28  FINANCIAL RISK MANAGEMENT

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.

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

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

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.

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.

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, 2022, 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 0.3 million (2021: CHF 0.4 million) higher/lower, mainly as a result of cash positions held at variable rates.

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:

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:

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:

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 – net of income taxes – 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 (see note 3.2.1). The remaining loss of the hedging instruments was considered as hedge ineffectiveness (CHF 4.4 million) which was recognized in profit or loss. The hedge ineffectiveness was caused by the contingent charge of the deal contingent forward and a lower estimated purchase price compared to the total of the forward agreements.

1. Excluding reconciling items (see note 28.2)

1. Excluding reconciling items (see note 28.2)

Unused lines of credit amounting to CHF 40.0 million (2021: CHF 40.0 million) are available to the Group at December 31, 2022. In addition, the Group has uncommitted lines of credit amounting to CHF 390 million (2021: CHF 340.0 million) to finance potential future business combinations.