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Financial Instruments - Fair values and risk management

12 Months Ended

Dec. 31, 2019

Financial Instruments - Fair values and risk management

30	Financial Instruments – Fair values and risk management

The effect of initially applying IFRS 9 on the Group’s financial instruments is described in note 5. Due to the transition method chosen, comparative information has not been restated to reflect the new requirements.

A. Accounting classification

The following tables show the classification and carrying amounts of Group’s financial assets and financial liabilities as at December 31, 2019 and 2018.


Financial assets	31/12/19		31/12/18
Financial assets measured at amortised cost
Other non-current receivables		4,519		4,533
Trade receivables		29,187		40,967
Other current receivables		7,723		9,507
Cash and cash equivalents		39,799		62,131

Total (a)		81,228		117,138


Financial assets measured at fair value
Forward exchange contracts		145		218

Total (b)		145		218


Total financial assets (a+b)		81,373		117,356

Financial assets measured at amortised cost include trade receivables, other receivables

(non-current

and current) and cash and cash equivalents. Financial assets at fair value reflect the positive change in fair value of forward exchange contracts that are not designated as hedge relationships, but are, nevertheless, intended to reduce the level of foreign currency risk for future cash flows from accounts receivables and sale orders.


Financial liabilities	31/12/19		31/12/18
Financial liabilities measured at amortised cost
Long-term borrowings		18,412		20,943
Lease liabilities		57,367		—
Bank overdrafts and short-term borrowings		24,170		35,148
Trade payables		68,476		77,901
Other payables		22,049		26,914

Total (a)		190,474		160,906


Financial liabilities measured at fair value
Forward exchange contracts		772		320

Total (b)		772		320


Total financial liabilities (a+b)		191,246		161,226

Financial liabilities measured at amortised cost include long-term borrowings

(non-current

and current portion), lease liabilities

(non-current

and current portion), bank overdrafts and short-term borrowings, trade payables and other payables. Financial liabilities measured at fair value reflect the negative change in fair value of forward exchange contracts that are not designated as hedge relationships, but are, nevertheless, intended to reduce the level of foreign currency risk for expected future cash flows from trade receivables and sale orders.

For the details on “Long-term borrowings”, “Lease liabilities” and “Bank overdrafts and short-term borrowings” reference should be made to note 19, 20 and 26.

B. Fair value and measurement of fair values

Management has assessed that the fair values of cash and cash equivalents, trade and other receivables, trade and other payables, bank overdrafts and short-term borrowings approximate their carrying amounts largely due to the short-term maturities of these instruments.

The following tables show the carrying amount and fair value of Group’s financial assets and financial liabilities as at December 31, 2019 and 2018, other than those with carrying amount that are reasonable approximation of fair value.


	31/12/19				31/12/18
	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets
Forward exchange contracts		145		145		218		218

Financial liabilities
Floating-rate borrowings		9,232		9,322		13,943		13,943
Fixed rate borrowings		9,180		10,256		7,000		7,000

Total long-term borrowings		18,412		19,578		20,943		20,943


Forward exchange contracts		772		772		320		320

As at December 31, 2019 and 2018, the fair value measurement hierarchy of the forward exchange contracts and long-term borrowings is “significant observable inputs” (level 2).

There were no transfers between level 1 (quoted prices in active markets) and level 2 during 2019 and 2018. There were no level 3 (significant unobservable inputs) fair values estimated as at December 31, 2019 and 2018.

The following methods and assumptions are used to estimate the fair values.

Forward exchange contracts are valued using valuation techniques, which employ the use of market observable inputs. The most frequently applied valuation techniques include forward pricing using present value calculations. The models incorporate various inputs, including the credit quality of counterparties, foreign exchange spot and forward rates, yield curves of the respective currencies, currency basis spreads between the respective currencies, interest rate curves and forward rate curves of the underlying commodity.

The fair values of the Group’s interest-bearing borrowings are determined using the discounted cash flow method. The discount rate used reflects the issuer’s borrowing rate as at the end of the reporting period. The own

non-performance

risk as at December 31, 2019 and 2018 is determined to be insignificant.

C. Financial risk management

The main financial risks which the Group is exposed to are reported in the following.

The Group’s principal financial assets, other than derivatives, include cash and cash equivalents, trade and other receivables that derive directly from operations. The Group’s principal financial liabilities, other than derivatives, comprise of long-term borrowings, lease liabilities, bank overdrafts and short-term borrowings, trade and other payables. The main purpose of these financial liabilities is to finance the Group’s operations. The Group also enters into derivative transactions, namely forward exchange contracts, to protect the value of its foreign currency denominated revenue, not for speculative or trading purposes.

