Other Disclosures

40. FINANCIAL RISK MANAGEMENT

The groups are exposed to various financial risks through their operating activities, particularly foreign exchange risk, liquidity risk, interest rate risk, commodity price risk and credit risk.

The foreign exchange, liquidity and interest rate risk to which the groups are exposed is systematically managed in accordance with financial guidelines. Financial risks are identified, assessed and hedged in close co-operation with the operating units. A central treasury committee discusses and decides on risk policy and strategy.

The operational framework, lines of responsibility, financial reporting and control mechanisms for financial instruments are defined in detail in the respective guidelines. These guidelines call in particular for a clear functional separation between trading and settlement activities.

Comprehensive management of financial risks focuses on the unpredictability of developments on the financial markets and aims to minimise the potential for negative impact on the financial position of the groups. Mitigating risk generally takes precedence over considerations of profitability.

Forward contracts, swaps and options are used to hedge interest rate risks, foreign exchange risks, and commodities price risks. These are recognised under other financial assets or other financial liabilities.

Fair Values of the Derivative Financial Instruments
in million €Fair value
Assets
Fair value
Liabilities
31 Dec. 201831 Dec. 201731 Dec. 201831 Dec. 2017
Interest rate swaps0.00.05.00.8
Accrued interest on derivatives0.00.00.50.0
Currency derivatives32.824.012.034.9
  of which: within cash flow hedges 26.67.67.418.1
  of which: within fair value hedges0.01.10.02.5
  of which: outside a hedging relationship6.215.34.614.3
Commodity derivatives0.01.21.80.8
Total32.825.219.336.5

Foreign Exchange Risk

The groups have international operations and are therefore exposed to potential foreign exchange risks.

Foreign exchange risks (i.e. potential impairment losses on financial instruments due to exchange rate changes) exist in particular where assets and liabilities are denominated or will routinely arise in a currency other than the groups' functional currency. In accordance with the financial guidelines, receivables and liabilities denominated in foreign currency must be hedged in full using derivatives. The group companies' counterparties in transactions involving derivative financial instruments are top-rated banks.

Foreign exchange risks may be hedged using only marketable derivative financial instruments whose correct financial engineering and accounting treatment must be assured in the groups' treasury systems.

In the Travel and Tourism business segment and at RZAG, future payments from foreign currency transactions are hedged through the conclusion of corresponding derivatives and reported as cash flow hedges. In both cases, these are hedging procedures (hedging of highly probable forecast transactions).

In the context of managing foreign exchange risks associated with the tourism business, liabilities denominated in foreign currency (hedged items) resulting from hotel procurement are hedged by using exchange rate hedges to mitigate the risk of fluctuations in exchange rates. These foreign exchange transaction risks arise when the calculation rates for the various seasonal classifications are set. The hedged transactions on these dates are planned foreign exchange liabilities that are realised only as the corresponding account entries are subsequently made. As part of currency hedging, the hedged transactions are offset against forward exchange contracts, currency swaps and currency options. If the requirements for applying hedge accounting in accordance with IFRS 9 are met, the hedging relationship is recognised as a cash flow hedge. 100% of the notional volume is designated upon conclusion of forward exchange contracts and currency swaps. If the companies assume that there is no longer a high probability that the hedged transaction will occur (for example, if payments are postponed to another season), the hedge is de-designated and hedge accounting is discontinued. The current currency options in this context are recognised as stand-alone derivatives.

RZAG also concludes forward exchange contracts and currency swaps. These are used to hedge against exchange rate fluctuations arising from merchandise management contracts. As at the date of the hedge, the hedged items are planned purchases in foreign currencies, which materialise over time from master contracts to individual orders. If the requirements for applying hedge accounting in accordance with IFRS 9 are met, the hedging relationship is recognised as a cash flow hedge. However, this only applies to forward exchange contracts that have been concluded. 90% of the notional volume is designated upon conclusion and designation of the derivatives. 10% of the notional volume of the derivatives is not designated in the hedging relationship and is recognised as a stand-alone derivative. If RZAG does not assume that the expected hedged transaction will occur (for example, if the delivery is postponed to the subsequent month or if there is no delivery), the corresponding derivative hedging instruments are de-designated and hedge accounting is discontinued. Currency swaps are recognised as stand-alone derivatives.

Moreover, short-term forward exchange contracts and currency swaps are entered into to hedge the foreign exchange risk arising from foreign-currency receivables and liabilities already recognised. These are recognised as stand-alone derivatives at fair value through profit or loss.

