9 Financial instruments and risk management
Financial instruments comprise financial assets and financial liabilities. Financial instruments associated with pension plans are not included in the following quantitative and qualitative information.
9.1 Classification and measurement
Financial assets include cash and cash equivalents, accounts receivable, prepaid expenses, and current and non-current financial assets. Financial assets are classified and measured as follows:
Financial assets measured at amortized cost comprise debt instruments held to collect contractual cash flows that are solely payments of the principal amount and interest. They are initially measured at fair value including transaction costs, and subsequently measured at amortized cost using the effective interest method. Interest income, foreign currency revaluations, and impairment losses are recognized in the income statement. On derecognition, gains and losses are recognized in the income statement.
Financial assets measured at fair value through profit or loss (FVPL) include equity instruments held for trading, debt instruments, and derivatives, unless they are designated for hedge accounting. They are measured at fair value. Dividends and fair value changes are reported in the income statement. On derecognition, gains and losses are recognized in the income statement.
Financial assets measured at fair value through OCI with recycling (FVOCI with recycling) include debt instruments held both for selling and collecting contractual cash flows that are solely payments of the principal amount and interest. They are initially measured at fair value including transaction costs and subsequently measured at fair value. Unrealized fair value changes are recognized in OCI, whereas interest income, foreign currency revaluations, and impairment losses are recognized in the income statement. On derecognition, the accumulated gains and losses recognized in OCI are reclassified to the income statement.
Financial assets measured at fair value through OCI without recycling (FVOCI without recycling) comprise equity instruments not held for trading. They are initially measured at fair value including transaction costs and subsequently measured at fair value. Dividends are recognized in the income statement, whereas unrealized fair value changes and foreign currency revaluations are recognized in OCI. On derecognition, the accumulated gains and losses recognized in OCI remain in retained earnings.
Purchases and sales of financial assets are recognized at trade date. Financial assets are derecognized when the related rights to the resulting cash flows are sold or expire.
Impairment of financial assets
For all debt instruments not classified and measured at FVPL, an allowance for expected credit losses (ECLs) is recognized. ECLs are based on the difference between the contractual cash flows and the cash flow that the Group expects to receive. Generally, the Group applies a 12-month ECL in view of the low credit risk of its debt instruments. At every reporting date, an assessment is performed to determine whether the debt instruments still have a low credit risk. For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the allowance is based on the lifetime ECL.
For accounts receivable and contract assets, the Group applies the simplified approach, without tracking the changes in credit risks. Instead, the Group recognizes a lifetime expected loss allowance based on a provision matrix. Refer to note 10 and note 15, respectively, for information on the expected loss allowances.
Financial liabilities include accounts payable, accrued expenses, lease liabilities, and current and non-current financial debts. Financial liabilities are classified and measured as follows:
Financial liabilities measured at amortized cost comprise all financial liabilities that are not classified and measured at fair value through profit or loss (FVPL). Financial liabilities are initially measured at fair value net of transaction costs. They are subsequently measured at amortized cost using the effective interest method. Interest expenses and foreign currency revaluations are recognized in the income statement.On derecognition, gains and losses are recognized in the income statement.
Financial liabilities measured at fair value through profit or loss (FVPL) include financial liabilities held for trading, derivatives not designated for hedge accounting, contingent consideration from business combinations, as well as financial liabilities designated at FVPL at initial recognition. They are measured at fair value. Fair value changes are recognized in the income statement. On derecognition, gains and losses are recognized in the income statement.
Financial liabilities are derecognized when the contractual obligations are fulfilled, cancelled or expire.
The carrying amounts of the Group’s financial instruments are classified and measured as follows:
|In CHF million||Note||Amortized cost||FVPL||FVOCI with recycling||FVOCI without recycling||Total||Amortized cost||FVPL||FVOCI with recycling||FVOCI without recycling||Total|
|Cash and cash equivalents||2 841||2 841||2 483||2 483|
|Current financial assets||11||922||54||976||833||75||908|
|Accounts receivable||10||2 092||2 092||1 947||1 947|
|Non-current financial assets||11||216||61||5||208||490||143||50||5||211||409|
|Total financial assets||6 076||137||5||208||6 426||5 412||142||5||211||5 770|
|Accounts payable||12||1 020||1 020||874||874|
|Accrued expenses||13||993||17||1 010||952||18||970|
|Total financial liabilities||3 102||17||3 119||2 765||18||2 783|
Prepaid and accrued expenses include derivatives, see note 9.3.
Financial assets of CHF 23 million are pledged (previous year: CHF 26 million). They serve as security for the Group’s own liabilities.
9.2 Fair values
Financial instruments measured at fair value are assigned to one of the following three hierarchy levels according to the input data available to measure them:
Level 1: Fair values are determined using quoted prices in active markets. The fair values of listed equity instruments and bonds are determined using level 1 fair values.
