Other Disclosures

Download

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 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.

Derivative financial instruments are used to hedge financial risks.

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 derivatives and reported as cash flow hedges. Hedging ensures that currency fluctuations do not have any material impact on earnings.

The equity from currency transactions would be approximately 22.1 million euros lower (previous year: 46.1 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 22.1 million euros higher (previous year: 46.1 million euros). Of this figure, 39.0 million euros (previous year: 43.4 million euros) are 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 1.5 billion euros with a term ending on 18 September 2020. The interest rate is based on EURIBOR. As at 31 December 2017, an amount of 650.0 million euros (previous year: 0.0 million euros) had been drawn down under this facility. 

In addition, RIF was used to finance a promissory note loan amounting to 175.0 million euros. The term expires on 2 September 2024.

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. 2017
Carrying amount
201820192020202120222023
and beyond
Primary financial instrumentsContractually agreed cash flowsLess than 1 year1 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 payables6.90.02.32.30.40.91.0
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
in million €31 Dec. 2016
Carrying amount
201720182019202020212022 and beyond
Primary financial instrumentsContractually agreed cash flowsLess than 1 year1 to 2 years2 to 3 years3 to 4 years4 to 5 yearsMore than 5 years
Other non-current financial liabilities911.96.7144.080.680.597.3603.6
Non-current trade payables5.10.01.52.40.61.15.1
Other current financial liabilities408.5436.60.00.00.00.00.0
Current trade payables5,825.45,826.40.00.00.00.00.0

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.

The loan commitments are loans firmly committed in the year under review, with a term beginning in 2017.

All financial liabilities in the liquidity analysis relate to primary financial instruments. In addition, derivative financial instruments amounting to 36.5 million euros (previous year: 17.3 million euros) are reported on the balance sheet.

Liquidity Analysis of Derivatives

in million €201820192020 and beyond
Derivative financial instrumentsCash flowsCash flowsCash flows
 Up to 1 yearMore than 1 and less than 2 yearsMore than 2 and less than 3 years
Currency derivatives
Financial assets
 Proceeds984.120.00.0
 Payments968.019.90.0
Financial liabilities
 Proceeds844.340.70.0
 Payments868.040.90.0
Interest rate derivatives
Financial liabilities
 Proceeds0.50.00.0
 Payments1.20.00.0
in million €201720182019 and beyond
Derivative financial instrumentsCash flowsCash flowsCash flows
 Up to 1 yearMore than 1 and less than 2 yearsMore than 2 and less than 3 years
Currency derivatives
Financial assets
 Proceeds1,307.040.60.0
 Payments1,250.339.70.0
Financial liabilities
 Proceeds590.853.80.0
 Payments601.554.60.0
Zinsderivate
Interest rate derivatives
 Proceeds0.10.00.0
 Payments1.41.20.0

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, 25.1 per cent (previous year: 60.7 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.

In terms of interest rate hedging transactions entered into as part of cash flow hedge accounting, equity would have been approximately 10.9 million euros higher (previous year: 1.0 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 11.5 million euros lower (previous year: 1.1 million euros).

In terms of interest rate hedging transactions involving stand-alone derivatives, net income would have been approximately 0.1 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, net income would have been approximately 0.1 million euros lower (previous year: 0.4 million euros).

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 9.5 million euros lower (previous year: 2.7 million euros). If interest rate levels had been 100 basis points lower, the interest result would have been 9.5 million euros higher (previous year: 2.7 million euros).

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 trade receivables, loans, other receivables, loans to customers under the REWE partnership model, joint liability risks from a position as partner in REWE partner companies and derivative financial instruments with positive fair values.

Possible default risks were taken into account by recognising individually determined specific valuation allowances and aggregated valuation allowances as well as adequate provisions (see note 27 "Trade Receivables"). In addition, sureties received (e.g., bank guarantees) amounted to 2.1 million euros.

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.

Breakdown of the Age Structure of Overdue Receivables on Which no Allowances Have Been Recognised
in million €31 Dec. 2017Of which past due as at the balance sheet date and not impaired
 Carrying amount Less than 90 daysBetween 90 and 180 days  Between 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
in million €31 Dec. 2016Of which past due as at the balance sheet date and not impaired
 Carrying amount Less than 90 daysBetween 90 and 180 days  Between 180 and 360 daysMore than 360 days 
Non-current other financial assets247.00.00.00.00.0
Current other financial assets609.631.42.40.40.7
Current trade receivables1,241.338.00.90.52.2

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 credit rating. Payment transactions are also settled exclusively 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.