Investor Presentaiton
CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | FINANCIAL PERFORMANCE
2.4 FOREIGN EXCHANGE SENSITIVITY
Sales by currency 1-12/2022
Foreign exchange risks
■ EUR
■ CNY
- USD
■ Other
KONE operates internationally and is thus exposed to risks
arising from fluctuations in foreign exchange rates related to
currency flows of revenues and expenses (transaction risk)
and from the translation of statement of income and statement
of financial position of the foreign subsidiaries from respective
functional currencies into euros (translation risk).
Transaction risks
A substantial part of KONE's operations are denominated in
local functional currencies of the subsidiaries and do not
therefore give rise to transaction risk. The sales of new
equipment and modernizations, including installation, typically
take place in the local currency of the customer. Component
and material expenses may occur in other currencies than the
sales currency, which exposes KONE to transaction risks.
KONE policy is to substantially hedge the foreign exchange
exposure of firm commitments and other highly probable
future sales and purchases with foreign exchange forward
contracts. The business units are responsible for evaluating
and hedging the transaction risks in their operations according
to the KONE treasury policy. The most significant transaction
risk exposures arising from business operations are in the
Chinese yuan, Canadian dollar, Saudi-Arabian rial, Australian
dollar and British pound. The majority of the currency forward
contracts expire within one year.
Hedge accounting is applied in business units, where
there are significant revenues or expenses in foreign
currency. When hedge accounting is applied, the gains and
A change of 10% in the annual average foreign exchange
rates
Impact on sales
6.9% change in
consolidated sales in
euros
Impact on operating
income (EBIT)
Higher impact on
operating income as
compared to sales and
some impact on relative
operating income
losses from the hedges are recognized in the statement of
income at the same time as the exchange rate gains and
losses for the hedged items are recognized.
The financial assets and liabilities of KONE subsidiaries
are in the local currencies of the subsidiaries whenever
possible. In case a subsidiary company has a financial asset
or liability in other than its local currency, these assets and
liabilities are hedged with foreign exchange forward contracts
whenever possible and required by the KONE Treasury
Policy.
KONE's internal loans and deposits are primarily initiated
in the local currencies of the subsidiaries in which case the
possible foreign exchange risks are hedged, by the parent
company, using foreign exchange swap contracts.
Translation risks
Changes in consolidation exchange rates affect KONE's
statement of income, statement of cash flows and statement
of financial position, which are presented in euros. As
approximately 69% of KONE's revenues occur in functional
currencies other than euro, the translation risk is significant for
KONE. A change of 10% in the annual average foreign
exchange rates would have caused a 6.9% (7.7%) change in
2022 consolidated sales in euros. Such a change would have
had a higher impact on KONE's operating income and
therefore also some impact on KONE's relative operating
income. The translation of the subsidiaries' balance sheets
into euros caused translation differences of EUR 5.1 (205.6)
million in 2022. The translation risk is not hedged as a rule as
KONE's business consists of continuous operations in various
currency areas. However, in individual cases, KONE can also
hedge translation risk related to net assets of subsidiaries.
The most significant translation risk exposures arising from
Accounting principles
Foreign currency transactions and translation
The items included in the financial statements are initially
recognized in the functional currencies, which are defined
for each group subsidiary based on their primary
economic environment.
The presentation currency of the financial statements
is the euro, which is also the functional currency of the
parent company.
The initial recognition of transactions denominated in
foreign currencies in the functional currency takes place
at the rate of exchange prevailing at the date of the
individual transaction. Foreign currency denominated
receivables and liabilities are translated using period end
exchange rates.
Foreign exchange gains and losses related to
business transactions are treated as adjustments within
operating income. Foreign exchange gains and losses
associated with financing transactions are included in
financing income and expenses.
The statements of income of foreign subsidiaries,
whose functional currency is not the euro, are translated
into euros based on the average exchange rate of the
accounting period. Items in the statement of financial
position, with the exception of net income for the
accounting period, are translated into euros at the closing
date exchange rates. Exchange rate differences arising
from net investments and associated companies in non-
euro currency subsidiaries, as well as the exchange rate
differences resulting from translating income and
expenses at the average rates and assets and liabilities
at the closing rate, are recorded in translation differences
within equity.
Respective changes during the period are presented
in other comprehensive income. Exchange rate gains and
losses resulting from financial instruments designated as
hedges of net assets in foreign subsidiaries have been
recognized as translation differences in other
comprehensive income. The cumulative translation
differences related to foreign operations are reclassified
from equity to statement of income upon the disposal of
the foreign operation.
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