Annual Report 2023

4 Financial risk management

4.1 Financial risk factors

The group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, equity price risk), credit risk and liquidity risk. The group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the group’s financial performance. The group uses derivative financial instruments to hedge certain risk exposures. The financial derivatives are measured with the aid of standardised mathematical models. The counterparty risk related to those derivatives is immaterial for the group.

Risk management is carried out by Group Treasury under a policy approved by the Board of Directors. Group Treasury identifies, evaluates, and hedges financial risks in close cooperation with the group’s operating entities. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments and investment of excess liquidity.

Market risk

Foreign exchange risk

The group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.

Group Treasury has set up a policy to manage its foreign exchange risk. The group hedges its foreign exchange risk exposure of recognised assets and liabilities and future commercial transactions by derivative contracts. The group reviews the currency exposure regularly and covers its risks in two ways:

• The group hedges the net exposure from foreign currency balance sheet positions with forward contracts. Such contracts, however, are not accounted for using hedge accounting.
• Highly probable future transactions are hedged with forward transactions (sales and purchase). These contracts are designated as cash flow hedges. The transactions are expected to affect profit and loss within the next 36 months. At inception of a hedge relationship, the group designates and documents the hedge relationship to apply hedge accounting. The hedge relationship includes the hedging instrument, the hedged item and the nature of the risk being hedged. The hedges are expected to be highly effective.

In addition, there are certain investments in foreign operations whose net assets are exposed to foreign currency translation risk which, as per group policy, is not hedged. These differences are recognised in other comprehensive income and accumulated in equity. Translation risk is not considered in the analysis below.

The following table details the group’s sensitivity to the major currencies with all the other variables held constant:

Interest rate risk

The group’s interest-bearing instruments with variable interest are cash, bank overdrafts, bank loans and a multiple currency revolving credit facility. Also refer to Note 18 Financial liabilities. Using these instruments, the group is exposed to interest rate risks. Currently, the mitigation possibilities are reviewed.

Equity price risk

The group is exposed to price risks related to listed shares. Changes in fair value are recognised in profit and loss as they arise. For a part of these listed equity instruments, the group entered into a total return swap agreement in 2022, in which it sold shares but remains exposed to the price risk related to these shares, refer to further explanations in section Liquidity Risk below.

A sensitivity analysis was performed. A 10% fluctuation in share price leads to fluctuations in pre-tax earnings of TCHF +/– 4,373 (prior year: TCHF +/– 5,841).

Credit risk

Group Treasury and the Group Credit & Collection Department are responsible for managing and analysing the credit risk for all new clients before standard payment and delivery terms and conditions are offered. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and contract assets. Risk control assesses the credit quality of the customers, considering its financial position, past experience and other factors. No collateral is required. Individual risk limits are set based on internal or external ratings in accordance with guidelines set by the Board. The utilisation of credit limits is regularly monitored.

There is no concentration of credit risk with respect to trade receivables, as the group has many customers that are internationally diversified. 36% of trade receivables are covered through credit insurance (prior year: 39%).

The remaining part is not insured for one of the following reasons:

• From end customers with top rating (based on internal and credit insurance assessment): 53% (prior year: 42%)
• Too small to be insured: 1% (prior year: 1%)
• No insurance available: 10% (prior year: 18%)

Refer to Note 11 Trade receivables for information about the credit risk exposure on the group’s trade receivables and contract assets using a provision matrix.

Liquidity risk

Cash flow forecasting is performed in the operating entities of the group and aggregated by Group Treasury. Group Treasury monitors rolling forecasts of the group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while always maintaining sufficient headroom on its undrawn borrowing facilities (for further details see below).

The table below analyses the group’s non-derivative financial liabilities according to relevant maturity groupings based on the remaining period as of the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, i.e., undiscounted interest and principal payments:

In July 2022, the group signed an amendment and restatement agreement for the multiple currency revolving credit facility to increase the facility from CHF 470 million to CHF 660 million and extend the tenor to 31 December 2025. The initial agreement was signed in 2019. The facility contains two extension options which can be exercised with the consent of the lending banks in the fourth quarter of 2023 and 2024. In December 2023, SWO exercised the first extension option. The tenor of the facility was extended from 31 December 2025 to 31 December 2026. The facility contains one remaining extension option (which can be exercised with consent of the lending banks in December 2024), which could extend the maturity of the credit facility by another year to December 2027. Interest is payable at a base rate plus a margin ranging from 62.5 to 77.5 basis points initially, depending on the currency, and thereafter adjusted for changes in the leverage ratio of the group. As of 31 December 2023, CHF 70 million of the credit facility has been drawn (prior year: CHF 0 million). The facility is available until maturity date with interest periods ranging from one week to six months. The facility is subject to loan covenants (leverage ratio: net debt/earnings before net financial items, taxes, depreciation and amortisation). A potential breach of covenant triggers measures which are standard in such circumstances. Under the agreement, the covenants are monitored on a regular basis by the treasury department and half yearly reported to management and lending banks to ensure compliance with the agreement.

In December 2022, the group entered into a total return swap agreement related to listed equity securities. Under the total return swap, SoftwareOne sold the underlying shares for cash consideration of TCHF 42,559 but remains exposed to changes in the market value of these shares. As a result, the group did not derecognise the financial asset and recorded a financial liability for the receipts from swap contracts. In the event of a negative market price development of the underlying asset, there is a risk of a cash outflow when agreed thresholds are exceeded up to the amount of the consideration received. On maturity date of the total return swap, the liability from the swap contract and the related financial asset will both be derecognised and the related cashflows will be settled. As of 31 December 2023, the market price of the underlying asset has fallen below the agreed threshold. Thus, SoftwareOne recorded a cash outflow of TCHF 10,447 which is set off against the financial liability and classified as investing cashflow. The financial liability for the receipts from swap contracts amounted to TCHF 27,050 at the end of the reporting period (prior year: TCHF 41,938). The total return swap had a negative market value (prior year: positive market value).

