Note 3 - Financial risk management
3.1 Financial risk factors
The Group is exposed to a number of different financial risks in its activities: market risk (currency risk), credit risk, liquidity risk and credit risk. The Group’s general risk management policy focuses on the unpredictability of the financial markets and attempts to minimise potential unfavourable effects on the Group���s financial results. The Group does not use derivative instruments to hedge its risk exposure.
Risk management is performed by Group Finance in accordance with policies adopted by the Board. The Board draws up written policies for general risk management and for specific areas such as currency risk, credit risk, the use of derivative instruments and financial instruments that are not derivatives, as well as the investing of excess liquidity.
(a) Market risk
(i) Currency risk
The Group operates on an international level and is exposed to currency risks arising from various currency exposures, in particular in respect of the US dollar (USD). Currency risk arises through future business transactions, recorded assets and liabilities, and net investments in foreign businesses.
Currency risks also arise when future business transactions are expressed in a currency that is not the entity’s functional currency. The Group’s product purchases takes place mainly in USD. In order to manage the currency risk of outflows in USD, the Group has USD bank accounts.
The Group has a holding in a foreign business in the UK, the net assets of which are exposed to currency risks.
If the Swedish krona had weakened by 10% in relation to the US dollar, with all other variables held constant, the recalculated annual profit figure as of 31 August 2017 would have been SEK 40,000 higher, largely as a consequence of gains from the translation of trade and other receivables in USD.
(b) Credit risk
Credit risk is managed at Group level, with the exception of credit risk in respect of outstanding trade and other receivables. Each company in the Group is responsible for monitoring and analysing the credit risk for each new customer before offering standard terms of payment and delivery. Credit risk arises through cash and cash equivalents and bank balances, as well as credit exposure to customers. Only banks and financial institutions awarded a credit rating of at least “A” by an independent assessor are accepted. In cases where there is no credit assessment, a risk assessment is conducted of the customer’s creditworthiness, taking into account the customer’s financial position, as well as previous experiences and other factors. Individual risk limits are defined on the basis of internal or external credit assessments in accordance with the limits set by the Board. The use of credit limits is monitored on a regular basis.
No credit limits were exceeded during the reporting period and management does not expect any losses as a consequence of a failure to pay from these counterparties.
(c) Liquidity risk and interest
Cash flow forecasts are drawn up by the Group’s operational companies and are aggregated by Group Finance. Group Finance monitors rolling forecasts of the Group’s liquidity reserve closely in order to make sure that the Group has sufficient cash funds to meet the need of operating activities.
Excess liquidity in the Group’s operating companies, in excess of the element required in order to meet working capital needs, is transferred to Group Finance. The Group invests excess liquidity in interest-bearing money market instruments and marketable securities, depending on which instrument has a suitable term or sufficient liquidity to satisfy the scope defined by the above forecasts. As of the balance sheet date on 31 August 2017, the Group had fixed income funds of KSEK 19,018 to manage liquidity risk. These are classified as other short-term securities in the balance sheet.
The table below analyses the Group’s non-derivative financial liabilities broken down according to the time remaining on the balance sheet date until the contractual due date. The amounts quoted in the table are the contractual, non-discounted cash flows.
|As of 31 August 2018||Less than 3 months||Between 3 months and 1 year||Between 1 and 2 years||Between 2 and 5 years||More than 5 years|
|Other long-term liabilities||0||0||15,556||0||0|
|Trade and other payables||5,047||0||0||0||0|
|Other current liabilities||1,041||15,556||0||0||0|
|Accrued expenses and prepaid income||15,483||0||0||0||0|
|As of 31 August 2017||Less than 3 months||Between 3 months and 1 year||Between 1 and 2 years||Between 2 and 5 years||More than 5 years|
|Other long-term liabilities||0||0||0||0||0|
|Trade and other payables||13,265||0||0||0||0|
|Other current liabilities||0||0||0||0||0|
|Accrued expenses and prepaid income||10,955||0||0||0||0|
Interest bearing debt for the group is TSEK 31,112 and is ammortized quarterly until June 2020. With a non-fixed interest the group carries limited risk in the interest cost in that peiod.
3.2 Managing capital
The Group’s objective with regard to the capital structure is to secure the Group’s ability to continue its activities so that it can continue to generate a return for shareholders and value for other stakeholders, and to maintain an optimal capital structure in order to keep down the costs of capital.
To maintain or adjust the capital structure, the Group can change the dividend paid to shareholders, repay capital to shareholders, issue new shares or sell assets in order to reduce liabilities.
3.3 Calculation of fair value
The table below shows financial instruments valued at fair value, based on how the classification in the fair value hierarchy has been carried out. The different levels are defined as follows:
- Listed prices (unadjusted) on active markets for identical assets or liabilities (level 1)
- Other observable data for the asset or liability than listed prices included in level 1, either direct (i.e. as price recordings) or indirectly (i.e. derived from price recordings) (level 2).
- Data for the asset or liability that is not based on observable market data (i.e. non-observable data) (level 3).
The table below shows the Group’s financial assets and liabilities valued at fair value on each balance sheet date:
|Financial assets valued at fair value through the income statement|
|Other short-term securities (level 1)||0||19,018|
|Financial liabilities valued at fair value through the income statement|
|Additional purchase price (level 3)||15,556||0|