6.2 Objectives and principles of financial risk management

Objectives and principles of financial risk management

In the years covered by these Consolidated Financial Statements, the Group was exposed to the following types of financial risk:

Market risk

The Group is exposed to market risks associated with changes of the exchange rates and interest rates. The objective of the market risk management process is to limit undesirable impact of changes of market risk factors on the cash flows and results in the short- and medium-term. The Group manages the market risk following from the aforementioned factors on the basis of internal procedures which define the rules of measurement of individual exposures, parameters and time horizon.
The principles of market risk management are implemented through assigned organizational units under the supervision of the Parent Company’s Management Board. Market risk management is executed based on developed strategies, with partial utilization of derivative instruments. Derivatives are used only to limit the risk of a change in the carrying amount and the risk of cash flow changes. Transactions are entered into only with reliable partners, admitted to participation as a result of application of internal procedures and execution of appropriate documentation.

Foreign exchange risk management

As at 31 December 2018, the Group was exposed to foreign exchange risk concerning for the most part trade receivables, loan liabilities and lease liabilities denominated in foreign currencies.
As a result of valuation of receivables and liabilities denominated in foreign currencies conducted as at the balance sheet date, and also as a result of ongoing settlements in foreign currencies, there arise positive and negative FX differences. Their values fluctuate during the year, which is caused by changes in exchange rates.
In a long-term perspective, the valuation risk matches the risk of change of cash flows, therefore the Group’s cash flows are subject to hedging operations.
For the EUR/PLN exchange rate, there is partial natural hedging due to the fact that sales revenues in EUR are partly balanced out by costs in the same currency. The FX risk management transactions used by the Group are aimed at hedging the net free position exposed to change of the value in PLN. As part of its hedge accounting policy, the Group used applied forward transactions for the currency pair EUR/PLN in 2017–2018 and established hedging relationships between cash flows arising from bank loans denominated in EUR and future highly probable cash flows arising from operating activities denominated in EUR.

Items in foreign currencies

⁽¹⁾ For financial assets/other financial liabilities in the tables above, the currency column (EUR) presents the Group’s exposure amount in forward transactions, while the currency column (PLN) corresponds to the fair value measurement of derivatives in PLN.

Sensitivity to FX risk

The Group is exposed mainly to the foreign exchange risk regarding the currency pairs EUR/PLN, CHF/PLN and CZK/PLN in connection with its operating and financing activities. Deviations in exchange rates were calculated on the basis of the average volatility of each currency exchange rate in the period under analysis. Sensitivity of financial Instruments to foreign exchange risk has been calculated as the difference between the original carrying amount of the financial Instruments and their potential value while assuming changes to foreign exchange rates. The tables below present the Group’s exposure to foreign exchange risk in 2017-2018.

FX forward transactions

To manage the foreign exchange risk in 2018 and 2017, FX forward transactions were applied on the EUR/PLN currency pair (sale and purchase of currency).

List of unrealized FX forward contracts

As at 31 December 2018

As at 31 December 2017

Interest rate risk management

As at 31 December 2018, the Group is exposed to the risk of volatility of interest rate cash flows following from bank loans and lease agreements based on variable interest rates. Interest on lease agreements was accrued according to the reference rates increased by the financing party’s margin. The reference rate for lease contracts denominated in EUR is EURIBOR 6M, and for agreements signed in PLN the reference rate is WIBOR 1M. Interest on loan agreements was accrued at the WIBOR 1M and 3M, EURIBOR 3M and PRIBOR 3M reference rates plus the banks’ margins. Interest rate risk in loan and leasing agreements is executed through revaluation of instalments in monthly, quarterly and semi-annual periods, depending on the agreement.

Until May 2018, the Group used interest rate risk management transactions (IRS) to hedge against fluctuations of interest rates for some of the finance lease liabilities.

The cash held by the Group as at 31 December 2018 was mainly in the form of fixed rate bank deposits which were concluded with time horizons depending on the Group’s liquidity needs. In future periods, as a result of changes in the deposit interest rates, the cash position may be exposed to interest rate risk.

Financial instruments by interest rate type

Interest rate fluctuation sensitivity

The sensitivity analyses presented below are based on the level of exposure of financial instruments to interest rate risk as at the balance sheet date. In the case of liabilities with variable interest rates, for the needs of the analysis it is assumed that the amount of outstanding liabilities as at the balance sheet date will be unpaid for the whole year. The Group identifies the exposure to interest rate risk mainly for WIBOR, EURIBOR and PRIBOR. Interest rate deviations are calculated on the basis of observations of average interest rate fluctuations. The sensitivity analysis presented below does not comprise the interest accrued as at the balance sheet date. The analysis results are presented in gross terms (before tax).

Credit risk management

The table below presents the items of the consolidated statement of financial position exposed to credit risk by financial instrument class:

Conducting its commercial activity the Group sells services to business entities with a deferred payment date, which may lead to the risk of counterparties defaulting with meeting the deadlines for payment of the amounts due for the provided services. To minimize the credit risk, the Group manages the risk through a prevailing client creditworthiness assessment procedure. This assessment is carried out for all clients who use a deferred payment date. As part of its internal policy, the Group makes application of the deferred term of payment conditional on acceptability of the counterparty’s condition and positive history of cooperation.

Concentration of risk associated with trade receivables is limited due to the large number of business partners with commercial credit dispersed among different sectors of economy.

Structure of trade receivables in terms of entity types

In addition, to reduce the risk of problems with recovery of trade receivables, the Group accepts from its customers securities in the form of, among others: receivables insurance, bank / insurance guarantees, assignment of contracts, blockage on bank accounts, and promissory notes. As at 31 December 2018, 12.0% of trade receivables were secured. 

The credit risk associated with cash and bank deposits is perceived as low. All entities in which the Group invests free cash operate in the financial sector. These include domestic banks, foreign banks and branches of foreign banks with a high creditworthiness. The concentration of risk involving cash and bank deposits with a maturity longer than 3 months is presented in the table below.