Investor Presentaiton
CONSOLIDATED FINANCIAL STATEMENTS | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | FINANCIAL PERFORMANCE
2.4 FOREIGN EXCHANGE SENSITIVITY
Sales by currency 1-12/2021
EUR
■ CNY
■ USD
■ Other
Foreign exchange risks
KONE operates internationally and is thus exposed to risks
arising from foreign exchange rate fluctuations 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 foreign exchange policy. The most significant
transaction risk exposures arising from business operations
are in the Chinese yuan, Canadian dollar, British pound,
Singapore dollar and Saudi-Arabian rial. The majority of the
currency forward contracts expire within one year.
A change of 10% in the annual average foreign exchange
Impact on sales
7.7% change in
consolidated sales in
euros
rates
Impact on operating
income (EBIT)
Higher impact on
operating income as
compared to sales and
some impact on relative
operating income
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
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 77% 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 7.7% (7.6%) change in
2021 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 205.6 (-
173.2) million in 2021. 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
Accounting principles
Foreign currency transactions and translations
The items included in the financial statements are
initially recognized in the functional currencies, which
are defined for each group entity 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 rate. 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 under
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 entered 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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KONE ANNUAL REVIEW 2021View entire presentation