23. Financial risk management

Financial risk management principles

The task of financial risk management is to identify, manage and track the major financial risks in the Group’s business and business environment to enable the Group to achieve its strategic and financial goals in the best possible way. The responsibilities of the Board of Directors include ensuring that the Group has adequate internal monitoring system in place. Group’s policy for hedging against risks is approved by the Board of Directors and the Group’s CFO is responsible for implementing it in practice. The objective of the Group’s financial risk management is to minimise the effects of volatility for recognised major market risks on the Group’s result and balance sheet. Tecnotree Group does not apply hedge accounting as defined under IFRS 9.

Financial risk management organisation

The financial risk management process is supported by the Management Board, who handles risks and risk management in its meetings on a regular basis. CEO reports the major risks to the Board of Directors. The Group’s financial management is responsible for managing foreign exchange, interest rate and liquidity risks according to the guidelines set by the Board.

Capital management

Tecnotree’s objective for capital management is to ensure cash sufficiency and support Group’s growth targets. Additionally, with capital management the Group is ensuring the operational precondition in capital markets during all conditions irrespective of industry’s market volatility. The key ratio in monitoring the development of Group’s capital structure is equity ratio, which is calculated by dividing equity with total balance sheet less advances reveiced.

In August 2015, the company's Board of Directors recognised the loss of shareholders’ equity of the Group’s parent company Tecnotree Corporation and delivered a statement concerning the matter to the Trade Register. The parent company’s shareholders’ equity was EUR 7,698 thousand negative on 31 December 2018 (EUR 3,067 thousand negative) and the Group’s shareholders’ equity was EUR 6,502 million negative (EUR 6,089 million negative).

Components of equity ratio
EUR 1,000 2018 2017

Equity at the end of period -6,502 -6,089

Balance sheet total

28,554 31,847
Advances received

Total balance sheet less advances reveiced 28,554 31,847

Equity ratio -22.8% -19.1%

Liquidity risk

The Group seeks to constantly assess and monitor the amount of liquid funds to ensure the sufficient amount of funding needed to finance the business.

On the reporting date, the Group’s cash and cash equivalents were EUR 4,158 (2,293) thousand.

At the end of the financial year, he company had in accordance to the payment program secured interest-bearing liabilities to the main creditor EUR 9,654 thousand, business mortgage debts EUR 6,952 thousand as well as restruturing debts EUR 3,997 thousand.

The cash flow varies considerably from one quarter to another.

Upcoming due schedule
2018 Balance sheet value Cash flow Due Less than
3 months
1-3 years Over 3 years

Guaranteed restructuring debts the main creditor, interest-bearing 16,606 16,606

4,465 3,288 8,853
Interest payments on the loans

330 676 276
Trade payables 3,621 3,621 1,729 340 443 1,109
Non-interest bearing liabilities 3,997 3,997

272 1,594 2,131
Derivative liabilities

Total 24,224 25,506 1,729 340 5,510 6,667 11,260

Of the overdue account payables, EUR 1.1 million was more than 90 days due.

Minumum lease payments less than one year EUR 150 thousand and between one and five years EUR 395 thousand

2017 Balance sheet value Cash flow Due Less than
3 months
1-3 years over 3 years

Guaranteed restructuring debts from financial institutions, interest-bearing 17,853 17,853
465 465 6,652 10,272
Interest payments on the loans 1,243 1,243

Trade payables 5,498 5,498 2,946 640 333 1,579
Non-interest bearing liabilities 4,396 4,396

400 1,205 2,791
Derivative liabilities 128 128


Total 29,118 29,118 2,946 2,348 1,326 9,436 13,063

Credit risk

Credit risk arises from the potential failure of counterparty to meet its contractual payment obligations. The amount of risk depends on the creditworthiness of the counterparty. The amount of credit risk inherent to financial instruments is the carrying value of the financial assets, which was EUR 15,767 (17,278) thousand at the reporting date. The financial assets are specified in note 24. The most significant separate item of credit risk is the trade receivables.

The credit quality of customers is regularly monitored by the finance department together with sales management, using data on payment history and reports from external sources. Credit rating checks are made on new customers before confirming an offer. The procedure for granting of credit for new customers or customers from countries with high risk rating requires always the acceptance of Group CFO. Tecnotree has not arranged financing for customers with third parties.

Tecnotree’s largest customers are much bigger businesses than the Group itself. The relationship between the Group and its major customers is one of interdependence, which poses a potential risk but also offers significant new business opportunities. The two largest customers accounted for 84 % of net sales in 2018 (2017: 86 %) and for 82 % of the trade receivables at the end of 2018 (2017: 80 %). Parent companies of these customers are large listed companies. In addition, the customers of Tecnotree are mainly in developing markets, with consequenses such as currency transfer regulations and limitations, exchange rate fluctuations and other politic and financial challanges.

