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23. Financial risk management

Financial risk management principles
The task of financial risk management is to identify, manage and track the major financial risks in the Group’s business and business environment to enable the Group to achieve its strategic and financial goals in the best possible way. The responsibilities of the Board of Directors include ensuring that the Group has adequate internal monitoring system in place. Group’s policy for hedging against risks is approved by the Board of Directors and the Group’s CFO is responsible for implementing it in practice. The objective of the Group’s financial risk management is to minimise the effects of volatility for recognised major market risks on the Group’s result and balance sheet. Tecnotree Group does not apply hedge accounting as defined under IFRS 9.
Financial risk management organisation
The financial risk management process is supported by the Management Board, who handles risks and risk management in its meetings on a regular basis. CEO reports the major risks to the Board of Directors. The Group’s financial management is responsible for managing foreign exchange, interest rate and liquidity risks according to the guidelines set by the Board.
Capital management
Tecnotree’s objective for capital management is to ensure cash sufficiency and support Group’s growth targets. Additionally, with capital management the Group is ensuring the operational precondition in capital markets during all conditions irrespective of industry’s market volatility. The key ratio in monitoring the development of Group’s capital structure is equity ratio, which is calculated by dividing equity with total balance sheet less advances reveiced.

In August 2015, the company's Board of Directors recognised the loss of shareholders’ equity of the Group’s parent company Tecnotree Corporation and delivered a statement concerning the matter to the Trade Register. The parent company’s shareholders’ equity was EUR 9,787 thousand on 31 December 2020 (EUR 1,228 thousand) and the Group’s shareholders’ equity was EUR 19,907 million negative (EUR 3,633 million).
 
Components of equity ratio
EUR 1,000         2020 2019
Equity at the end of period         19,907 3,633
             
Balance sheet total         50,650 36,840
Advances received            
Total balance sheet less advances reveiced         50,650 36,840
             
Equity ratio         39.3 % 9.9 %
 
Liquidity risk
The Group seeks to constantly assess and monitor the amount of liquid funds to ensure the sufficient amount of funding needed to finance the business.
On the reporting date, the Group’s cash and cash equivalents were EUR 8,034 (3,381) thousand.
At the end of the financial year, he company had in accordance to the payment program secured interest-bearing liabilities to the main creditor EUR 7,242 thousand, business mortgage debts EUR 6,032 thousand as well as restruturing debts EUR 3,454 thousand.
 
Upcoming due schedule, EUR 1,000
2020 Balance sheet value Cash flow Due Less than
3 months
3-12
months
Over 12 months
Guaranteed restructuring debts the main creditor, interest-bearing 13,264 13,264   0 978 12,286
Interest payments on the loans 0 853   0 260 593
Trade payables 1,619 1,619 685 934 0 0
Non-interest bearing liabilities 3,454 3,454   0 661 2,792
Total 18,337 19,190 685 934 1,899 15,672
             
2019 Balance sheet value Cash flow Due Less than
3 months
3-12
months
Over 12 months
Guaranteed restructuring debts the main creditor, interest-bearing 13,729 13,729   0 465 13,264
Interest payments on the loans 0 1,126   0 272 854
Trade payables 2,758 2,758 1,429 220 1,109 0
Non-interest bearing liabilities 3,725 3,725   0 272 3,454
Total 20,213 21,339 1,429 220 2,117 17,572
             
Credit risk
Credit risk arises from the potential failure of counterparty to meet its contractual payment obligations. The amount of risk depends on the creditworthiness of the counterparty. The amount of credit risk inherent to financial instruments is the carrying value of the financial assets, which was EUR 21,557 (18,601) thousand at the reporting date. The financial assets are specified in note 24. The most significant separate item of credit risk is the trade receivables.
             
The credit quality of customers is regularly monitored by the finance department together with sales management, using data on payment history and reports from external sources. Credit rating checks are made on new customers before confirming an offer. The procedure for granting of credit for new customers or customers from countries with high risk rating requires always the acceptance of Group CFO. Tecnotree has not arranged financing for customers with third parties.
 
Tecnotree’s largest customers are much bigger businesses than the Group itself. The relationship between the Group and its major customers is one of interdependence, which poses a potential risk but also offers significant new business opportunities. The two largest customers accounted for 76% of net sales in 2020 (2019: 80 %) and for 64 % of the trade receivables at the end of 2020 (2019: 82 %). Parent companies of these customers are large listed companies. In addition, the customers of Tecnotree are mainly in developing markets, with consequenses such as currency transfer regulations and limitations, exchange rate fluctuations and other politic and financial challanges.
 
