CDON Group Annual Report 2010

Annual Report 2010

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Note 20 Financial instruments and financial risk management

Capital management            
The Group’s aim is to have a solid financial position that contributes to maintaining the confidence of investors, creditors, and the market, as well as be a solid foundation for the continued development of business operations, while generating satisfactory long-term investor returns. However, there are no explicit quantitative objectives, such as for the debt/equity ratio.
Capital is defined as total equity.
Capital (SEK thousands)         31 december 2010 31 december 2009
Total equity         346 544 8 211
             
Neither the parent company nor any of the subsidiaries have any external capital requirements to be met.
Finance policy
The CDON Group is exposed to various types of financial risks through its operations, such as market risk, liquidity risk, and credit risk. The CDON Group’s financial risk management is centralised within the parent company to capitalise on economies of scale and synergies, as well as minimise operational risks. The parent company also functions as the Group’s internal bank and is responsible for financing and the financial policy. This includes pooling of cash requirements. The Board has established financial principles for overall management of risks and for specific areas, such as liquidity risk, interest rate risk, currency risk, credit risk, insurance risk, the use of financial instruments, and placement of extra liquidity.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to fulfil its obligations associated with financial liabilities. This risk is centrally managed by the parent company, which ensures that there is always sufficient cash and cash equivalents and the ability to extend the available financing. Access to cash and cash equivalents for the subsidiary is ensured partly through the use of cash pools. Through the issue of a SEK 250 million convertible, the Group has good access to cash and cash equivalents; at 31 December 2010, the Group’s liquidity stood at SEK 431 million (3). The Group does not currently have any available unutilised credit facilities.
The Group’s financial policy stipulates that there must always be at least SEK 80 million in available funds.
Market risk – interest rate risk
The interest rate risk is the risk that the value of a financial instrument may vary due to changes in market interest rates. The Group’s interest rate risk almost exclusively consists of long-term loans in the form of a nominal SEK 250 million convertible loan. However, the fixed interest rate of 2.85% on the convertible limits the Company’s interest rate risk. For the terms of the convertible loan, see Note 27.
Credit risk
Credit risk is defined as the company’s exposure to loss in the event that one party to a financial instrument fails to fulfil its obligations. The exposure is based on the carrying amount of the financial assets, of which the majority comprises accounts receivables and cash. The Group has a credit policy detailing how customer credit will be managed.
Credit risk attributable to the Group’s accounts receivable is distributed among a large number of customers, mainly private individuals. Accounts receivable have been sold since early 2009 to a factoring company. See Note 13 Accounts receivable.
Insurable risks
The insurance cover is governed by the Group’s corporate guidelines, and centrally negotiated insurance policies cover the majority of its subsidiaries. In certain cases, local insurance policies have been put in place. The business areas and other units are responsible to manage the insurable risks associated with its day-to-day operations.
Market risks – exchange risk
Foreign exchange risk is the risk that fluctuations in exchange rates will adversely affect the income statement, financial position and/or cash flow. The risk can be divided into transaction exposure and translation exposure.
Transaction exposure
Transaction exposure is the risk that arises from net inflow or outflow of a foreign currency required by operations and financing. The transactions are not hedged.
The entities’ net foreign cash flow was distributed among the currencies as follows:
Flow of foreign funds (SEK thousands)         2010 2009
DKK         114 057 102 253
NOK         341 988 260 579
EUR         -99 628 -108 826
USD         -68 915 -14 290
GBP         -94 155 -
             
A five per cent currency exchange rate movement for each currency would affect earnings before tax by the following amounts:
Sensitivity analysis (SEK thousands)         2010 2009
DKK         +/- 5 703 +/- 5 113
NOK         +/- 17 099 +/- 13 029
EUR         +/- 4 981 +/- 5 441
USD         +/- 3 446 +/- 715
GBP         +/- 4 708 -
 