Notional Amounts of the Currency Derivatives in a Cash flow hedge for Each Currency
ISO code
 
 
Country
 
 
Currency
 
 
Purchase
Notional amount
in million units
Sale
Notional amount
in million units
AEDUnited Arab EmiratesDirham199.90.0
AUDAustraliaDollar26.00.0
CADCanadaDollar25.30.0
CHFSwitzerlandFranc10.795.8
CNYChinaYuan9.70.0
DKKDenmarkKrone7.0195.0
EUREU-StatesEuro1.00.0
GBPUnited KingdomPound Sterling10.643.0
HKDHong KongDollar8.50.0
INRIndiaRupee419.00.0
JPYJapanYen206.30.0
MADMoroccoDirham23.70.0
NOKNorwayKrone38.8760.0
NZDNew ZealandDollar22.40.0
SEKSwedenKrona95.71,519.6
SGDSingaporeDollar4.20.0
THBThailandBaht2,689.80.0
TNDTunisiaDinar8.80.0
USDUSADollar360.70.0
ZARSouth AfricaRand463.90.0

As at the reporting date, the currency derivatives used mature in a total of up to 16 months. Weighted by the respective hedged notional volume, the following exchange rates resulted for the major currencies.

Average exchange rate of the currency derivatives in a Cash flow hedge
ISO code
 
 
Country
 
 
Currency
 
 
Purchase
Weighted average rate per €
Sale
Weighted average rate per €
AEDUnited Arab EmiratesDirham3.699
AUDAustraliaDollar1.639
CADCanadaDollar1.524
CHFSwitzerlandFranc1.1471.069
CNYChinaYuan7.908
DKKDenmarkKrone6.4780.734
EUREU-StatesEuro1.123
GBPUnited KingdomPound Sterling0.8680.824
HKDHong KongDollar9.317
INRIndiaRupee85.008
JPYJapanYen124.845
MADMoroccoDirham11.535
NOKNorwayKrone9.1940.947
NZDNew ZealandDollar1.760
SEKSwedenKrona9.3319.784
SGDSingaporeDollar1.602
THBThailandBaht34.436
TNDTunisiaDinar3.633
USDUSADollar1.177

Gains and losses from the measurement of stand-alone derivatives in the context of managing risks associated with the tourism business and for hedging merchandise management contracts are recognised under other operating income and other operating expenses. The currency translation effects from the hedged items are also reported in the operating result. The fact that measurement effects may arise from stand-alone derivatives before the corresponding hedged items (such as advance travel services or inventories) are recognised may cause shifts in the operating result. However, since the volume of stand-alone derivatives is low, the associated effects on earnings are immaterial.

Gains and losses from the measurement of stand-alone derivatives also include effects from terminating previously existing hedges. De-designation expenses of 0.1 million euros and de-designation income of 0.3 million euros was recognised during the financial year.

The carrying amounts of the hedging instruments are shown in the table under note 40 "Financial Risk Management". The change in value used to determine ineffectiveness amounts to 29.7 million euros for hedging instruments and -29.4 million euros for hedged items. The amount of the hedged risk (existing hedging relationships) recognised in other comprehensive income amounts to 2.2 million euros.

Ineffective portions from changes in the value of the designated components of hedges can result from credit valuation adjustments relating to the own default risk or the risk of the counterparty (debit valuation adjustments and credit valuation adjustments). Furthermore, these can arise from gains or losses upon initial recognition resulting from exchange rate fluctuations between the trading date and the conclusion of the transaction with the bank (day one gains or losses). The effects of these ineffective portions are also recognised in other operating expenses or other operating income.

Effects of ineffective portions on the income statement
in million €2018
Gains on ineffective portions2.2
  of which: other effects2.2
Losses on ineffective portions-1.9
  of which: other effects-1.9
Total0.3

The conclusion of currency derivatives meant that fluctuations in exchange rates did not have any significant impact on the result.

For an explanation of the effects of cash flow hedges on the equity attributable to the shareholders of the parent companies, please refer to the changes in the reserve for cash flow hedges presented in the statement of changes in equity. In addition, the statement of comprehensive income presents for all shareholders the amounts recognised in the income statement and those taken directly to equity and thus the impact of cash flow hedges on other comprehensive income and on net income for the year.