Level 2: Fair values are determined using quoted prices in inactive markets or according to the discounted cash flow method based on observable market data. The fair values of derivatives are determined using level 2 fair values.
Level 3: Fair values are determined by using external valuations or according to the discounted cash flow method based on unobservable data. The fair values of private equity instruments are determined using level 3 fair values.
With the exception of bonds issued by the Group, the carrying amounts of all other financial instruments measured at amortized cost are reasonable approximations of their fair values.
The Group previously issued domestic bonds in two tranches. In the previous year, the 2-year bond tranche with a coupon of 0.00% amounting to CHF 100 million reached its maturity and was repaid. As of December 31, 2021, the carrying amount of the remaining 5-year bond tranche 2018–2023 with a coupon of 0.25% is CHF 400 million (previous year: CHF 400 million). The level 1 fair value amounts to CHF 404 million (previous year: CHF 405 million). The bond is listed on the SIX Swiss Exchange.
The fair values of the financial instruments measured at fair value and the hierarchy level for their measurement are as follows:
|In CHF million||Fair value||Level||Fair value||Level|
|Current financial assets||54||1||75||1|
|Non-current financial assets||61||1||50||1|
|Financial instruments at FVPL||137||142|
|Non-current financial assets||5||1||5||1|
|Debt instruments at FVOCI with recycling||5||5|
|Non-current financial assets||201||1||203||1|
|Non-current financial assets||7||3||8||3|
|Equity instruments at FVOCI without recycling||208||211|
|Financial instruments at FVPL||17||18|
There were no transfers between the different hierarchy levels during the reporting year, nor in the previous year.
The reconciliation of the level 3 fair values of non-current financial assets is as follows:
|In CHF million||2021||2020|
|Fair value changes recognized in OCI||–1||–|
9.3 Derivatives and hedge accounting
The Group hedges interest rate risks and foreign currency risks arising from its operating activities, financial transactions, and investments using derivative financial instruments. Derivatives are measured at FVPL unless the derivative financial instrument was designated for hedge accounting.
To apply hedge accounting, various criteria must be fulfilled relating to documentation, probability of occurrence, effectiveness of the hedging instrument, and reliability of the valuation. The Group decides on an individual basis whether or not hedge accounting is applied.
Changes in value resulting from cash flow hedge accounting are recognized in OCI and reclassified to the income statement when the underlying transaction occurs.
When the hedged transaction results in the recognition of a non-financial asset or liability, the amounts are transferred from other reserves and included in the initial measurement of the cost of the non-financial asset or liability. Changes in value due to ineffectiveness are recognized in the financial result when they occur.
The following table outlines the fair values and nominal amounts of foreign currency derivatives:
|In CHF million||Fair value of assets||Fair value of liabilities||Nominal amount||Fair value of assets||Fair value of liabilities||Nominal amount|
|Without hedge accounting||16||16||1 731||9||15||1 699|
|Fair value hedges||1||–||23||–||–||15|
|Cash flow hedges||5||1||328||8||3||286|
|Total derivatives||22||17||2 082||17||18||2 000|
9.4 Financial risk management
The Group is exposed to a variety of general and industry-specific risks, which can have a material impact on the Group’s consolidated financial statements. Principles and guidelines for the management of these risks are determined annually by the Board of Directors, the Supervisory and Strategy Committee, and the Group Executive Committee.
The Risk Management Framework is intended to promote sustainable growth, increase the value of the business,and minimize potential adverse effects on the Group’s financial performance. Risk management is monitored by the Supervisory and Strategy Committee and the Finance Steering Committee. The Finance Steering Committee is comprised of internal experts who are not members of the Board of Directors.
Sensitivity analyses are performed to assess the effects of different market conditions. These analyses enable risk positions to be evaluated on a Group-wide basis. They provide an approximate measure of the risk that can arise based on specific assumptions in the event of isolated changes to individual parameters of a defined amount. The actual impacts on the statement of comprehensive income may differ, depending on how the market develops.
The most significant financial risks to which the Group is exposed are as follows:
Interest rate risks
Exposure is primarily driven by negative interest rates for cash held in CHF. The most significant risk results from financial assets and liabilities denominated in the following currencies: CHF, EUR, USD, BRL, CNY, INR.
Foreign currency risks
Exposure to foreign currency risks arises from transactions in currencies other than the functional currency of the Group company. The most significant risk results from the following currencies: EUR, USD, BRL, CNY, INR.
Resulting from valuation changes of investments in equity instruments.
Exposure arises in the event that debt obligations cannot be met when due, or external borrowings cannot be refinanced.
Resulting from the inability or unwillingness of counterparties of financial assets to fulfill their payment obligations.
Interest rate risks
In order to mitigate interest rate risks, the Group aims to invest excess cash to reduce the negative interest exposure wherever feasible, as well as constantly monitor and fix interest rates for financial liabilities.
