[34] Financial risk reporting

Capital management

One of the prime objectives of capital management is to ensure liquidity at all times. Measures aimed at achieving these objectives include the optimisation of the capital structure, the reduction of liabilities and ongoing Group cash flow planning and management. Besides the supplementary agreement to the SFA in 2009, long-term financing requirements were also covered by the issuance of the corporate bond (see 'Credit terms' table).

Close cooperation between local units and the Group head office ensures that the local legal and regulatory requirements faced by foreign group companies are considered in the capital management process.

Net financial debt before borrowing costs – defined as the difference between financial liabilities and cash and cash equivalents – is the key performance measure used in liquidity planning at Group level. Lease liabilities and other financial liabilities are excluded from this figure, which were €2,656,613 thousand in 2011 (2010: €2,640,829 thousand).

Credit risk

In certain finance and operating activities, the KION Group is subject to credit risk, i.e. the risk that partners will fail to meet their contractual obligations. This risk is limited by diversifying business partners based on certain credit ratings. The Group only enters into transactions with business partners and banks holding a good credit rating and subject to fixed limits. Counterparty risks involving our customers are managed by the individual Group companies.

The following table shows the age structure of receivables as at the reporting date.

Impairment losses are based on the credit risk associated with the receivables and are assessed primarily using factors such as a customer’s credit rating and historical pattern of meeting payment terms.

Some of the receivables that were overdue as at the reporting date, but for which no impairment losses had been reported, were offset by corresponding trade payables or collateral. Apart from this item, the Group did not hold any significant collateral.

Liquidity risk

Based on IFRS 7, a liquidity risk arises if a company is unable to meet its financial liabilities. The KION Group maintains a liquidity reserve in the form of lines of credit and cash in order to ensure financial flexibility and solvency. The age structure of financial liabilities is reviewed continuously and was improved by issuing the corporate bond.

The following table shows all of the contractually agreed payments under recognised financial liabilities as at 31 December 2011, including derivative financial instruments with negative fair values.

The calculation of future cash flows for derivative financial liabilities includes all currency forwards and interest-rate swaps that have negative fair values as at the reporting date.

Bank guarantee lines (e.g. sureties, performance bonds) had been issued under the ancillary facility agreements for a total amount in the low double-digit millions as at 31 December 2011. They included guarantees payable 'on first demand'. No guarantees were utilised in 2011.

The volume of business for which factoring was used in 2011 was €17,844 thousand (2010: €19,853 thousand). Because all material risks and rewards are assigned to the purchaser, these assets are derecognised in full.

Default risk

For financial assets, default risk is defined as the risk that a counterparty will default, and therefore is limited to a maximum of the carrying amount of the assets relating to the counterparty involved. The potential default risk attaching to financial assets is mitigated by secured forms of lending such as reservation of title, credit insurance and guarantees.

Specific valuation allowances for defaults are recognised to reflect the risk arising from primary financial instruments. Financial transactions are only entered into with selected partners holding good credit ratings. Investments in interest-bearing securities are limited to investment-grade securities.

Risks from financial services

The KION Group's leasing activities mean that it may be exposed to residual value risks from the marketing of machinery and equipment that is returned by the lessee at the end of a long-term lease and subsequently sold or re-leased. Residual values in the markets for used trucks are therefore constantly monitored and forecasted.

KION regularly assesses its overall risk position arising from financial services, recognising write-downs, valuation allowances or provisions to cover the risks it identifies. It immediately takes into account any changes in residual values when calculating new leases.

The increased marketing activities for used trucks and the overall increase in demand help to stabilise the residual values of the KION Group's industrial trucks and therefore serve to mitigate risk.

In addition, residual values are mainly based on remarketing agreements that continued to achieve positive outcomes in 2011. Under these agreements, any residual-value risk is transferred to the leasing company concerned. Group-wide standards to ensure that residual values are calculated conservatively reduce risk and provide the basis on which to create the transparency required. KION also has an IT system for residual-value risk management.

The KION Group mitigates its liquidity risk and interest-rate risk by ensuring that most of its transactions and funding loans have comparable maturities. Long-term leases are primarily based on fixed-interest agreements. The credit facilities provided by various banks ensure that the Group has sufficient liquidity.

In order to eliminate exchange-rate risk, KION generally funds its leasing business in the local currency used in each market.

Because of low default rates, counterparty risk has not been significant to date in the KION Group. The Company did not identify any material year-over-year changes in 2011. KION's losses from defaults are also mitigated by its receipt of the proceeds from the sale of repossessed trucks. In addition, it primarily offers financial services indirectly via selected funding partners, and KION bears the counterparty risk in less than 5 per cent of cases. The credit risk management system was refined as part of the work involved in transferring financial services activities to a separate segment. In particular, this involved revising procedures on operational and organisational structure as well as processes for risk management and control.

Exchange-rate risk

In accordance with its treasury risk policy, the KION Group hedges exchange rate risks both locally at the level of the individual companies and centrally via KION GROUP GmbH in order to meet the prescribed minimum hedging ratios.

The main hedging instruments employed are foreign-currency forwards, provided that there are no country-specific restrictions on their use.

At an entity company level, hedges are entered into for highly probable future transactions on the basis of rolling 15-month forecasts, as well as for firm obligations not reported in the statement of financial position. In accordance with IAS 39, these hedges are generally classified as cash flow hedges for accounting purposes (see note [35]).

Foreign-currency forwards are also employed to hedge the exchange rate risks resulting from internal financing.

The following table shows an overview of the foreign-currency forwards entered into by the KION Group.

The currency options bought and sold in 2008, each with a notional value of US$ 780,000 thousand, were closed in 2011. The income generated by the sale totalled €1,649 thousand. No new options have been entered into.

Significant exchange rate risks from financial instruments are measured on the basis of value at risk (VaR) as part of internal Group management. VaR figures are calculated using historical variance-covariance analyses. Correlations and volatilities are calculated on the basis of the 250 working days prior to the reporting date (unweighted).

Exchange rate risks from financial instruments as defined by IFRS 7 are only included in calculating value at risk if the financial instruments are denominated in a currency other than the functional currency of the reporting entity concerned. This means that exchange rate risks resulting from the translation of the separate financial statements of subsidiaries into the Group reporting currency, i.e. currency translation risk, are not included.

The value at risk in respect of currency risk as at 31 December 2011 was €54,676 thousand (31 December 2010: €19,968 thousand). Value at risk is the loss that is not expected to be exceeded over a holding period of one year with a confidence level of 97.7 per cent (2010: 97.7 per cent).

Interest-rate risk

Interest-rate risk within the KION Group is managed centrally. The basis for decision-making includes sensitivity analyses of interest-rate risk positions in key currencies.

The table below shows the cumulative effect of an increase or decrease of 100 basis points (bps) in the relevant interest-rate curves, with a rate of 0 per cent constituting the lower limit of the calculation.

The Group essentially funds itself by drawing down loans under its agreed credit facilities. Interest-rate derivatives - mainly interest-rate swaps - are used to hedge the resulting interest-rate risk.

The interest-rate caps purchased in 2009 and with a notional value of €1,250,000 thousand expired in 2011 as planned. No new interest-rate options have been entered into.