3.6 Risk management

Enterprise risk management as a fully integrated risk management process was systematically applied in 2020 at all levels of the GF Corporation. A risk map was prepared in May and November for the Corporation, the three divisions and all significant GF Corporate Companies, including the key risks in the areas of strategy, markets, operations, management and resources, financial 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. The main content of the discussions were the improvement of the risk management process and the evaluation of a new risk management reporting software. 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 outcome of these workshops was included in the risk reports for 2019 and 2020, which were approved by the Board of Directors in February and in December 2020 respectively. In addition, the Board held a risk management workshop in September 2020 with the aim to define all corporate-relevant risks from a Board viewpoint and compare the findings with the risk assessment of the Executive Committee. The result of this workshop as well as the determined measures in order to mitigate or control the risks defined were included in the 2020 risk report.

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.

The following key risks were identified: the negative economic impact of the COVID-19 pandemic crisis and the uncertain commercial relationship between the US and China as well as 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.

Financial risk management

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Financial risks overview

Risk source

Risk management

 

 

 

a) Credit risk

default of a counterparty affecting the recoverability of trade accounts receivable or bank deposits

diversification and regular assessments of creditworthiness

b) Market risk

 

 

- Currency risk

sales and purchases as well as financing to GF Corporate Companies in foreign currencies

selling and producing in functional currency (congruency principle) and hedging by means of currency forward contracts

- Interest rate risk

deemed insignificant

not deemed necessary

- Price risk

deemed insignificant

not deemed necessary

c) Liquidity risk

insufficient liquidity to pay liabilities due

constant monitoring of liquidity, liquidity reserves and unused credit lines

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.

Credit risk

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

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CHF million

2020

2019

 

 

 

On-balance sheet

 

 

Cash and cash equivalents

834

521

Trade accounts receivable

550

597

Other accounts receivable 1

30

25

Accrued income

16

19

Other financial assets 2

98

109

Derivative financial instruments

2

5

Total on-balance sheet

1’530

1’276

 

 

 

Off-balance sheet

 

 

Guarantees to third-parties 3

90

81

Total off-balance sheet

90

81

1 Without tax credits.

2 Relates to loans to third parties, security deposit and long-term invested securities for the settlement of pension liabilities.

3 Thereof used CHF 89 million (previous year: CHF 70 million).

Cash is predominantly deposited with leading Swiss, German, US and Chinese banks with a credit rating of at least BBB– (Standard & Poor’s). Furthermore 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 a 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.

Currency risk

Foreign exchange rates

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Average rates

Spot rates

CHF

 

2020

2019

2020

2019

 

 

 

 

 

 

1

ARS

0.013

0.021

0.011

0.016

1

AUD

0.648

0.691

0.680

0.679

1

BRL

0.184

0.252

0.170

0.240

1

CAD

0.700

0.749

0.691

0.744

1

CNY

0.136

0.144

0.135

0.139

1

EUR

1.071

1.112

1.080

1.085

1

GBP

1.204

1.268

1.202

1.276

1

HKD

0.121

0.127

0.114

0.124

1

INR

0.013

0.014

0.012

0.014

1

MXN

0.044

0.052

0.044

0.051

1

NZD

0.610

0.655

0.636

0.652

1

RON

0.221

0.234

0.222

0.227

1

SGD

0.680

0.728

0.666

0.718

1

TRY

0.135

0.175

0.119

0.162

1

USD

0.938

0.994

0.880

0.966

100

CZK

4.050

4.334

4.116

4.272

100

DKK

14.362

14.900

14.517

14.527

100

JPY

0.879

0.912

0.854

0.890

100

KRW

0.080

0.085

0.081

0.084

100

NOK

10.002

11.299

10.317

11.004

100

PLN

24.108

25.888

23.690

25.498

100

SEK

10.217

10.509

10.765

10.390

100

THB

3.000

3.202

2.941

3.248

100

TWD

3.187

3.215

3.132

3.232

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

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CHF million

Fair value hedges

Cash flow hedges

2020

2019

 

 

 

 

 

Nominal value

232

59

291

443

Market value (net; positive and negative) 1

1

–1

0

4

Net nominal value

233

58

291

447

Corresponds to the carrying amount recognized as marketable securities or other liabilities.

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 that differ 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 currencies (congruency principle) or by entering into foreign currency forwards (cash flow hedges), usually for a maximum of 12 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 expire no later than 12 months from 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 expire no later than 12 months from the balance sheet date.

Assuming unchanged exchange rates, a cash outflow of CHF 291 million (gross) (previous year: CHF 443 million) would be offset by a cash inflow of CHF 291 million (gross) (previous year: CHF 447 million), giving a market value of CHF 0 million (previous year: positive market value of CHF 4 million).

Contract values, net by currencies

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CHF million

2020

2019

 

 

 

EUR/CHF

114

184

USD/CHF

92

191

CNY/USD

11

2

TRY/USD

6

4

BRL/CHF

24

0

CAD/CHF

18

16

RON/CHF

11

15

JPY/CHF

6

4

TRY/EUR

1

0

SGD/CHF

4

4

SEK/CHF

3

7

GBP/CHF

1

1

GBP/EUR

0

8

USD/SEK

0

7

Total

291

443

Accounting principles

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 maximum 75% of the probable future cash flows.

Interest rate risk

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 the 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, variable interest rate instruments may impact 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 8 million (previous year: CHF 4 million). A one-percentage-point decrease in the interest rate is expected to reduce the ordinary result by the same amount.

Price risk

Listed securities of CHF 5 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.

Liquidity risk

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

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CHF million

Carrying amount

Contractual cash flows

Up to 1 year

1 to 5 years

More than 5 years

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable

445

445

445

 

 

Bonds

775

830

9

178

643

Other financial liabilities

180

189

95

94

 

Accrued liabilities and deferred income

239

239

239

 

 

Other liabilities current/non-current 1

75

75

54

21

 

Total 2020

1’714

1’778

842

293

643

Total 2019

1’546

1’608

880

287

441

1 For more details, see [note 2.3.1] Other liabilities.

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 2020 was CHF 732 million (previous year: CHF 768 million). The credit lines are maintained with different banks in order to ensure swift and adequate access to these credit lines.

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