The maturity structure of the derivative financial instruments based on cash flows is as follows:

The contractual agreement determines whether the contracting parties must fulfil their obligations from derivative financial instruments net or gross.

As of 31 December 2023, the group had total committed and uncommitted credit lines (including factoring) of CHF 1,149 million (prior year: CHF 1,098 million) available, of which 25% (prior year: 24%) was drawn. From the drawn amount, CHF 70 million were covered by financial covenants and fulfilled as of 31 December 2023 (prior year: CHF 0 million).

4.2 Capital risk management

The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

Surplus cash held by the operating entities over and above working capital requirements are transferred to Group Treasury whenever the legal environment permits. Group Treasury invests surplus cash in interest-bearing current accounts or short-term time deposits to provide sufficient headroom as determined by the above-mentioned forecasts.

In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

Capital is measured based on the group’s consolidated financial statements and monitored closely on an ongoing basis. Management's target for the period under review was to strengthen the capital base to sustain and support further development of the business. In 2023, this goal was achieved through the positive operating results of the group.

The equity ratio for the period ended 31 December 2023 and the prior year were as follows:

The equity ratio for 2023 decreased compared to the previous year, which is due to an increase of total assets and a reduction in equity as a result of dividends paid and repurchases of treasury shares under share buyback programme which were only partly compensated by the net income for the period.

4.3 Categories of financial instruments and fair value estimation

For purposes of subsequent measurement, SoftwareOne has financial assets at amortised cost (debt instruments), financial assets at fair value through profit or loss and derivatives designated as hedging instruments for purposes of subsequent measurement.

The group’s financial assets at amortised cost comprise trade and other receivables, loans and cash and cash equivalents. 

The group’s financial liabilities include trade and other payables, accrued expenses, contingent consideration liabilities and other financial liabilities including bank overdrafts and derivative financial instruments.

SoftwareOne has listed equity instruments presented as short-term financial assets which are subsequently measured at fair value through profit or loss. Financial assets at fair value through profit or loss are carried in the balance sheet at fair value with net changes in fair value recognised in finance income and finance costs.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value through profit or loss except for the effective portion of cash flow hedges, which is recognised in OCI and later reclassified to the income statement when the hedged item affects profit or loss. The ineffective portion is recognised immediately in the income statement.

In case of a positive value, the derivative is recognised as an asset and in case of a negative value, as a liability (classified as non-current when the remaining maturity of the hedged item is more than 12 months and as current when the remaining maturity of the hedged item is less than 12 months).

Categories of financial instruments

The following table discloses the carrying amounts and fair values, as required, of the group’s financial instruments by class and category:

For investments in listed equity instruments the group recognised a fair value loss of TCHF 9,244 in finance expenses in 2023 (prior year: TCHF 71,328).

Fair value estimation

The carrying amounts of cash and cash equivalents, trade and other receivables and trade and other payables with a remaining term of up to 12 months, as well as other current financial assets and liabilities, represent a reasonable approximation of their fair values, due to the short-term maturities of these instruments.

The fair value of financial assets (equity instruments) is based on observable price quotations at the reporting date. The fair value of derivatives is determined based on input factors observed directly or indirectly on the market. The fair value of foreign exchange forward contracts is based on forward exchange rates.

Financial instruments carried at fair value are analysed by valuation method. The fair value hierarchy has been defined as follows:

Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices for identical assets or liabilities at the reporting date.

Level 2: The fair value measurements are those derived from valuation techniques using inputs for the asset or liability that are observable market data, either directly or indirectly. Such valuation techniques include the discounted cash flow method and option pricing models. For example, the fair value of interest rate and currency swaps is determined by discounting estimated future cash flows, and the fair value of forward foreign exchange contracts is determined using the forward exchange market at the end of the reporting period.

Level 3: The fair value measurements are those derived from valuation techniques using significant inputs for the asset or liability that are not based on observable market data.

The following table discloses valuation classes for financial instruments measured at fair value:

There have been no transfers between the different hierarchy levels in 2023 and 2022.

The change in carrying values associated with 'Level 3' contingent consideration liabilities are set forth below:

The most significant contingent consideration liability relates to the acquisition of the customer base of Predica acquired in 2022.

Predica (fair value as of 31 December 2023: TCHF 4,347; prior year: TCHF 8,750): The contingent consideration liability of Predica depends on certain KPIs of the year 2023 to 2024 and the retention of three key employees. An early termination of one key employee resulted in a fair value gain of TCHF 1,300. An amount of TCHF 2,708 was paid in 2023. The remaining contingent consideration is capped at a maximum of TCHF 4,347. A partial amount of TCHF 3,338 is exclusively related to the retention of the two remaining key employees. The calculation for the performance year 2024 is primarily based on chargeability of delivery resources and new customers and amounts to a maximum of TCHF 1,404.

4.4 Transfer of financial assets

The group enters transactions in which it transfers trade receivables under factoring agreements and, as a result, may either be eligible to derecognise the transferred receivables in their entirety or must continue to recognise the transferred receivables to the extent of any continuing involvement, depending on certain criteria.

Receivables subject to factoring arrangements are derecognised on sale and these assets are not held to collect contractual cash flows and would be measured at fair value through profit or loss. However, due to their short-term nature, the difference between transaction price and fair value is not considered to be material. Where the factored receivables continue to be recognised in the balance sheet, they are treated as held to collect contractual cash flows and measured at amortised cost.

The amount of the receivables sold as of 31 December 2023 is TCHF 192,671 (prior year: TCHF 197,477). The amount is fully derecognised from the balance sheet.