The amounts recognized directly in equity in the statement of comprehensive income include the derecognition of reserves against the initial cost of inventories (basis adjustments) in an amount of -2.0 million euros. Of this amount, -1.0 million euros was temporarily recognised in profit or loss.

Due to the conclusion of hedges, fluctuations in exchange rates did not have any significant impact on the result.

The result from currency transactions would have been approximately 18.9 million euros (previous year: 11.0 million euros) lower if the euro had been ten percentage points stronger against the key foreign currencies on the balance sheet date. If the euro had been ten percentage points weaker against the key foreign currencies, the result from currency transactions would have been approximately 18.9 million euros (previous year: 11.0 million euros) higher. Of this figure, 1.0 million euros (previous year: 0.4 million euros) is attributable to changes in the euro exchange rate against the dollar. Interest rate effects have not been taken into account.

The equity from currency transactions would be approximately 17.2 million euros lower (previous year: 22.1 million euros) if the euro had been ten percentage points stronger against the key foreign currencies on the balance sheet date. If the euro had been ten percentage points weaker against the key foreign currencies, equity from currency transactions would have been approximately 17.2 million euros higher (previous year: 22.1 million euros). Of this figure, 32.6 million euros (previous year: 39.0 million euros) is attributable to changes in the euro exchange rate against the dollar. Interest rate effects have not been taken into account.

Liquidity Risk

The aim of liquidity management is to ensure that, through RIF the consolidated companies always have access to sufficient liquidity on the basis of adequate undrawn lines of credit so that no liquidity risk exists should unexpected events have a negative financial impact on liquidity.

Loans, fixed-term deposits and overnight money are used as financial instruments.

Through RIF, the group companies have access to a syndicated loan of 2,000.0 million euros with a term ending on 3 December 2023 and which can be renewed twice, in each case by one year. The interest rate is based on EURIBOR. As at 31 December 2018, the line of credit had not been drawn down. The syndicated loan of 1,500.0 million euros, which was available in the previous year and had a term ending in September 2020, was terminated early in the financial year. The amount drawn down in the previous year was 650.0 million euros.

In addition, RIF was used to finance a promissory note loan amounting to 1,000.0 million euros. The promissory note loan has different maturities ranging between 2021 and 2028.

In addition, there are other bilateral lines of credit between individual companies and banks.

Internal cash pooling is aimed at reducing the amount of debt financing and at optimising cash and capital investments. Cash pooling allows the use of the excess liquidity of individual companies to internally finance the cash requirements of other consolidated companies. The financial control system ensures the optimal use of the group companies' financial resources.

The groups did not significantly offset financial assets and financial liabilities with non-group companies. There are global netting agreements in connection with the central settlement business.

The following tables provide information on the contractually agreed, undiscounted interest and principal payments for financial liabilities. Where there is a right to terminate a loan agreement, a cash outflow on the earliest possible termination date has been assumed.

Liquidity Analysis of Financial Liabilities

in million 31 Dec. 2018
Carrying amount
201920202021202220232024 and beyond
Primary financial instrumentsContractually agreed cash flowsLess than
1 year
1 to 2 years2 to 3 years3 to 4 years4 to 5 yearsMore than 5 years
Other non-current financial liabilities2,104.513.8136.5193.6133.8427.31,436.1
Non-current trade payables9.10.03.12.51.21.90.5
Other current financial liabilities676.0703.20.00.00.00.00.0
Current trade payables6,841.56,841.50.00.00.00.00.0
in million 31 Dec. 2017
Carrying amount
201820192020202120222023 and beyond
Primary financial instrumentsContractually agreed cash flowsLess than
1 year
1 to 2 years2 to 3 years3 to 4 years4 to 5 yearsMore than 5 years
Other non-current financial liabilities1,209.03.4118.2118.5111.2133.6869.3
Non-current trade payables6.90.02.32.30.40.92.0
Other current financial liabilities1,152.21,157.00.00.00.00.00.0
Current trade payables6,153.26,154.20.00.00.00.00.0
Loan commitments15.80.10.81.01.01.011.8

Cash outflows from primary financial instruments include the interest component in addition to the principal repayment, so that the sum of the cash outflows may exceed the carrying amount in the financial year under review.

All financial liabilities in the liquidity analysis relate to primary financial instruments. In addition, derivative financial instruments amounting to 19.3 million euros (previous year: 36.4 million euros) are reported on the balance sheet.

