2. Financial risk management
In the normal course of business the Group is exposed to changes in currency exchange rates, financing risk, changes in interest rates and credit risks.
Precious Woods financial risk management seeks to minimize potential adverse effects on financial performance.
The Group may use derivative financial instruments to economically hedge financial risks. In the reporting period, Precious Woods did not apply hedge accounting.
Risk management is carried out by the Group finance department under conditions approved by the Board of Directors and Group Management. The Group Management takes decisions covering specific areas, such as foreign exchange risk, on a case-by-case basis.
Market risk
The market risk includes interest rate risk, foreign exchange risk and equity price risk.
Interest rate risk
Precious Woods has no significant interest-bearing assets. The Group’s interest rate risk arises from borrowings. Borrowings issued at variable rates expose Precious Woods to cash flow interest rate risks. Group borrowings are denominated in CHF, BRL, EUR and XAF.
Management’s policy is to maintain its borrowings in fixed rate instruments. There was no material variable interest rate borrowing on 31 December 2016 as well as on 31 December 2017.
Foreign exchange risk
Precious Woods operates internationally and is exposed to foreign exchange risk arising from various currency exposures. The XAF is in a fix relation to the EUR. Most of the sales out from Gabon are denominated in EUR and all cost in XAF. The sales out of Brazil are denominated in EUR and USD, the cost are in BRL. Therefore the currency risk for the local books is given. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. To manage their foreign exchange risk arising from future commercial transactions the Group may use forward contracts, transacted by the Group finance department.
The sensitivity is based on the exposure on 31 December based on assumptions that have been deemed reasonable by Management, showing the impact on profit or loss before tax as well as on equity. The Group uses historical volatilities of the currency pairs below to determine the reasonable shift.
The following table summarizes the Group’s sensitivity to currency exposures regarding the positions in the statement of financial position of the main currencies on 31 December:
| 31.12.17 | 31.12.17 | 31.12.17 | 31.12.16 | 31.12.16 | 31.12.16 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousand EUR | Reasonable shift |
"Impact" on profit or loss before tax |
"Impact" on equity |
Reasonable shift |
"Impact" on profit or loss before tax |
"Impact" on equity |
||||||
| EUR/CHF | +/–10% | +/–82 | +/–2 149 | +/–15% | +/–550 | +/–3 224 | ||||||
| USD/CHF | +/–10% | +/–9 | +/–928 | +/–10% | +/–28 | +/–1 057 | ||||||
| USD/BRL | +/–15% | +/–3 | +/–1 332 | +/–10% | +/–12 | +/–1 069 | ||||||
| CHF/BRL | +/–15% | +/–0 | +/–6 323 | +/–15% | +/–0 | +/–6 678 | ||||||
| XAF/CHF | +/–10% | +/–0 | +/–755 | +/–15% | +/–0 | +/–822 |
All the loans in Precious Woods Holding are denominated in CHF or EUR. The situation will be monitored very closely when it comes to a due date of a loan whether it shall be replaced or repaid in CHF or EUR and hedged before.
Price risk
Precious Woods is exposed to equity securities price risks because of unlisted investments held by the Group and classified as available for sale through OCI or at fair value through profit or loss. For details about the exposure please see Note 10.
Liquidity risk
Liquidity risk management is centralized at the Groups head office and monitored through cash-flow forecasts. The subsidiaries provide regular forecasts based on the expected cash-inflows and -outflows. Excess funds are pooled in accounts managed by the holding company. Cash deficits are funded by the holding company in general. Group administration raises the majority interest-bearing debt centrally. The Group seeks to reduce liquidity risks through sufficient cash reserves and credit facility arrangements.
The following table analyses the Group’s remaining contractual maturity for financial liabilities and derivative financial instruments.
| in thousand EUR | Less than 1 year | Between 1 and 2 years | Over 2 years | Total | ||||
|---|---|---|---|---|---|---|---|---|
| 31 December 2017 | ||||||||
| Trade and other payables | 12 009 | – | – | 12 009 | ||||
| Financial liabilities | 9 699 | 2 046 | 21 674 | 33 419 | ||||
| Non-derivative financial liabilities | 21 708 | 2 046 | 21 674 | 45 428 |
| in thousand EUR | Less than 1 year | Between 1 and 2 years | Over 2 years | Total | ||||
|---|---|---|---|---|---|---|---|---|
| 31 December 2016 | ||||||||
| Trade and other payables | 12 348 | – | – | 12 348 | ||||
| Financial liabilities | 12 001 | 2 094 | 17 801 | 31 896 | ||||
| Non-derivative financial liabilities | 24 349 | 2 094 | 17 801 | 44 244 |
Credit risk
Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions.
Where banks and financial institutions are concerned, generally independently rated parties with a minimum rating of “A” are accepted. Precious Woods has one main relation with a bank, which has a rating of “A”. Most of the sales are CAD (Cash Against Documents) and if this does not apply and the customers are independently rated, these ratings are used. The Group has set up a policy to minimize credit risk and monitor its clients. Customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Group therefore monitors its accounts receivable at individual customer level by payment due date rather than the number of days from invoice date. No concentrations of credit risk are currently present. An allowance on bad debt is determined on both an individual and a general basis. An individual allowance is determined when a customer disputes the amount due, or if legal steps have been taken to recover the overdue amount. A general allowance on bad debt is determined for all other amounts based on past experience. For detailed information see Note 3.
Capital management
When managing capital, Precious Woods’ objectives are to safeguard the Group’s ability to continue as a going concern and to maintain an optimal structure to reduce the cost of capital. In order to reach these goals, Precious Woods issues new shares or sells assets to reduce debts. The mid-term target of the Group is to have an equity ratio of >40 %. Capital is considered the equity attributable to holders of Precious Woods Holding. There were no changes in the Group’s approach to capital management during the year.
Guarantees and pledges of assets
Precious Woods Tropical Gabon Industrie has pledged buildings in the amount of EUR 3.5 million (2016: EUR 7.6 million), machinery and equipment in the amount of EUR 0.0 million (2016: EUR 2.6 million) and leased property and plants by EUR 0.0 million (2016: EUR 0.1 million) to secure bank loans. Precious Woods Compagnie Equatoriale des Bois has pledged machinery and equipment in the amount of EUR 1.1 million (2016: EUR 4.5 million), leased property and plants by EUR 3.4 million (2016: EUR 1.6 million) and inventories in the amount of EUR 0.0 million (2016: EUR 1.2 million). Precious Woods Holding Ltd has no pledged assets, but used land in Brazil in the amount of EUR 22.2 million in connection with loans (2016: EUR 21.5 million).