(i) Risk management framework

The Group is exposed to credit risk, liquidity risk and market risk. The management of these risks is performed on the basis of guidelines set by the Group’s senior management. The main purpose of these guidelines is to balance the Group’s liabilities and assets, in order to ensure an adequate capital viability. The main financial sources of the Group are represented by a mix of equity and financial liabilities, including long-term borrowings used to finance investments, bank overdrafts, short-term borrowings and a

non-recourse

factoring agreement used to finance the Group’s working capital.

(ii) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in this note.

Impairment losses on financial assets recognised in profit or loss for the years ended December 31, 2019, 2018 and 2017 are related mainly to trade receivables.

(ii-a)

Trade receivables

The Group’s customers are mainly represented by distributors, retailers and end consumers. Customer credit risk is managed on the basis of the Group’s established policies, procedures and controls relating to customer credit risk management. Credit quality of a customer is assessed based on an extensive credit rating scorecard and individual credit limits are defined in accordance with this assessment. Sales to the end consumers are required to be settled in cash or using major credit cards, mitigating credit risk.

Outstanding customer receivables are regularly monitored to prevent losses. The Company insures the collections risk related to a significant portion of trade receivables (about 80%), with a third party insurer and, in case of insolvency, the insurance company has to refund 85% of uncollected outstanding balances.

For receivables subject to collective valuation an impairment analysis is performed at each reporting date, starting from

year-end

2018, using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by customer type and rating, and coverage by credit insurance). The calculation reflects the probability-weighted outcome based on reasonable and supportable information available at the reporting date about past events, current conditions and forecasts of future economic conditions.

For individual receivables which are known to be uncollectible an impairment analysis is performed at each reporting date to measure expected credit losses. The provision is estimated by the Group based on the financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or late payments.

The Group evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and operate in largely independent markets (see note 15).

In addition, in July 2015 the Company signed a

non-recourse

factoring agreement with a major Italian financial institution. Under this agreement, the Company sells certain customer performing receivables to a financial institution in exchange for cash, for a maximum amount of 47,500. Such agreement is set to expire in July 2020 and the Company expects to renew it.

Given the considerations above, the credit risk is full for

non-insured

trade receivables, in the limit of 15% for insured receivables and nil for receivables included in the

non-recourse

factoring agreement.

Therefore, the allowance for doubtful accounts is estimated by the Group based on the insurance in place, the credit worthiness of its customers, historical trends, as well as current and future general economic conditions.

As at December 31, 2019 and 2018 the ageing of trade receivables is as follows:


	31/12/19			31/12/18
Current (not past due)		15,179			24,251
From 1 to 29 days past due		8,570			8,614
From 30 to 60 days past due		1,298			1,409
From 61 to 90 days past due		2,531			1,274
More than 90 days past due		10,308			15,046

Gross trade receivables		37,886			50,594
Allowance for doubtful accounts		(8,699	)		(9,627	)

Net trade receivables		29,187			40,967

Set out below is the information about the credit risk exposure on the Group’s trade receivables using a provision matrix as at December 31, 2019, 2018 and January 1, 2018, further to the adoption of IFRS 9.

December 31, 2019


	Days past due
	<30 days			30-60 days			61-90 days			> 91 days			Total
Trade receivables subject to collective valuation		4,936			387			—			309			5,632
Trade receivables subject to specific valuation														32,524

Total gross carrying amount														37,886
Default rate		0.13	%		1.42	%		3.83	%		27.07	%		—
Expected credit loss		6			5			—			84			95

December 31, 2018


	Days past due
	<30 days			30-60 days			61-90 days			> 91 days			Total
Trade receivables subject to collective valuation		9,288			1,323			88			669			11,368
Trade receivables subject to specific valuation														39,226

Total gross carrying amount														50,594
Default rate		0.10	%		0.99	%		2.90	%		5.80	%		—
Expected credit loss		9			13			3			39			64

January 1, 2018


	Days past due
	<30 days			30-60 days			61-90 days			> 91 days			Total
Trade receivables subject to collective valuation		11,661			651			254			173			12,739
Trade receivables subject to specific valuation														35,585

Total gross carrying amount														48,324
Default rate		0.11	%		1.04	%		2.99	%		5.33	%		—
Expected credit loss		13			7			8			9			37

(ii-b)

Other receivables

As at December 31, 2019 and 2018 other receivables current and

non-current

amount to 12,242 and 14,040, respectively. Such receivables are considered to have a low credit risk and the impairment loss has been measured on a

12-months

expected credit losses basis. Management considers its other receivables to have a low credit risk as they have a low risk of default and their counterparties are able to meet their contractual cash flow obligations in the short-term. As at December 31, 2019 and 2018 the identified impairment loss of other receivables is immaterial.