Risks from changes in interest rates are modelled using sensitivity analyses that demonstrate the effects of changes in market interest rates on interest expense and interest income. If market interest rates had been 1 percentage point higher or lower during the reporting year, net interest income would have been CHF 29 million higher or lower (previous year: CHF 23 million higher or lower).
Foreign currency risks
The Group mitigates its foreign currency risk through natural hedging of the income currency with the expense currency, or through hedging transactions with financial institutions. Intra-Group financing takes place in local currencies. The foreign currency risk is regularly monitored by key management. Speculative borrowing or investment in foreign currencies is not permitted.
The following table shows the net positions of significant currency hedges and the impact on the net financial result in the event of a movement of +/– 5% in the respective currency.
|In CHF million||Net position||Sensitivity +/–5%||Net position||Sensitivity +/–5%|
|EUR||234||+11 / –11||205||+10 / –10|
|USD||13||+1 / –1||2||– / –|
|BRL||–35||–2 / +2||–10||–1 / +1|
|CNY||69||+6 / –6||59||+3 / –3|
|INR||–5||– / –||–||–|
Unhedged net positions amount to less than CHF 10 million and the resulting foreign currency risks are insignificant (previous year: less than CHF 10 million).
In order to effectively manage and mitigate the underlying price risk, decisions on investments in equity instruments are made by the Supervisory and Strategy Committee, Finance Steering Committee, or Global Treasury only.
As of December 31, 2021, the Group is invested in equity instruments totaling CHF 230 million (previous year: CHF 227 million), of which CHF 201 million are represented by the investment in Hyundai Elevator Co. Ltd. (previous year: CHF 203 million).
If the prices of the equity instruments as of December 31, 2021, had been 10% higher or lower, net financial income and OCI would have been CHF 2 million and CHF 21 million higher or lower, respectively (previous year: CHF 2 million and CHF 21 million higher or lower, respectively).
Liquidity risks are mitigated by maintaining a substantial liquidity reserve in cash, as well as through the efficient use of debt markets for financing purposes, available due to the Group’s creditworthiness.
Future cash outflows for the Group’s financial liabilities are as follows:
|In CHF million||Carrying amounts||Total||< 1 year||1–5 years||> 5 years|
|as of December 31, 2021|
|Accounts payable||–1 020||–1 020||–1 020|
|thereof cash inflows||2 104||2 029||75||–|
|thereof cash outflows||–2 099||–2 024||–75||–|
|Other financial debts||–264||–264||–79||–18||–167|
|Total||–3 097||–3 147||–2 213||–672||–262|
|as of December 31, 2020|
|thereof cash inflows||2 017||1 956||61||–|
|thereof cash outflows||–2 018||–1 957||–61||–|
|Other financial debts||–132||–132||–86||–19||–27|
|Total||–2 766||–2 814||–2 034||–650||–130|
The contractual maturities are based on the undiscounted, contractually agreed payments of the principal amount and interest.
Lease liabilities with future cash outflows in more than five years comprise payments for leases of land and buildings for which the Group assessed contractual extension options as reasonably certain to be exercised. The future cash outflow above ten years is less than CHF 30 million (previous year: less than CHF 35 million).
Credit risks are mitigated through the active collection management of accounts receivable and contract assets, down payments received for customer contracts, and the use of limits governing the total value of financial instruments held at any one financial institution.
Furthermore, in view of the Group’s large customer base and global presence, the concentration of credit risks in accounts receivable and contract assets is limited. Refer to note 10 and note 15, respectively, for more information on bad debt allowances and expected loss allowances on contract assets.
The Group is invested mainly in time deposits and high-quality, low-risk, liquid securities. Cash and cash equivalents as well as financial assets are held with counterparties which are primarily rated as investment grade, as defined by public rating agencies. Those assets without rating relate predominately to time deposits held with non-publicly rated Swiss cantonal banks and Swiss towns and communities.
|In CHF million||AAA range||AA range||A range||BBB range||<BBB range||No public rating available||Total|
|as of December 31, 2021|
|Cash and cash equivalents||209||661||907||579||56||429||2 841|
|Current financial assets||50||50||260||11||9||596||976|
|Non-current financial assets||–||–||57||51||–||152||260|
|as of December 31, 2020|
|Cash and cash equivalents||172||488||869||462||49||443||2 483|
|Current financial assets||–||69||245||85||–||509||908|
|Non-current financial assets||–||–||82||–||–||100||182|
The table above excludes equity instruments, as investments in equity instruments are subject only to price risks and not to credit risks.
The Group’s capital management activities aim to maintain its strong credit rating and robust key performance indicators in order to ensure its operating activities, support growth, and increase the value of the Group.
The Group manages capital by monitoring net liquidity and the equity ratio.
|In CHF million||2021||2020|
|Net liquidity||3 027||2 669|
|Equity ratio in %||37.0||36.8|
Net liquidity is defined by Schindler in the non-GAAP measures. The definition of these non-GAAP measures is available on the Group’s website.