Material financial risks
HUGO BOSS is subject to currency, tax-related as well as financing risks.
As a result of the global nature of its business activities as well as the Group’s internal financing activities, HUGO BOSS is exposed to currency risks, which may have an impact on the Group’s net income and equity.
In the operating business, currency risks primarily arise due to the fact that products are bought and sold in different currencies in different amounts (transaction risk). Significant cash flows in foreign currencies are primarily related to the Group’s global sales activities and the purchasing activities of the sourcing units in foreign currencies such as the U.S. dollar. Currency risks in financing result from financial receivables and liabilities in foreign currency and loans in foreign currency to finance Group companies (transaction risk). As of the reporting date, the main financing loans were hedged using forward exchange contracts. In addition, currency risks exist in connection with the translation of financial statements of Group companies outside the Eurozone into the Group currency, the euro (translation risk). The translation risk is monitored on an ongoing basis, however the Group does not hedge it as the impact on the consolidated statement of financial position and the Group’s income statement is not a cash item. Notes to the Consolidated Financial Statements, Currency Translation
Currency risks are managed centrally by the Group’s central treasury department. Group-wide guidelines are intended to ensure a strict separation of the trading, handling and control functions for all financial market transactions. They also form the basis for the selection and scope of hedges. The primary aim is to mitigate the exchange rate exposure using natural hedges. This way, currency exposures from business operations throughout the Group can be offset against each other as much as possible, thereby minimizing the need for hedging measures. Forward exchange contracts and swaps as well as plain vanilla options can be concluded to hedge the remaining exposures. The objective here is to limit the impact of exchange rate fluctuations on exposures already on the balance sheet as well as future cash flows. Notes to the Consolidated Financial Statements, Note 20
Future cash flows from the Group’s production activities in Turkey are designated to be an effective hedging relationship shown on the balance sheet (hedge accounting). The derivative financial instruments used in this instance are solely intended to hedge underlying transactions. These derivatives are traded over the counter. When concluded, their terms are generally adapted to the underlying business. Transactions are always concluded with the best quoting bank.
In accordance with the requirements set down in IFRS 7, HUGO BOSS has calculated the effects of translation risk on the Group’s net income and equity. This is determined based on the balance sheet currency exposure as of December 31, 2020. The exposures include cash, receivables and liabilities, as well as intercompany loans held in currencies other than the functional currency of each respective Group Company.
The Group applies the value-at-risk method on the basis of its parametric approach to quantifying and managing currency risk. The value at risk (VaR) is calculated on the basis of historical volatilities and correlations of exchange rates as well as a confidence level of 95%. The holding period is always adjusted to the remaining term of the current year. Furthermore, it is assumed that the total financial currency exposure and its hedging ratio as of the reporting date are representative for the entire reporting period. Although the VaR is an important concept in measuring market price risks, the model’s assumptions can limit its usefulness. The actual impact on the Group’s net income can vary considerably from the model-based values calculated using the VaR method. This is especially the case in the event of exceptional occurrences.
Aggregated across all currencies examined, the diversified portfolio risk for the Group’s net income calculated using this method after hedging comes to EUR 7 million (2019: EUR 5 million). Hedging costs for concluding forward exchange transactions are not included. The largest foreign currency positions come from accounting exposure against the Renminbi, Japanese yen and the Australian dollar. The sensitivity of the Group’s equity is not the same as that of the Group’s net income due to the hedge accounting implemented in the Group. Had the euro appreciated or depreciated against the Turkish lira by one standard deviation, the Group’s equity would have been EUR 1 million higher or lower in the reporting year (2019: EUR 1 million).
Management also expects significant changes in the exchange rates which are relevant to HUGO BOSS to be likely in fiscal year 2021. Based on the results of the VaR analysis, the impact of the transaction risk on the Group’s net income is considered to be material. The translation risk is considered to be likely, with a possible significant impact. Overall, Management assumes a significant impact of currency risk.
As a globally operating group, HUGO BOSS is subject to a variety of tax laws and regulations. Changes in this area could lead to higher tax expenses and tax payments and also have an influence on recognized actual and deferred tax assets and liabilities. All tax-related issues are regularly analyzed and evaluated by the Group’s tax department. The expertise of external local experts such as lawyers and tax advisors is also taken into account.
Tax risks exist for all assessment periods still open. Sufficient provisions were recognized for known tax risks. The amount provided for is based on various assumptions, for example the interpretation of respective legal requirements, the latest court rulings and the opinion of the authorities, which is used as a basis for measuring the loss amount and its likelihood of occurrence.
The Group tax department regularly assesses the likelihood of the future usefulness of deferred tax assets which have been recognized on unused tax losses. This assessment takes into account various factors, such as future taxable results in the planning periods, past results and measures already taken to increase profitability. HUGO BOSS applies a forecast period of a maximum of five years for this purpose. Actual figures may differ from the estimates in this regard.
As for taxes, risks may occur primarily from modifications of tax legislation in various countries, due to varying assessment of existing topics by tax authorities or tax field audits. There may also be risks in transfer pricing in relation to the business model of the Company. The Group therefore considers tax risks to be possible overall, while assessing the financial impact as high. Notes to the Consolidated Financial Statements, Note 5
HUGO BOSS has secured its financial flexibility by means of a revolving syndicated loan with a term up to September 30, 2022. The syndicated loan agreement contains a standard covenant requiring the maintenance of financial leverage, defined as the ratio of net financial liabilities to EBITDA. In light of the implications of the COVID-19 pandemic on its business, HUGO BOSS has agreed with its financing banks in fiscal year 2020 on a suspension of the covenant until June 30, 2021. As of the reporting date, the contractually agreed ceiling has been exceeded. However, due to the suspension of the covenant, this does not represent a reason for cancellation. After the suspension of the covenant ends, HUGO BOSS is obliged to maintain the contractually agreed range of 0 to 3,5 until the end of the term. In case of a violation, the financing banks may declare the syndicated loan earlier due. In light of the Group’s anticipated sales and earnings development in fiscal year 2021, HUGO BOSS currently expects financial leverage in the second half of 2021 to be substantially below the permissible maximum. Financial Position, Capital Structure and Financing