Note 22

The objective of the Group’s risk management is to identify and analyze the risks impacting the Group, to define appropriate risk levels and controls and to monitor the realization of risks in relation to the risk levels. The objective of financial risk management is to decrease the volatility related to profit, financial positions and cash flows, as well as secure the Group’s sufficient liquidity as well as efficient and competitive financing. The Board of Directors approve the general principles of risk management. The principles and policies of risk management are reviewed regularly to reflect changes in market conditions and the Group’s operations.

The Group is mainly exposed to the following financial risks: market risk (currency risk), liquidity risk and credit risk. The Group’s management assesses the financial risks and obtains the instruments necessary to hedge against these risks. For risk management, the Group uses currency forward contracts and credit insurance for trade receivables. There are no risk concentrations of financial risks.

MARKET RISK

Currency risk

Currency risk refers to the uncertainty in cash flows, income or financial position caused by changes in foreign exchange rates. The Group operates internationally and thus is exposed to risks due to fluctuations in foreign exchange rates. In addition, the Group is exposed to translation risks when investments in foreign subsidiaries are converted to parent company’s functional currency (Euro).

The objective of the Group’s currency risk management is to manage and control uncertainty in cash flows, income and financial position caused by fluctuations in foreign exchanges rates. The Group is exposed to currency risk in its business operations as, in addition to its functional currency, the Group’s sales and purchases and other business transactions are carried out in the subsidiaries’ local currencies and in US dollars. The most significant foreign currencies for the Group are US dollar, Swedish crown, Danish crown and Norwegian crown. In the financial period 2019, 31.0% of the Group’s sales were currency denominated and of purchases, including variable and fixed costs, 50.0%. The Group utilizes forward exchange contracts to hedge its exposure to foreign exchange risk. Hedge accounting in accordance with IFRS 9 is not applied to these derivatives, and thus changes in their fair value are recognized in the statement of profit or loss. The fair value and nominal value of derivatives are presented in the note 19.

The transaction risk exposure by currency and the Group’s sensitivity to changes in the exchange rates is described in the following table.

In addition, the Group is exposed to currency risk through net investments in foreign subsidiaries (translation risk). Foreign net investments are converted into the functional currency (Euro) of the Group’s parent company. The Group’s risk management principle is not to hedge against foreign exchange risk through net investments in foreign subsidiaries, because the risk exposure is considered of minor importance.

CREDIT RISK

Credit risk is a risk of financial loss if a counterparty to a financial instrument fails to meet its contractual obligations. The Group’s credit risk arises principally from the Group’s trade receivables from customers, which is determined by open risk position and counterparties’ credit rating. The Group has no significant credit risk concentrations related to a certain client segment, because it has a broad clientele, which is geographically spread over a wide area.

The Group’ credit risk policy defines the credit rating requirements for clients and other commercial contract parties. The Group regularly reviews clients’ credit ratings and monitors its clients’ payment behavior. The credit risk is reduced and managed by taking out a Euler Hermes credit insurance policy for trade receivables from customers. Credit losses on customer-specific basis is provided for with the credit insurance, and therefore the Group’s financial management makes a customer-specific assessment of the need for credit insurance and insures the receivables from customers based on this estimate. The age analysis of trade receivables is provided in Note 15.

In addition, the Group is exposed to credit risk through its investment of cash in financial institutions and through the use of derivative contracts. The credit risk is managed by contracting with well-established financial institutions in accordance with the Group’s risk management policy.

Assessment of expected credit losses

The Group uses an allowance matrix, a simplified approach allowed by IFRS 9, to measure expected credit losses for trade receivables from customers. The loss allowance is measured at an amount equal to lifetime expected credit losses for trade receivables. The Group measures loss allowances for trade receivables at an amount equal to lifetime expected credit losses (ECL).

The Group uses its previous credit losses and historical credit loss experience for trade receivables to estimate the lifetime expected credit losses on financial assets. In addition, the economic conditions and Group’s assessment on future development are taken into account in the estimate. The Group updates its follow-up data based on historical information and future estimates at each reporting date. Expected credit losses are determined based on fixed provision rates depending on the number of days that a trade receivable is past due. Expected credit losses are thus calculated by multiplying the gross carrying amount of trade receivables with the fixed provision rate determined for a class of trade receivables. Changes in expected credit losses are recognized in profit or loss under other operating expenses.

Expected credit losses are described in Note 15.

Based on historical experience, the Group has an insignificant amount of realized credit losses. Based on the Group’s assessment, the gross carrying amount of a trade receivable is written off when the management estimates that the Group has no reasonable expectation of recovering the payment. Realized credit losses are recognized in profit or loss under other operating expenses.

LIQUIDITY RISK

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities. The objective of managing liquidity risk is to continuously maintain an adequate level of liquidity and ensure that it will have sufficient financing for working capital and investment costs. As stated in the Group’s risk management policy, the amount of financing required for business activities and liquidity forecasts are monitored in the Group. The management has not identified liquidity risk concentrations in its financial assets or sources of finance.

The Group’s management estimates that the Group’s liquidity is at a good level. The Group did not have any loans from financing institutions at the end of the financial period 2019. The cash and cash equivalents of the Group totaled EUR 4,110 thousand on 31 December 2019 (EUR 1,218 thousand on 31 December 2018). The Group strives to ensure the availability and flexibility of funding through an overdraft facility. The Group maintains an undrawn credit facility totaling EUR 5,000 on 31 December 2019. The Group’s credit facility contract contains a financial covenant clause related to the equity ratio. The Group has complied with the covenant during the reporting period 2019.

The table below presents the maturity analysis of financial liabilities and derivative instruments. The amounts disclosed in the table are the contractual undiscounted cash flows that include both expected interests and repayments.

CAPITAL MANAGEMENT

The Group’s objective in capital management is to maintain optimum capital structure in order to secure normal operating conditions and to increase shareholder value in the long term. For capital management purposes, the Group manages equity as indicated in the consolidated balance sheet. The equity is mainly influenced through dividend distribution or share issue. The Group is not subject to externally imposed capital requirements. The Group management and the Board of Directors of the parent company monitor the Group’s capital structure and the development of liquidity. The objective of this monitoring is to ensure the Group’s liquidity and the flexibility of capital structure to realize the growth strategy and positive development of shareholder value.

The Group monitors the development of its capital structure based on the ratio of equity to balance sheet total (equity ratio). The equity ratio was 60.6% at the end of reporting period 2019.