33 JOTUN GROUP 11 FINANCIAL RISK MANAGEMENT The Jotun Group is exposed to financial risks like currency risk, liquidity risk and credit risk. The Jotun Group handles these risks in accordance with the Group’s Treasury policy. The responsibility for managing financial risk in the Jotun Group is divided between the individual operational entities and Group level. At Group level, Group Treasury manages risk related to centralised activities like funding and currency risk. Furthermore, Group Treasury monitors and advises the local entities on risk issues and ensures that the Group’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Group’s policies and risk objectives; • Have financing available for investments and growth • Ensure that working capital is giving satisfactory return • Provide prudent financial risk management throughout the Group • Utilise internal cash resources to minimise external borrowings • Secure dividend inflows from subsidiaries and associates • Maintain efficient and safe cash management routines • Streamline processes for internal loans and equity transactions Group Treasury shall ensure that the Group has financing available to meet both short-term funding needs and the longterm strategic ambitions of the Jotun Group. Minimizing the cost of capital shall be secondary to maintaining financial flexibility in line with the Jotun Group’s strategy and business objectives. It is the Group’s policy not to trade for speculative purposes. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below. Jotun Group’s management of funding is further described in Note 15. The Group has no official credit rating, but actively monitors quantitative and qualitative measures which affect its creditworthiness. As of 31 December 2016, all of the Group’s financial instruments related to hedging are owned by the parent company Jotun A/S. Each operating unit has a net inflow or outflow of foreign currency related to product sales and raw material purchases. The currency risk arises when the movements in currency rates can not immediately be passed on to the product prices. This creates an impact on the operational result. The Jotun Group has a policy to hedge against this effect in companies where the effect is significant. There has been no hedging in companies in 2016, except Jotun A/S. Foreign currency financial cash flows such as dividend payments, royalty payments, interest payments, instalments and issuing of loans and equity, give a currency exposure. For the Group this risk is concentrated to Jotun A/S. The policy is to hedge this exposure. Hedge accounting in accordance with IAS 39 is not applied. Both realised and unrealised effects are recognised in the financial result. A) FOREIGN CURRENCY RISK Foreign currency risk is the risk that cash flows, profits and balance sheet items will fluctuate because of future changes in foreign exchange rates. As the Norwegian krone (NOK) is the functional currency for Jotun A/S and the presentation currency for the Jotun Group, the Group is exposed to currency risk between NOK and other currencies. During 2016 NOK has strengthened moderately versus most other functional currencies within the Group, with the notable exceptions of the Egyptian Pound and Turkish Lira, which both weakened substantially versus NOK. Currency translation at yearend was based on the following key exchange rates: CLOSING RATE NORWEGIAN KRONE 1 = 2016 2015 CHANGE % Chinese renminbi (CNY) 1.24 1.353 –8% Hong Kong Dollar (HKD) 1.111 1.134 –2% Malaysian Ringgit (MYR) 1.92 2.048 –6% Thai Baht (TBH) 0.241 0.244 –1% Egyptian Pound (EGP) 0.468 1.122 –58% Omani Rial (OMR) 22.369 22.824 –2% Saudi Riyal (SAR) 2.296 2.341 –2% South Korean Won (KRW) 0.007 0.007 –4% U.S. Dollar (USD) 8.611 8.786 –2% Turkish Lira (TRY) 2.444 3.003 –19% FOREIGN CURRENCY RISK ON OPERATIONAL AND FINANCIAL CASH FLOWS
Jotun Annual Report 2016
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