The credit quality of financial institutions is monitored by the finance department. The parent company’s counterparties are restricted to financial institutions with legal entities in Finland specified in the Group’s cash management policy. The subsidiary in India has its own finance function and their counterparties are also restricted in the Group’s cash management policy. The amount of cash reserves in other subsidiaries is minimized.
 
ANALYSIS OF TRADE RECEIVABLES BY AGE AND IMPAIRMENT LOSSES RECOGNIZED
EUR 1,000 2020 Impairmet loss recognised -% 2019 Impairmet loss recognised -%
Trade receivables not due 4,591     5,456    
Trade receivables 1-90 days overdue 3,965 69 2 % 5,540 14 0 %
Trade receivables 91-360 days overdue 4,056 123 3 % 3,742 52 1 %
Trade receivables more than 360 days overdue 908 253 28 % 481 168 35 %
Total 13,520 446 3 % 15,220 234 2 %
 
CHANGE IN IMPAIRMENT LOSS PROVISIONS
1 000 € Impairment loss provisions 1.1.2020 Realised provisions Cancelled provisions New provisions Impairment loss provisions 1.1.2020 Change in provision
MEA & APAC 234   22 217 429 195
Europe & Americas 0     16 16 16
Total 234   22 234 446 212
 
Project deliveries result in large accounts receivable. Most of Tecnotree’s net sales comes from developing countries and some of these contain political and economic challenges. There is the risk of a considerable delay in the payment of invoices in these countries and that Tecnotree will have to record credit losses. The payment record of customers and the situation concerning trade receivables are actively monitored and credit rating checks are made on new customers before confirming an offer. During the period, new impairment losses of EUR 0 (280) thousand were recorded for over one year overdue trade receivables. The above analysis of trade receivables by age shows net trade receivables, thus after recognition of impairment losses.
 
Market risks
 
Currency risk
The financial risk to which the Group is exposed in its operations is mainly currency risk. Changes in exchange rates create risks especially in receivables and order backlog. Tecnotree Group’s reporting and presentation currency is Euro, but significant part of Group’s revenue is in US dollars. The Group’s open translation risk comes from the investments in six foreign subsidiaries, India (Rupees, INR), Brazil (Real, BRL), Argentina (Peso, ARS), Malaysia (Ringgit, MYR), The United Arab Emirates (Dirham, AED) and Nigeria (Naira, NGN).
 
Transaction risk
The Group’s open currency position comprises foreign currency denominated, sales related balance sheet items, cash and cash equivalents balance, currency denominated order backlog and binding currency denominated purchase and sales contracts.
 
In the policy for approval of sales contracts, it is required that only the Euros or the US dollar can be used as the sales currency. There shall not be any clauses tying the payments into any other currencies. Sales offices, when selling within their own country, use their own local currency. If any other currencies than Euro, US dollar or sales offices’ local currency are used in sales contracts, it requires a prior written approval from the group CFO.
 
In 2020, 26 per cent of external invoicing was in Euros, 49 per cent in US dollars, 13 per cent in Nigerian Nairas, 8 per cent in Argentinian Pesos, and 4 per cent in other currencies. The Group is hedging the open US dollar currency position. The Group does not hedge the open ARS, NGN and BRL currency positons, partly because of local currency restrictions and high cost of hedging. The Group does not hedge the other currency positions, since they are not significant.
 
The Argentinian peso is the functional currency of the company’s subsidiary in Argentina. During 2018, the economic crisis led to the economy of Argentina to be classified as hyperinflationary. Because of this development, adoption of IAS 29 Financial Reporting in Hyperinflationary Economies applies that means from the beginning of the relevant reporting period financial statements of the Argentine subsidiary are to be restated into the current purchasing power that reflects a price index current at the end of the reporting period. Hyperinflation adjustment impact on profit was negative EUR 114 thousand in the consolidated financial statements 2020.
 