The credit quality of financial institutions is monitored by the finance department. The parent company’s counterparties are restricted to financial institutions with legal entities in Finland specified in the Group’s cash management policy. The subsidiary in India has its own finance function and their counterparties are also restricted in the Group’s cash management policy. The amount of cash reserves in other subsidiaries is minimized.
Analysis of trade receivables by age and impairment losses recognized

EUR 1,000 2018 Impairmet loss recognised -% 2017 Impairmet loss recognised -%

Trade receivables not due 2,945


Trade receivables 1-90 days overdue 3,092 1 0% 2,756 100 4%
Trade receivables 91-360 days overdue 3,919 253 6% 2,856 396 14%
Trade receivables more than 360 days overdue 1,653 457 28% 989 372 38%
Total 11,609 711 6% 15,294 868 6%

Change in impairment loss provisions
1 000 € Impairment loss provisions 1.1.2018 Realised provisions Cancelled provisions New provisions Impairment loss provisions 31.12.2018 Change in provision

MEA & APAC 456 -268 -9 425 603 148
Europe & Americas 412 -45 -267 8 108 -304
Total 868 -313 -276 433 711 -156

Project deliveries result in large accounts receivable. Most of Tecnotree’s net sales comes from developing countries and some of these contain political and economic challenges. There is the risk of a considerable delay in the payment of invoices in these countries and that Tecnotree will have to record credit losses. The payment record of customers and the situation concerning trade receivables are actively monitored and credit rating checks are made on new customers before confirming an offer. During the period, new impairment losses of EUR 280 (273) thousand were recorded for over one year overdue trade receivables. The above analysis of trade receivables by age shows net trade receivables, thus after recognition of impairment losses.

Market risks

Currency risk

The financial risk to which the Group is exposed in its operations is mainly currency risk. Changes in exchange rates create risks especially in receivables and order backlog. Tecnotree Group’s reporting and presentation currency is Euro, but significant part of Group’s revenue is in US dollars. The Group’s open translation risk comes from the investments in six foreign subsidiaries, India (Rupees, INR), Brazil (Real, BRL), Argentina (Peso, ARS), Malaysia (Ringgit, MYR), The United Arab Emirates (Dirham, AED) and Nigeria (Naira, NGN).

Transaction risk

The Group’s open currency position comprises foreign currency denominated, sales related balance sheet items, cash and cash equivalents balance, currency denominated order backlog and binding currency denominated purchase and sales contracts.

In the policy for approval of sales contracts, it is required that only the Euros or the US dollar can be used as the sales currency. There shall not be any clauses tying the payments into any other currencies. Sales offices, when selling within their own country, use their own local currency. If any other currencies than Euro, US dollar or sales offices’ local currency are used in sales contracts, it requires a prior written approval from the group CFO.

In 2018, 23 per cent of external invoicing was in Euros, 50 per cent in US dollars, 10 per cent in Argentinian Pesos, 9 per cent in Nigerian Nairas, and 9 per cent in other currencies. The Group is hedging the open US dollar currency position. The Group does not hedge the open ARS, NGN and BRL currency positons, partly because of local currency restrictions and high cost of hedging. The Group does not hedge the other currency positions, since they are not significant.

The Argentinian peso is the functional currency of the company’s subsidiary in Argentina. During 2018, the economic crisis led to the economy of Argentina to be classified as hyperinflationary. Because of this development, adoption of IAS 29 Financial Reporting in Hyperinflationary Economies applies that means from the beginning of the relevant reporting period financial statements of the Argentine subsidiary are to be restated into the current purchasing power that reflects a price index current at the end of the reporting period. Based on the preliminary calculations the impact of this restatement is estimated to be EUR 0.14 million (AR$ 6.1M) in the income statement of the Argentine subsidiary, which has been taken into account at Group level as financial expenses in the consolidated 2018 financial statements.

Currency risks can also arise on intra-group currency positions. The Indian subsidiary has intragroup receivables denominated in EUR, on which exchange rate gains amounting to EUR 238 thousand (148) arose due to rate changes of Indian Rupies. Also the intra-group liabilities denominated in BRL held by the parent company gave rise to exchange rate gains of EUR 126 thousand (7) in 2018. Similarly, EUR dominated intragroup receivables from Nigeria gave rise to exchange rate gain of EUR 63 thousand (2017: losses of EUR 437 thousand) and AED dominated intragroup receivables from the subisdiary UAE exchange rate gains of EUR 148 thousand (2017: losses of EUR 640 thousand). Intra-group currency positions are not hedged.

