Annual Report 2024

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 programme is focused on mitigating the unpredictability of financial markets and aims to minimise potential adverse effects on the group’s financial performance. To hedge certain risk exposures, the group uses derivative financial instruments, which are measured using standardised mathematical models. The counterparty risk associated with these derivatives is tracked but considered immaterial for the group.

Risk management is carried out by Group Treasury under the Global Treasury 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.

The group hedges its foreign exchange risk exposure of recognised assets and liabilities and future commercial transactions with 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.

Cash flow hedge of a firm commitment to acquire a business:

SoftwareOne entered into a foreign currency call option in 2024 to hedge foreign currency risks relating to NOK 7,225 million in relation to a purchase price for a highly probable future company acquisition, refer to Note 3 Change in the scope of consolidation. The option is designated as a cash flow hedge. The acquisition is expected to take place in June 2025, when the related amount accumulated in OCI will be transferred from the hedging reserve to the consideration for the net assets acquired and will affect goodwill. The option premium is due at the date of expiry. Therefore, the group recorded a financial liability of TCHF 13,516 under current financial liabilities.

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:

With regard to the foreign currency call option, an increase of 5% in NOK/CHF results in a decrease in equity of CHF 12,513. Conversely, a decrease of 5% in NOK/CHF results in an increase in equity of CHF 28,950.

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. An interest rate risk exists due to changes in market interest rates. Since 2024, the group has managed the risk of changes in the interest rate on the basis of limits using interest rate derivatives as part of the defined risk strategy. The underlying transactions are designated as cash flow hedges. They are expected to affect profit and loss within the next 30 months (end of December 26). 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.

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

Equity price risk

The group is exposed to price risks related to listed shares in Crayon Group Holding ASA, Norway. 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 +/– 6,233 (prior year: TCHF +/– 4,373).

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 end customers, including outstanding receivables and contract assets. Risk control assesses the credit quality of the end customers, considering their 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 end customers that are internationally diversified. 33% of trade receivables are covered through credit insurance (prior year: 36%).

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

• From end customers with top ratings (based on internal and credit insurance assessment): 63% (prior year: 53%)
• Too small to be insured: 0.5% (prior year: 1%)
• No insurance available: 3.5% (prior year: 10%)

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 from 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 ccould be exercised with the consent of the lending banks in the fourth quarter of 2023 and 2024. In December 2024, SWO exercised the second extension option. The tenor of the facility was extended by a majority (96.5%) of lenders from 31 December 2026 to 31 December 2027. Interest is payable at a base rate plus a margin ranging from 72.5 to 87.5 basis points initially, depending on the currency, and thereafter adjusted for changes in the leverage ratio of the group. As of 31 December 2024, CHF 250 million of the credit facility has been drawn (prior year: CHF 70 million). The facility is available until maturity date with interest periods ranging from one week to six months.

The facility is subject to the loan covenant leverage ratio. The leverage ratio is calculated as net debt divided by earnings before net financial items, taxes, depreciation and amortisation. The leverage ratio was 0.76 as of 31 December 2024 (prior year: –0.62). A potential breach of covenant triggers measures which are standard in such circumstances. In addition, there is another credit line that contains this covenant. Under the agreements, the covenant is tested semi-annually on 30 June and 31 December each year and reported to management and lending banks to ensure compliance with the agreement. The group complied with this covenant in 2024 and 2023.

As of 31 December 2024, the group had total committed and uncommitted credit lines (including factoring) of CHF 1,168 million (prior year: CHF 1,149 million) available, of which 38% (prior year: 25%) was drawn. From the drawn amount, CHF 250 million were covered by financial covenants and fulfilled as of 31 December 2024 (prior year: CHF 70 million).

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. The maturity date of the swap was extended in 2024 from 31 July 2024 to 22 December 2025. 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 had fallen below the agreed threshold, thus, SoftwareOne recorded a cash outflow of TCHF 10,447 which was set off against the financial liability. As of 31 December 2024, the market price of the underlying asset had risen compared to prior year and was above the agreed threshold. As a result, SoftwareOne recorded a cash inflow of TCHF 10,114 which increased the financial liability and is classified as investing cashflow. The financial liability for the receipts from swap contracts amounted to TCHF 35,911 at the end of the reporting period (prior year: TCHF 27,050). The total return swap had a positive market value (prior year: negative 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.

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.

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.

The equity ratio for the period ended 31 December 2024 and the prior year were as follows:

The equity ratio for 2024 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, repurchases of treasury shares under the share buyback programme and low profitability of the group.

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.

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 expenses.

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 or as part of the initial carrying amount of the non-financial assets or liability recognised. The ineffective portion is recognised immediately in the income statement.

In the case of a positive value, the derivative is recognised as an asset and in the 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 gain of TCHF 21,543 in finance income in 2024 (prior year: fair value loss of TCHF 9,244).

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. The fair value of financial liabilities (related to a swap contract) is determined based on input factors observed directly or indirectly on the market.

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.

There has been a transfer from level 3 to level 2 in 2024. No transfers between the hierarchy levels were made in 2023.

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

The change in carrying values associated with “Level 3” contingent consideration liabilities are set out below:

The most significant contingent consideration liability relates to the acquisition of Medalsoft (fair value as at 31 December 2024: TCHF 6,279). The contingent consideration liability of Medalsoft depends on the achievement of certain fixed events (TCHF 2,317) and the retention of the selling shareholder with continuing employment (TCHF 3,962). The cash outflows are expected on a yearly basis until 2027. In the event of termination by the selling shareholder, the contingent consideration is reduced proportionately over the term of the arrangement.

4.4 Transfer of financial assets

The group has entered into 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 2024 is TCHF 151,666 (prior year: TCHF 192,671). The amount is fully derecognised from the balance sheet.

4.5 Offsetting of financial assets and liabilities

The group has entered into arrangements that do not meet the criteria for offsetting but still allow for the related amounts to be offset if certain credit events occur (such as a default). The following table shows the amounts which cannot be offset under IFRS, but which could be settled net under the terms of master netting agreements, to show the total net exposure of the group.