Liquidity Analysis of Derivatives

in million 20192020 and beyond
 Cash flowsCash flows
Currency derivatives
Financial assets
 Proceeds1,059.07.9
 Payments1,025.57.6
Financial liabilities
 Proceeds864.71.2
 Payments872.91.2
Interest rate derivatives
Financial liabilities
 Proceeds0.01.2
 Payments1.48.7
in million €20182019
 Cash flowsCash flows
Currency derivatives
Financial assets
 Proceeds984.120.0
 Payments968.019.9
Financial liabilities
 Proceeds844.340.7
 Payments868.040.9
Interest rate derivatives
Financial liabilities
 Proceeds0.50.0
 Payments1.20.0

Interest Rate Risk

Interest rate risk is generally caused by fluctuations in market interest rates for interest-bearing assets and interest-bearing liabilities. All assets and liabilities with variable interest rates or short-term interest rates that are fixed expose the groups to cash flow risk. Fixed interest-bearing liabilities with extended fixed interest periods result in a fair-value interest-rate risk. At the end of the year, 11.8 per cent (previous year: 25.1 per cent) of liabilities to banks had fixed interest rates.

Interest-bearing assets and liabilities may impact earnings and equity as a result of interest rate fluctuations. These risks are reported on the basis of a sensitivity analysis, which shows the effects that would result from changes in the relevant risk variables – in particular interest rates. These changes are determined on the balance sheet date, using reasonable discretion.

The interest rate swaps in Hungary and the Czech Republic recognised in the previous year expired on 31 October 2018. The measurement of the interest rate swaps in Hungary resulted in a gain of 0.7 million euros in the financial year (previous year: gain of 0.7 million euros).

Under the agreements dated 28 February 2018, RIF concluded four interest rate swaps with different external banks to hedge variable interest payments on various tranches of a promissory note loan.

Payment terms for interest rate swaps
MaturityNotional volume
in million €
Fixed interest rate
in %
28 February 202535.00.878
28 February 202535.00.897
28 February 202545.50.873
28 February 202831.01.225

These interest rate swaps are accounted for as cash flow hedges. Since the critical contractual terms of the hedged item and the hedging instrument as well as the term and the notional volume match, no ineffective portions are recognised. The reserve for cash flow hedges in the statement of changes in equity includes 5.0 million euros in losses attributable to the aforementioned interest rate swaps at RIF.

In terms of interest rate hedging transactions entered into as part of cash flow hedge accounting, equity would have been approximately 9.8 million euros higher (previous year: 0.4 million euros) if the interest rate level had been 100 basis points higher at the balance sheet date. If the interest rate level had been 100 basis points lower, equity would have been approximately 10.8 million euros lower (previous year: 0.5 million euros). Since a decrease of 100 basis points in no longer expected, the calculation for 2018 is for the first time based on a decrease of 50 basis points. If the interest rate level had been 50 basis points lower, equity would have been approximately 5.3 million euros lower.

In addition, there is an interest rate risk from primary, variable-rate financial instruments. If interest rate levels had been 100 basis points higher, the interest result would have been 7.4 million euros lower (previous year: 9.9 million euros). If interest rate levels had been 100 basis points lower, the interest result would have been 7.4 million euros higher (previous year: 9.9 million euros).

Commodity Price Risk

Nova Airlines AB, Stockholm, Sweden, is exposed to commodity price risks. The management of the company estimates how much aviation fuel will be needed for the next season and initially hedges approximately 40 to 50 per cent of the net exposure before the bookings are available and approximately 70 to 80 per cent prior to the start of the season. Since the contracts are denominated in US dollars, currency hedges are also concluded.

The hedges are only concluded for Nova Airlines AB since the fuel prices in other transport contracts are already fixed at the time the contracts are negotiated prior to the start of a season, rendering hedges unnecessary.

In the financial year, Nova Airlines AB used derivatives in the form of commodities futures to hedge the price of aviation fuel. The commodity hedges concluded were used to hedge a total volume of 22,000 metric tonnes (previous year: 15,500 metric tonnes) of aviation fuel. The derivatives have a maximum term of 17 months. The hedges are accounted for as cash flow hedges.

Credit Risk

Credit risk from financial assets arises from the potential failure of a counterparty to meet its obligations in whole or in part, thereby causing financial losses to the other party.

Potential credit risk exists in relation to cash and cash equivalents, trade receivables, loans, other receivables and derivative financial instruments with positive fair values.