(ii-c)

Cash and cash equivalents

As at December 31, 2019 and 2018 the Group has cash and cash equivalents of 39,799 and 62,131, respectively. The cash and cash equivalents are held with financial institutions, which have external credit risk ratings that are equivalent to the understood definition of “investment grade”. Impairment of cash and cash equivalents has been measured on a 12-months expected credit losses basis and reflects the short-term nature of the exposures. The Group considers its cash and cash equivalents to have a low credit risk based on the external credit ratings of the financial institutions. As at December 31, 2019 and 2018 the identified impairment loss of cash and cash equivalents is immaterial.

(ii-d)

Derivative financial instruments

Domestic currency swaps (see note 29) are entered into with financial institutions that have outstanding external credit ratings (“investment grade”). As at December 31, 2019 and 2018 the identified impairment loss of the favourable domestic currency swaps is immaterial.

(iii) Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group aims to maintain the level of its cash and cash equivalents at an amount in excess of expected cash outflows on financial liabilities over the next 60 days. The Group also monitors the level of expected cash inflows on trade and other receivables together with expected cash outflows on trade and other payables.

Therefore, the Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, short-term borrowings, long-term borrowings and a

non-recourse

factoring agreement of export-related trade receivables.

The tables below summarize the remaining contractual maturities of financial liabilities as at December 31, 2019 and 2018.

The amounts are gross and undiscounted, and include contractual interest payments and exclude the impact of netting agreements.

December 31, 2019


	Less than 2 months		2 to 12 months		1 to 2 years		2 to 5 years		More than 5 years		Total
Long-term borrowings		512		4,222		6,568		5,389		3,525		20,216
Lease liabilities		3,341		10,587		9,972		26,568		17,760		68,228
Bank overdrafts and short-term borrowings		24,170		—		—		—		—		24,170
Trade and other payables		22,049		68,476		—		—		—		90,525
Losses on derivative financial instruments		772		—		—		—		—		772

Total financial liabilities		50,844		83,285		16,540		31,957		21,285		203,911

December 31, 2018


	Less than 2 months		2 to 12 months		1 to 2 years		2 to 5 years		More than 5 years		Total
Long-term borrowings		899		10,019		3,416		6,158		1,358		21,850
Bank overdrafts and short-term borrowings		35,148		—		—		—		—		35,148
Trade and other payables		26,914		77,901		—		—		—		104,815
Losses on derivative financial instruments		320		—		—		—		—		320

Total financial liabilities		63,281		87,920		3,416		6,158		1,358		162,133

As disclosed in note 19, the Group has secured bank loans that contain covenants. A future breach of covenants may require the Group to repay the loan earlier than indicated in the above table. Under the agreement, the covenants are monitored on a regular basis by the treasury department and regularly reported to management to ensure compliance with the agreement.

The interest payments on variable interest rate loans in the tables above reflect market forward interest rates at the reporting date and these amounts may change as market interest rates change.

Except for these financial liabilities, it is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.

In addition, the following is to be considered: (a) as at December 31, 2019, the Group has unused credit lines of 24,251 (see note 26); (b) the Company can use the credit facilities of its subsidiaries adhering to the cash pooling contract in place; from time to time, the Company evaluates the adequacy of such credit facilities, requesting additional facilities as needed; (c) the Group holds cash at foreign subsidiaries, that can be withdrawn by the Company subject to the approval of a dividend distribution; some of these dividends are subject to withholding taxes; (d) the Company can apply for long-term borrowings to sustain long-term investments; (e) there are no significant liquidity risk concentrations, both on financial assets and on financial liabilities.

(iv) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (e.g., interest rates, foreign exchange rates). Market risk, mainly, depends on the trend of the demand for furniture and other finished products, the trend in raw materials and the fluctuation of interest rates and foreign currencies.

The market demand risk is managed by way of a constant monitoring of markets, performed by the commercial division of the Group, and a product diversification in the different brands.

In order to manage the raw materials risk, the Group constantly monitors procurement policies and attempts to diversify suppliers while respecting the quality standards expected by the market.

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term borrowings obligations with floating interest rates. The Group manages its interest rate risk by having a portfolio of fixed and variable rate borrowings. As at December 31, 2019, approximately 49.9% of the Group’s borrowings were at a fixed rate of interest (2018: 33.4%). No derivative financial instruments were entered into by the Group to manage the cash flow risk on floating interest-rate borrowings.

