of the expected credit losses over the entire period of validity of the trade receivables.

The Group makes use of its experience of prior credit losses realized on trade receivables and historical data to evaluate the expected credit losses on these financial assets over their entire period of validity. The evaluation also takes into consideration the financial climate and the Group’s estimate of future development. The Group updates its estimates concerning the future and monitoring based on historical data on every reporting date. Expected credit losses are determined on the basis of fixed provision percentages according to the number of days by which the payments related to trade receivables are overdue. The expected credit loss is calculated by multiplying the gross carrying amount of trade receivables by the fixed provision percentage determined for the age of the specific trade receivable. Changes in expected credit losses are recognized on the income statement under other operating expenses.

The amounts of expected credit losses are described in Note 15.

Based on its financial history, the Group has a small amount of realized credit losses. The Group ultimately recognizes a credit loss on a trade receivable when the management considers it unreasonable to expect payment to be received. Realized credit losses are recognized on the income statement under other operating expenses.

The Group has a related-party loan receivable measured at deferred acquisition cost. The terms of the receivable are described in Note 26. The guarantees for the loans are the shares that were subscribed by key personnel using the loans. Expected credit losses are not recognized on receivables from related parties as the Group has a guarantee that covers the principal receivable and the interest payable.

SOLVENCY RISK

Solvency risk is the risk that the Group will have difficulties meeting its obligations related to financial liabilities. The aim of solvency risk management is to continuously maintain an adequate standard of liquidity and ensure sufficient financing as required for working capital and investment expenses. In accordance with the Group’s risk management practices, the Group monitors the amount of financing required by the business and the solvency forecasts. The Group’s management has not identified any significant solvency risk concentrations in its financial assets or sources of financing.

In the assessment of the Group’s management, the Group’s solvency is good. At the end of the 2018 financial period, the Group had no loans from financial institutions. At the end of the 2018 financial period, the Group’s cash and cash equivalents totaled EUR 1,218 thousand (Dec 31, 2017: EUR 10,871). The Group endeavors to secure the availability and flexibility of financing using an overdraft facility. On December 31, 2018, the Group had access to an overdraft facility worth EUR 5,000 thousand, none of which had been withdrawn. The Group’s overdraft agreement includes a covenant related to the Group’s equity ratio, and the Group satisfied this covenant in the 2018 financial period.

The following is a maturity analysis of the Group’s financial liabilities and derivative instruments based on the relevant contracts. The figures are not discounted, and they include interest payments as well as principal repayments.

CAPITAL MANAGEMENT

The Group’s capital management policy aims to maintain the optimal capital structure for the group to safeguard the ordinary operating conditions of the business and increase shareholder value over the long term. Capital management applies to the shareholders’ equity indicated on the consolidated balance sheet. The structure of the shareholders’ equity is mainly affected by dividends and share issues. The Group has no external capital requirements. The Group’s management and the parent company’s Board of Directors monitor the company’s capital structure and liquidity trends. The purpose of monitoring is to ensure that the company is solvent and has a flexible capital structure in order to realize the growth strategy and ensure the positive development of shareholder value.

The Group monitors the development of its capital structure by examining the ratio of shareholders’ equity to total equity (the equity ratio). In the 2018 financial period, the equity ratio was 68.6% (2017: 70.4%).