Investor Presentaiton
CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | CAPITAL STRUCTURE
5.3 FINANCIAL RISKS AND INSTRUMENTS
KONE's business activities are exposed to financial risks such
as foreign exchange risks, interest rate risks, liquidity risks
and credit risks. These financial risks are managed as part of
the total KONE risk portfolio. KONE Treasury is responsible
for the centralized management of financial risks in
accordance with the KONE Treasury Policy approved by the
Board of Directors. KONE business units manage their
financial risks locally in accordance with the KONE Treasury
Policy.
Financial credit risk
KONE has substantial amounts of cash and financial
investments. In order to diversify the financial credit risk and
manage liquidity risk, funds are invested into highly liquid
interest rate funds and deposits with several banks. Global
counterparty limits are approved by the Board of Directors. All
open exposures such as cash on bank accounts, investments,
deposits and other financial assets, for example derivatives
contracts, are included when measuring the financial credit
risk exposure. When selecting counterparty banks and other
investment targets, only counterparties with high
creditworthiness are approved. The size of each limit reflects
the creditworthiness of the counterparty. Counterparty
creditworthiness is evaluated constantly and the required
actions are considered case by case if significant changes in
the creditworthiness of a counterparty occur. The fair values
of interest rate funds are measured based on market
information (fair value hierarchy level 2).
Refinancing and liquidity risks
KONE's cash and cash equivalents was EUR 490.4 (457.9)
million and financial investments EUR 2,393.7 (2,170.4)
million on December 31, 2021.
Cash and financial investments are managed centrally by
KONE Treasury. Due to local regulations, part of the funds
reside in local investments and on decentralized bank
accounts in a number of KONE countries. A substantial part of
the funds is nevertheless accessible to KONE Treasury.
Changes in the local regulations can also in the future have
an impact on the location of the cash and financial
investments.
KONE has a credit facility from the European Investment
Bank (EIB) of EUR 200 million. The credit facility is a 5-year
fixed interest rate loan which will be used for R&D purposes.
Accounting principles
Derivative financial instruments and hedge accounting
Derivative financial instruments are initially and subsequently
recognized at fair value in the statement of financial position.
The fair values of foreign exchange forward contracts are
calculated by discounting the future cash flows of the contracts
with the relevant market interest rate yield curves on the
valuation date and by calculating the difference between the
discounted values as at the forward contract date and balance
sheet date in euros.
At the contract date the derivatives are classified according
to the foreign exchange policy as hedging instruments of a
business transaction arising from a firm or highly probable
purchase or sales contract. These are partly included in cash
flow hedge accounting, hedges against fair value changes of
assets or liabilities or hedges of net investments in foreign
entities.
In cash flow hedge accounting KONE uses foreign
currency forward contracts to hedge its exposure in foreign
currency dominated cash flows which ensures economic
relationship between the hedged item and the hedging
instrument and full effectiveness as the value of the hedging
instrument and the value of the hedged item move in the
opposite direction because of the common underlying
denominator. The full fair value of derivatives, including
transaction related forward points, is designated in the
hedging relationship.
The effective portion of changes in the fair values of the
foreign exchange derivatives initiated for hedging firm or highly
probable future purchase or sales transactions is recognized
through the statement of comprehensive income to the hedge
reserve within equity. The cumulative changes of fair values
are transferred into the statement of income as adjustment
items to sales or purchases simultaneously when the hedged
sale or purchase realizes. When cash flow hedge accounting
is applied, at the inception of the hedging transaction the
economic relationship between hedging instruments and
hedged items is documented including whether the hedging
instrument is expected to offset changes in cash flows of
hedged items. Also, the risk management objective and
strategy for undertaking various hedge transactions is
documented at the inception of each hedge relationship.
Hedge effectiveness is assessed before hedge accounting is
applied and at least on a quarterly basis thereafter.
The gain or loss relating to the ineffective portion is
recognized immediately as an adjustment to cost and
expenses. In hedges of foreign currency transaction,
ineffectiveness may arise if the timing of the forecast
transaction changes from what was originally estimated. If a
foreign exchange derivative included in the cash flow hedge
accounting expires or is sold or when a hedge no longer
meets the criteria for hedge accounting, the cumulative
change in the fair value of the hedging instrument will remain
in the hedge reserve and is recognized in the income
statement at the same time with the hedged sale or
purchase. The cumulative fair values of the hedging
instruments are transferred from the hedge reserve to adjust
cost and expenses immediately if the hedged cash flow is no
longer expected to occur.
The changes in the fair values of derivatives that are
designated as hedging instruments but are not accounted for
according to the principles of cash flow hedge accounting are
recognized based on their nature either in the operative
income or costs, or as financial income or expenses: if the
hedged risk arises from an operative transaction, the fair
values of the hedging instruments are recognized in costs
and expenses, and if the hedged item is a monetary item, the
fair values are recognized in financing items.
Changes in the fair values of foreign exchange
derivatives are recognized in financing income and expenses
if the hedged item is a loan receivable, deposit or a financial
asset or liability denominated in a foreign currency.
The effective portion of the change in the fair values of
currency forward contracts hedging translation differences
arising from net investments in foreign subsidiaries, are
recognized through the statement of comprehensive income
to the translation differences within equity and would be
transferred to the income statement in case the net
investment were disposed of partially or in its entirety. The
hedged risk is designated as movements in the spot rate
(excluding changes due to interest rates i.e. forward points).
Changes in fair value of the hedging instrument due to the
forward points (cost of hedging) are immediately recognized
in the consolidated statement of income.
Fair values of derivative instruments are recognized
under current assets and liabilities in the balance sheet.
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