Credit risk related to cash deposits, derivative contracts and financial transactions are mitigated by entering into such transactions subject to fixed limits and only with banks that have a good to excellent credit rating, which corresponds to an independent minimum rating of "investment grade". Payment transactions are also settled through such banks. The credit rating and risk-bearing capacity of the partner banks is monitored systematically on an ongoing basis. The functions of setting and monitoring the limits are separated for trading and settlement operations.

Minimum credit rating requirements and individual caps on financial exposure have been established as part of accounts receivable management, operational monitoring of debtors and ongoing receivables monitoring.

Business dealings with large corporate customers are subject to a separate solvency monitoring system. Compared with the overall exposure to credit risk, receivables from these counterparties are not so large individually that they would create an exceptional concentration of risk. Sales to retail customers are settled in cash or with EC cash cards or conventional credit cards. Cash logistics in the retail trade are subject to a separate monitoring system.

Material loans are monitored by external rating agencies in order to identify potential credit risks early.

In addition, sureties received (e.g. bank guarantees or transferred inventories) amounted to 151.6 million euros.

Impairment of Financial Assets

The groups apply the requirements of multi-step impairment model under IFRS 9 to financial assets measured at amortised cost. The initial recognition of such financial receivables is based on a loss allowance at an amount equal to the 12-month expected credit loss. If the credit risk has increased significantly since initial recognition, a loss allowance at an amount equal to the lifetime expected credit loss is recognised.

The credit risk of trade receivables is calculated using the simplified approach for using a provision matrix based on historical default rates adjusted for current and forward-looking information. Objective indications of impairment are identified through the ongoing monitoring of debtors and reflected in specific valuation allowances. If it can be reasonably expected that the receivable is no longer realisable, it is derecognised. Indicators that a receivable – based on reasonable assessment – is no longer realisable include, among others, the debtor's failure to agree to a repayment plan with the groups.

Due to the large number of customers at different locations, there is no concentration of credit risk.

The change in loss allowances on trade receivables as at 31 December 2018 is presented in the table below:

Change in Loss Allowances on Trade Receivables
in million €20182017
As at 1 Jan.56.1123.2
Additions10.624.8
Reversals/utilisations-21.5-14.5
Changes in scope of consolidatio-1.4-77.4
Exchange rate effects and other changes0.40.0
As at 31 Dec.44.256.1

As described above, trade receivables on which no loss allowances have been recognised are recognised at their expected credit loss using a provision matrix.

The age structure of trade receivables on which no loss allowances have been recognised is presented in the table below:

Breakdown of the Age Structure of Overdue Receivables on Which no Loss Allowances Have Been Recognised in accordance with IFRS 9
in million €31 Dec. 2018Of which past due as at the balance sheet date and not impaired
 Carrying amountLess than 30 daysBetween 30 and 60 daysBetween 60 and 90 daysMore than 90 days
Expected losses0.4%0.2%0.0%0.1%9.2%
Trade receivables724.8691.912.24.616.2
Impairments2.91.40.00.01.5
Breakdown of the Age Structure of Overdue Receivables on Which no Loss Allowances Have Been Recognised in accordance with IAS 39
in million €31 Dec. 2017Of which past due as at the balance sheet date and not impaired
 Carrying amountLess than 90 daysBetween 90 and 180 daysBetween 180 and 360 daysMore than 360 days
Non-current other financial assets283.10.30.00.00.0
Current other financial assets681.535.21.90.71.2
Current trade receivables1,262.448.72.10.21.4

The other financial assets within the scope of the general impairment model have a low credit risk.

Due to the large number of vendors at different locations, there is no risk concentration, which means that the identified 12-month expected credit loss on other receivables from vendors is immaterial. For an overview of financial assets measured at amortised cost, please refer to the breakdown by class.

Only immaterial impairment losses were identified for cash and cash equivalents.

The change in loss allowances on other financial assets as at 31 December 2018 is presented in the table below:

Change in Loss Allowances on Other Financial Assets
in million €Level 1Level 2Level 3
As at 1 Jan. 20180.0-32.3-2.5
 Additions0.0-17.0-4.9
 Reversals/disposals0.02.80.0
As at 31 Dec. 20180.0-46.5-7.4

As at the reporting date there were loans amounting to 130.0 million euros that had not been impaired because assignment agreements for inventories are in place.

Expenses for loss allowances on financial assets are recognised together with income from reversals of impairment losses recognised in the operating result in previous years.