The following tables demonstrate the sensitivity to a reasonably possible change in interest rates on that portion of loans and borrowings affected. With all other variables held constant, the Group’s profit before tax is affected through the impact on floating rate borrowings as follows:


	Increase/ decrease in basis points		Effect on profit before tax
December 31, 2019		+45		(51)
December 31, 2019		-45		51
December 31, 2018		+45		(71)
December 31, 2018		-45		71
December 31, 2017		+45		(90)
December 31, 2017		-45		78

Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when revenue or expense is denominated in a foreign currency) and the Group’s net investments in foreign subsidiaries. In particular, the Group purchases a significant portion of raw materials in U.S. Dollars, and sells a significant amount of finished products in Euro. As a consequence, the Group is exposed to a foreign currency risk, which is managed by forward exchange contracts.

When a derivative is entered into for the purpose of being a hedge, the Group negotiates the terms of the derivative to match the terms of the hedged exposure. For hedges of forecast transactions, the derivative covers the period of exposure from the point the cash flows of the transactions are forecasted up to the point of settlement of the resulting receivable that is denominated in the foreign currency.

The following tables demonstrate the sensitivity to a reasonably possible change in foreign exchange rates, with all other variables held constant.


	Change in foreign exchange rates		Effect on profit before tax
December 31, 2019		+5%		3,155
December 31, 2019		-5%		(3,486)
December 31, 2018		+5%		2,776
December 31, 2018		-5%		(3,183)
December 31, 2017		+5%		3,023
December 31, 2017		-5%		(3,449)

As at December 31, 2019 and 2018 the Group’s financial assets and financial liabilities denominated in foreign currency are as follows:


Financial assets	31/12/19		31/12/18
Trade receivables		19,807		26,490
Cash and cash equivalents		36,031		49,413

Total financial assets		55,838		75,903


Financial liabilities	31/12/19		31/12/18
Lease liabilities		38,844		—
Bank overdraft and short-term borrowings		253		254
Trade payables		26,065		29,155

Total financial liabilities		65,162		29,409

As at December 31, 2019 and 2018, the summary quantitative data about Group’s exposure to currency risk as reported to the management of the Group is as follows:

December 31, 2019


	Financial Assets (a)		Financial liabilities (b)		Net Exposure (c) = (a)-(b)
Chinese Yuan		20,592		12,071		8,521
U.S. dollars		15,524		26,995		(11,471	)
British pounds		5,984		12,482		(6,498	)
Brazilian Reais		5,975		2,012		3,963
Canadian dollars		3,758		124		3,634
Mexican pesos		984		910		74
Romanian Leu		528		6,673		(6,145	)
Other		2,493		3,895		(1,402	)

Total		55,838		65,162		(9,324	)

December 31, 2018


	Financial Assets (a)		Financial liabilities (b)		Net Exposure (c) = (a)-(b)
Chinese Yuan		27,101		9,726		17,375
U.S. dollars		19,661		8,841		10,820
British pounds		8,696		2,482		6,214
Brazilian Reais		6,211		2,250		3,961
Canadian dollars		3,696		236		3,460
Mexican pesos		3,344		43		3,301
Romanian Leu		886		4,976		(4,090	)
Other		6,308		855		5,453

Total		75,903		29,409		46,494

(v) Changes in liabilities arising from financing activities

The following tables show the changes in financial liabilities arising from financing activities for the three years ended December 31, 2019, 2018 and 2017.

December 31, 2019


	Jan. 1, 2019		Cash flows			Changes in fair value		Other changes			Dec. 31, 2019
Long-term borrowings		20,943		(1,365	)		—		(1,166	)		18,412
Lease liabilities		56,758		(11,960	)		—		12,569			57,367
Bank overdrafts and short-term borrowings		35,148		(10,978	)		—		—			24,170
Losses on derivative financial instruments		320		—			452		—			772

Total liabilities from financing activities		113,169		(24,303	)		452		11,403			100,721

December 31, 2018


	Jan. 1, 2018		Cash flows			Changes in fair value		Dec. 31, 2018
Long-term borrowings		25,717		(4,774	)		—		20,943
Bank overdrafts and short-term borrowings		25,967		9,181			—		35,148
Losses on derivative financial instruments		267		—			53		320

Total liabilities from financing activities		51,951		4,407			53		56,411

December 31, 2017


	Jan. 1, 2017		Cash flows		Changes in fair value			Dec. 31, 2017
Long-term borrowings		17,961		7,756		—			25,717
Bank overdrafts and short-term borrowings		24,427		1,540		—			25,967
Losses on derivative financial instruments		1,293		—		(1,026	)		267

Total liabilities from financing activities		43,681		9,296		(1,026	)		51,951