Translation exposure            
Translation exposure is the risk that arises from recalculating equity in a foreign subsidiary. Translation exposure is not hedged.
Net foreign assets including goodwill and other intangible assets arising from acquisitions are distributed as follows:
    2010   2009
Currency   (SEK thousands) %   (SEK thousands) %
NOK   - -   -935 -7
EUR   24 914 100   15 246 107
Total   24 914 100   14 311 100
             
A five per cent currency exchange movement for EUR/SEK would affect equity by about SEK 0.3 million (1).
Other financial assets are recognised in the statement of financial position as cash and cash equivalents, interest-bearing long-term receivables, accounts receivables, and receivables in MTG companies. Financial liabilities are recognised as liabilities to suppliers, current interest-bearing liabilities, and long-term interest-bearing liabilities. The company deems that the book values and the fair values are equal for these items.
Classification of financial instruments
Group (SEK thousands)         2010 2009
Assets            
Loans receivable and accounts receivable            
Accounts receivable         28 923 19 439
Tax receivable         - 583
Current interest-bearing receivables, MTG cash pool accounts         - 270 027
Other receivables         35 824 30 308
Cash and cash equivalents         431 343 3 045
Total loans receivable and accounts receivable         496 090 322 819
             
Total assets         496 090 322 819
             
Other liabilities            
Interest-bearing liabilities, MTG cash pool accounts         -  258 380 
Accounts payable         240 133 202 127
Convertible bonds



207 204
 -
Other liabilities
         39 852 158 780
Accrued expenses and prepaid income
         124 899 95 107

       

Total other liabilities         612 088 714 394
             
Total liabilities         612 088 714 394
             
Parent company (SEK thousands)         2010 2009
Assets            
Loans receivable and accounts receivable            
Accounts receivable         154 -
Current interest-bearing receivables, MTG cash pool accounts         - 142
Receivables from subsidiaries         165 766 130 660
Other receivables         269 927
Cash and cash equivalents         407 444 -
Total loans receivable and accounts receivable         573 633 131 729
             
Total assets         573 633 131 729
             
Liabilities            
Other liabilities            
Interest-bearing liabilities, MTG cash pool accounts         - 230 049
Accounts payable         612 -







Convertible bonds         207 204 -
Other liabilities         2 689 -
Liabilities to Group companies         241 311 186 905
Accrued expenses and prepaid income         16 983 25
Total other liabilities         468 799 416 979
             
Total liabilities         468 799 416 979
             
Calculation of fair value            
Convertible bonds            
Fair value of the debt component of the convertible bonds is calculated by discounting future flows of principal amounts and interest using a market interest rate for similar debts without conversion right.
Accounts receivable and accounts payable            
For accounts receivable and accounts payable with a remaining life of less than six months, the book value reflects the fair value. The Group has no accounts receivable or accounts payable with a life in excess of six months.
Interest rates used to determine fair value            
The company uses the governmental loan rate (Stibor) as of 31 December 2010, plus a relevant interest spread when discounting financial instruments. The applicable interest rates follow.
Group and parent company         2010 2009
Convertible bonds         6,99% -
             
Maturity structure financial liabilities – undiscounted cash flows
Group (SEK thousands) Total 0-3 mo 3 mo - 1 yr   1-5 yr > 5 yr
Convertible bonds 285 071 1 781 5 344   277 946  
Accounts receivable 240 133 240 133        
Other liabilities 35 432 35 432        
Accrued liabilities and deferred income 124 899 114 578 10 321      
Total 685 535 391 924 15 665   277 946 0
             
Parent company (SEK thousands) Total 0-3 mo 3 mo - 1 yr   1-5 yr > 5 yr
Convertible bonds 285 071 1 781 5 344   277 946  
Accounts receivable 612 612        



   
Liabilities to subsidiaries 241 311 241 311        
Other liabilities 2 689 2 689        
Accrued liabilities and deferred income 16 983 15 139 1 844      
Total 546 666 261 532 7 188   277 946 0

CDON Group AB, P.O. Box 385, Bergsgatan 20 (visiting address), SE-201 23 Malmö, Sweden