Enterprise risk management as a fully integrated risk management process was systematically applied in 2019 at all levels of the GF Corporation. The three Divisions, the Corporate Staff and all significant GF Corporate Companies prepared a risk map in May and November including the key risks in the areas of strategy, markets, operations, management and resources, financials as well as sustainability. The likelihood of the risk occurring was classified into four categories. Where possible and appropriate, the identified risks were subject to a quantifiable assessment, taking into consideration any measures already implemented. Alternatively, a qualitative assessment of the risk exposure was applied.

The risk council, consisting of representatives of the Divisions and the Corporate Staff and headed by the Chief Risk Officer, held two meetings. Main content of the discussions were the enhanced handling of cyber risks and the execution of adequate measures as well as the optimization of the sustainability risk reporting. In addition, the divisional risk maps were closely analyzed.

In accordance with the semi-annual risk reporting process, the Executive Committee and the management of the Divisions discussed the risk maps twice. They defined, at the appropriate level, the key risks of the GF Corporation, the Divisions and the Corporate Companies, and determined adequate measures to mitigate those risks. The Board of Directors has reviewed the enterprise risk management most recently in February 2020 and analyzed the corporate and divisional risk maps as well as defined the key risks and the risk mitigation measures.

The multi-stage procedure, including workshops at division management, Executive Committee and Board of Directors level, has proven to be very effective, as has having Internal Audit assess the risk maps prepared by the GF Corporate Companies.

Following key risks were identified: slow-down of the economic growth due to political and economic uncertainties, mainly in China, the impact of the lower automotive sales in Europe on some GF Casting Solutions plants in Europe and cyber risks. Measures to reduce these and other risks were defined and are being implemented in line with the strategic targets of the Corporation and the three Divisions.

The Board of Directors bears ultimate responsibility for financial risk management. The Board of Directors has mandated the Audit Committee with monitoring the development and implementation of the risk management principles. The Audit Committee reports regularly to the Board of Directors on this matter. The Audit Committee is supported by the Head of Corporate Controlling and Investor Relations in this task.

The financial risk management principles are designed to identify and analyze the risks to which the Corporation is exposed and to establish appropriate control mechanisms. The principles of financial risk management are regularly reviewed, taking into consideration changes in the relevant financial markets and in the Corporation’s activities.

Through its different business activities, the GF Corporation is exposed to various financial risks such as credit risk, market risk (including currency risk, interest rate risk, and price risk), and liquidity risk. The following sections provide an overview of the extent of the individual risks as well as the goals, principles, and processes employed for measuring, monitoring, mitigating and managing the risks.

As per balance sheet date, the maximum amount of credit risk including off-balance sheet commitments was as follows:

Cash is predominantly deposited with leading Swiss, German, US and Chinese banks with a credit rating of at least BBB– (Standard & Poor’s). Further and in accordance with the investment policy, all financial transactions are only entered into with counterparties deemed creditworthy. In addition, cash holdings are allocated to different banks in order to limit the counterparty risk. The maximum amount of cash to deposit with a bank is defined in relation to its credit rating. Cash deposits, current accounts and cash investments have a maturity of less than three months.

Transactions involving derivative financial instruments are only entered into with counterparties with at credit rating of at least BBB– (Standard & Poor’s). The purpose of such transactions is to hedge against currency risks.

The risk of concentrated credit risks on trade accounts receivable is limited due to the large number of customers and their wide diversification across industries and regions. The extent of credit risk is determined by individual characteristics of the customers and in order to assess this risk, the creditworthiness of customers is assessed on a regular basis.

The maximum credit risk on financial instruments corresponds to their carrying amounts. No additional arrangements have been entered into, that would increase the risk above the carrying amounts.

The table below shows the foreign currency forward nominal and market values of the foreign currency contracts used to mitigate currency risk:

Given its international activities, the GF Corporation is exposed to currency risk. Currency risk occurs in connection with transactions (in particular the purchase and sale of goods) which are effected in currencies different from the functional currencies. Through such transactions the corporation is mainly exposed to changes in the euro and US dollar exchange rates. These currency risks can be reduced by purchasing and producing goods in the functional currency (congruency principle) or by entering into foreign currency forwards (cash flow hedges), usually for a maximum of twelve months.

The fair value hedges include foreign currency forward contracts that are used to hedge loans to GF Corporate Companies in foreign currencies. Unrealized gains and losses from changes in the fair value are reported in the financial result. These fair value hedges are mainly in US dollar, euro, Canadian dollar and Romanian leu and have an expiry of no more than 12 months of the balance sheet date. 

The fair value hedges also include foreign currency forward contracts that serve to hedge currency risks on receivables and payables. Like the currency effects on the underlying balance sheet item, gains and losses from changes to the fair value of these contracts are recognized in “Other operating income”. These fair value hedges are mainly in US dollar and euro and have an expiry of no more than 12 months of the balance sheet date.

Assuming unchanged exchange rates, a cash outflow of CHF 443 million (gross) (previous year: CHF 462 million) would be offset by a cash inflow of CHF 447 million (gross) (previous year: 463 million), giving a positive replacement value of CHF 4 million (previous year positive replacement value of CHF 1 million).

Derivative financial instruments used to hedge balance sheet items (fair value hedges) are accounted for at market values through the income statement. Hedging transactions on probable future cash flows (cash flow hedges) are initially accounted for at market values through equity. Later, when an asset or a liability results from the hedged underlying transaction, the gains and losses previously recognized in equity are transferred to the income statement. In the case of cash flow hedges the volume of the foreign currency forward contracts is limited to a maximum 75% of the probable future cash flows.

The interest rate risk may involve either changes in future interest payments owing to fluctuations in market interest rates or the risk of a change in fair value of interest bearing liabilities.

As fair value accounting is not applied for interest bearing liabilities, changes in market interest rates are not expected to have a material impact on the income statement.

However, there is an expected impact from variable interest rate instruments on the cash flows. It is expected that a one-percentage-point increase in the general level of interest rates would increase the ordinary result by CHF 4 million (previous year: CHF 4 million). A reduction in the interest rate by a one-percentage-point decrease is expected to reduce the ordinary result by the same amount.

Listed securities of CHF 4 million (previous year: CHF 4 million) are exposed to price risk. Since the value of these securities is low compared to the total assets, no significant impact on the income statement is expected from price fluctuations.

The following table shows the contractual maturities (including interest rates) of the financial liabilities:

The liquidity risk is the risk that GF is unable to meet its obligations when they fall due. Liquidity is constantly monitored to ensure that it is adequate. Liquidity reserves are held in order to offset the usual fluctuations in requirements. At the same time, the Corporation has unused credit lines in case more serious fluctuations occur. The total amount of unused credit lines as of 31 December 2019 was CHF 768 million (previous year: CHF 591 million). The increase is explained by the increase of the syndicated loan agreement by CHF 150 million. The credit lines are maintained with different banks in order to ensure swift and adequate access to these credit lines.