The Group is hedging the US dollar currency denominated cash flow position for a maximum period of 12 months for not more than 100 per cent of the net position. Hedging is carried into effect with foreign exchange forwards and options. On the reporting date, 0 per cent (0 %) of the open currency position was hedged.

US dollar denominated cash inflow is mainly converted into Euros. Some cash reserves are held in US dollar in order to manage forthcoming US dollar payments.

Sensitivity analysis for market risks

The functional currency of the parent company is Euro. Financial assets and liabilities nominated in foreign currency are presented in the table below. Figures are translated to Euros at the year-end exchange rate.

2018 2017 2018 2017

Current assets
Trade and other receivables 17 6,520 9,440 6,371 3,213
Other receivables related to construction contracts 17

1,851 1,927
Cash and cash equivalents 18

113 317
Trade and other payables 22
-121 -444 -397
Total current assets

6,520 9,319 7,891 5,059

In the sensitivity analysis below, the effect of weakening and strengthening of the INR and USD exchange rate against EUR is presented with all other factors remaining unchanged. The analysed change in the exchange rate represents a possible volatility of the currency during a 12-month period. Fluctuation in exchange rates has no direct effect on equity as the Group does not apply hedge accounting.

EUR 1,000 2018 2017

Change in percentage, INR -10% +10% -10% +10%
Effect on the result after taxes 425 -425 641 -641

Change in percentage, USD -10% +10% -10% +10%
Effect on the result after taxes -717 877 -460 562

Translation risk

Tecnotree India and its subsidiaries are consolidated into Tecnotree Group as from 6 May 2009, hence the Group is exposed to the risks incurred when the net investments denominated in INR are translated into Euro, the functional currency of the parent company. On the reporting date, the open translation risk for the Indian subgroup was EUR 6,636 (6,907) thousand. This net investment is not hedged, mainly because of local currency restrictions and high cost of hedging. The sensitivity for trnslation risk was analysed by determining the effects of 10 percent strengthening and wakening of the INR exchange rate against EUR, all other factors remaining unchanged.

2018 2017

Change in percentage -10% +10% -10% +10%
Effect on the result after taxes 2,339 -2,858 2,569 -3,140
Effect on equity -603 -737 -628 767

During 2018 Indian Rupie weakened 4 per cent compared to Euro, INR/EUR rate being 79.7298 at the end of 2017 and 76.6055 at the end of 2016. This gave rise to a negative translation difference in the Group's equity amounting to EUR 1,527 thousand negative.

The exposure for translation risk related to net investments in other foreign subsidiaries is not significant and is therefore neither hedged nor analysed for sensitivity. However, during 2018, Argentinian Peso (ARS) changed exceptionally compared to Euro. The EUR/ARS rate weakened 93 per cent being 43.0692 at teh end of 2018 and 22.3390 at the end of 2017, which caused a negative translation difference EUR 377 thousand in Group's equity. On the reporting date, the open translation risk position for the Argentine subsidiary EUR 286 (736) thousand.

On the reporting date, the open translation risk position for the Brazilian subsidiary was negative EUR -1.426 (-1.798) thousands, Malaysian subsidiary was EUR 129 (114) thousand, for the Nigeria subsidiary EUR -437 (-943) thousand and correspondingly for the subsidiary in the United Arab Emirates EUR -1.792 (-1.413) thousand, The change in translation difference in equity caused by fluctuations in exchange rates for these subsidiaries was EUR 111 (295) thousand.

Interest rate risk

The Group’s interest rate risk management focuses on the optimal management of liquid funds in sense of profitability and safety and interest rate risk management of bank loans.

At the end of the financial period, the company had interest-bearing loans from the main creditor EUR 16.6 (17.8) million.

Interest rate sensitivity was analysed by determining the effects of one percentage unit’s change in the interest rates on the Group’s interest-bearing financial instruments on an annual level. The analysis included all the significant interest-bearing financial instruments of the Group totalling EUR 12,448 (15,408) thousand debt. On the reporting date, an increase / decrease of one percentage unit in the interest rates would have decreased / increased the net income after tax by EUR -140 / 140 (-97 / 97) thousand. Changes in interest rates would not have had a direct effect on equity. The effect of an increase and a decrease in the interest rates is presented with all other factors remaining unchanged.

Price risk

Tecnotree Group does not own any equity or other financial instruments with values tied to other market prices than interest or currency rates.