Currency risks can also arise on intra-group currency positions. The Indian subsidiary has intragroup receivables denominated in EUR, on which exchange rate gains amounting to EUR 1,182 thousand (74) arose due to rate changes of Indian Rupies. Also the intra-group liabilities denominated in BRL held by the parent company gave rise to exchange rate gains of EUR 293 thousand (2019: gain of EUR 3 thousand) in 2020. Similarly, EUR dominated intragroup receivables from Nigeria gave exchange rate gains of EUR 531 thousand (2019: gain of EUR 88 thousand) and AED dominated intragroup receivables from the subisdiary UAE exchange rate gains of EUR 750 thousand (2019: gains of EUR 114 thousand). Intra-group currency positions are not hedged.
 
The Group is hedging the US dollar currency denominated cash flow position for a maximum period of 12 months for not more than 100 per cent of the net position. Hedging is carried into effect with foreign exchange forwards and options. On the reporting date, 0 per cent (0 %) of the open currency position was hedged.
 
Sensitivity analysis for market risks
The functional currency of the parent company is Euro. Financial assets and liabilities nominated in foreign currency are presented in the table below. Figures are translated to Euros at the year-end exchange rate.
 
EUR 1,000   Note INR 2019 INR 2019 USD 2019 USD 2019
Current assets        
Trade and other receivables 13,028 9,069 6,070 6,615
Other receivables related to projects     1,561 2,478
Cash and cash equivalents     534 144
Trade and other payables     -543 -472
Total current assets 13,028 9,069 7,622 8,765
 
In the sensitivity analysis below, the effect of weakening and strengthening of the INR and USD exchange rate against EUR is presented with all other factors remaining unchanged. The analysed change in the exchange rate represents a possible volatility of the currency during a 12-month period. Fluctuation in exchange rates has no direct effect on equity as the Group does not apply hedge accounting.
 
EUR 1,000     2020 2019
Change in percentage, INR     -10% +10% -10% +10%
Effect on the result after taxes     912 -912 609 -609
             
Change in percentage, USD     -10% +10% -10% +10%
Effect on the result after taxes     -693 847 -797 974
 
Translation risk
Tecnotree India and its subsidiaries are consolidated into Tecnotree Group as from 6 May 2009, hence the Group is exposed to the risks incurred when the net investments denominated in INR are translated into Euro, the functional currency of the parent company. On the reporting date, the open translation risk for the Indian subgroup was EUR 13,716 (11,024) thousand. This net investment is not hedged, mainly because of local currency restrictions and high cost of hedging. The sensitivity for trnslation risk was analysed by determining the effects of 10 percent strengthening and wakening of the INR exchange rate against EUR, all other factors remaining unchanged.
 
EUR 1,000     INR 2020 INR 2020 INR 2019 INR 2019
Change in percentage -10% +10% -10% +10%
Effect on the result after taxes -387 473 294 -360
Effect on equity -536 656 -600 733
 
During 2020 Indian Rupie weakened 12 % compared to Euro. INR/EUR rate was 89.66 at the end of 2020 and 80.18 at the end of 2019. This gave rise to a negative translation difference in the Group's equity amounting to EUR 708 thousand.
 
The exposure for translation risk related to net investments in other foreign subsidiaries is not significant and is therefore neither hedged nor analysed for sensitivity.
 
On the reporting date, the open translation risk position for the Brazilian subsidiary was negative EUR -853 (-1 271) thousands, Malaysian subsidiary was EUR 37 (55) thousand, for the Nigeria subsidiary EUR 1 061 (-126) thousand and correspondingly for the subsidiary in the United Arab Emirates EUR 302 (-188) thousand. The change in translation difference in equity caused by fluctuations in exchange rates for these subsidiaries was EUR 87 (372) thousand.
 
Intererst rate risk
The Group’s interest rate risk management focuses on the optimal management of liquid funds in sense of profitability and safety and interest rate risk management of bank loans. At the end of the financial period, the company had interest-bearing loans from the main creditor EUR 13.3 (13.7) million.
 
Interest rate sensitivity was analysed by determining the effects of one percentage unit’s change in the interest rates on the Group’s interest-bearing financial instruments on an annual level. The analysis included all the significant interest-bearing financial instruments of the Group totalling EUR 3,831 (10,348) thousand debt. On the reporting date, an increase / decrease of one percentage unit in the interest rates would have decreased / increased the net income after tax by EUR -71 / 71 (-114 / 114) thousand. Changes in interest rates would not have had a direct effect on equity. The effect of an increase and a decrease in the interest rates is presented with all other factors remaining unchanged.
 
Price risk
Tecnotree Group does not own any equity or other financial instruments with values tied to other market prices than interest or currency rates.