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24 Financial instruments and associated risks

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24.1 General

24.1.1 Background and policies

Financial instruments that are used by KPMG N.V. arise directly from normal business operations. During the financial year it was KPMG N.V.’s policy not to trade in financial instruments.

The Group is exposed to credit, interest, liquidity and foreign exchange risks as part of its normal business operations. The Group does not trade in financial derivatives, and has procedures and policies in place to limit the credit risk relating to counterparty default or market risk.

If a counterparty defaults in its payments due to the Group, any resulting losses will be limited to the fair value of the instruments concerned. The contract values or notional principals of the financial instruments are only an indication of the extent to which such financial instruments are used, and do not reflect credit or market risks.

These notes provide information about the extent to which the Group is exposed to the specified risks, together with the objectives, policies and processes relating to the measurement and management of these risks, as well as management of capital by the Group.

The Board of Management evaluates and confirms the policy for mitigating each of these risks as summarised below. There were no changes to the policy during the period under consideration.

The Board of Management has general responsibility for establishing and supervising risk management. The Group’s risk management policy is used to identify and analyse the risks to which the Group is exposed, to set risk limits and controls and to monitor and minimise risks. The risk management policy and the relevant systems are tested on a regular basis against changes in market conditions and the Group’s business activities.

24.1.2 Concentrations of risks

The operational activities of the Group relate to a diversity of clients and suppliers predominantly in the Netherlands. As a result, the concentration of risks for the operations of the Group is limited, except for the geographic risk. Funding of operations is arranged by a diversity of partners through Coöperatie KPMG U.A. and an additional bank’s credit facility. The Group has current accounts of over EUR 63 million at the same bank (2019/2020: over EUR 16 million), and it notes that this results in a concentration of risks associated with this bank. The bank is also one of the Group’s clients for professional non-audit services. The Group has confirmed that from an independence perspective this is allowed, as all transactions with the bank are at arm’s length. The Group closely monitors the credit rating of the bank (A+ according to S&P Global).

24.2 Credit risk

It is inherent in the nature of the activities of the organisation that it is exposed to credit risk. This risk relates to the loss that may be incurred if a counterparty defaults. It is limited mainly by depositing cash with banks rated BBB or higher, and by the large number and diversity of clients that owe amounts to the organisation for unbilled services and trade and other receivables. The carrying amount of each financial asset represents the maximum credit exposure.

24.2.1 Trade and other receivables and contract assets

The exposure to credit risks is monitored continuously, and the creditworthiness of all clients is checked for transactions exceeding a certain amount. The Group does not require protection in respect of non-current financial assets.

Credit risk exposure is mitigated by the large number and diversity of clients and therefore by diversifying risk. Only a limited percentage of revenue is attributable to any single client and, as a result, there is no major concentration of credit risk at the level of individual clients.

The recoverable amount of unbilled services and trade receivables is estimated on an ongoing basis. The important factors to be considered when estimating unbilled services and trade receivables are historical performance, the terms and conditions of the contract and the progress and results of the work performed. Both macro-economic factors, including the resulting impact of the Covid-19 pandemic and the financial position of the debtor are important when assessing the loss allowance.

In monitoring customer credit risk, customers are grouped according to their credit characteristics, with the main driver being the instrument type. In addition, the Group actively monitors the economic environment in the Netherlands.

The Group does not require collateral in respect of trade and other receivables. The Group does not have trade receivable and contract assets for which no loss allowance is recognised due to collateral.

24.2.2 Exposure to credit risk

Maximum exposure to credit risk as at 30 September was as follows:

EUR 000

30 September 2021

30 September 2020

Unbilled services

32,157

27,926

Trade receivables

89,140

85,030

Due from equity accounted investees

211

Other receivables

3,147

4,512

Cash and cash equivalents

164,594

85,181

Assets held for sale

256

 

289,294

202,860

Loss allowance

Debtor and unbilled services ageing analysis:

EUR 000

30 September 2021

30 September 2020

 

Gross

Loss allowance

Gross

Loss allowance

Not yet due: age 0-15 days

79,677

72

71,165

120

Overdue: age 16-180 days

40,409

530

39,301

142

Overdue: age 181-365 days

1,235

70

1,635

120

Overdue: age over 365 days

972

68

1,885

437

 

122,293

740

113,986

819

Trade receivables due from equity accounted investees are included in the debtor ageing analysis.

The movement in the loss allowance in respect of trade receivables during the year is presented below.

EUR 000

2020/2021

2019/2020

Balance at 1 October

819

911

Added

684

526

Written off

-434

-523

Released

-329

-95

Balance at 30 September

740

819

24.2.3 Cash and cash equivalents

Aa at 30 September 2021, the Group held cash and cash equivalents of EUR 164,594 (30 September 2020: EUR 85,181). The cash and cash equivalents are held with bank and financial institution counterparties, which are rated on average A, based on ratings by Moody’s Investor Services, S&P Global Ratings and Fitch Ratings (ranging from A- to AA). Impairment on cash and cash equivalents is measured on a 12-month expected loss basis and reflects the short maturities of the exposures. The Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties.

24.3 Liquidity risk

Liquidity risk is the risk that the Group will be unable to meet its financial liabilities as they fall due. The Group’s liquidity management policy is to ensure as far as possible that there are sufficient liquid funds available to be able to meet its liabilities when due without incurring unacceptable losses or damaging its reputation.

The aim of the Group's treasury policy is to ensure that there are sufficient funds available to finance day-to-day activities. Surplus funds are deposited in business savings accounts or held for specified periods. In the financial year 2019/2020, the Group further strengthened its cash-management procedures by implementing increasing focus on debtor collection and WIP management, as well as cash controls, which was maintained in the financial year 2020/2021.

The Group has a combined credit and guarantee facility of EUR 50,000 (2019/2020: EUR 50,000), of which no drawdown was made (2019/2020: no draw down) in the form of guarantees. A first right of pledge has been granted to the bank on trade receivables as security. The credit facility is available until 30 June 2024. Interest payable is based on the average one‑month EURIBOR rate plus a margin of 1.95%.

The Group has to comply to certain covenants in connection with the credit facility made available by the bank. These covenants relate to the maintenance of a certain tangible net worth, EBITDA, asset coverage and sales coverage. During and at the end of the financial year, the Group complied with all covenant requirements.

Summary of financial liabilities:

EUR 000

Carrying amount

Contractual cash flow

Due within 1 year

Due between 1 and 5 years

Due after 5 years

30 September 2021

     

Loans and borrowings from partners

141,598

166,679

102,303

37,441

26,936

Loans and borrowings from employee bonds

2,531

2,531

2,531

Trade and other payables

107,053

107,053

107,053

Employee benefits

45,632

45,632

44,820

184

628

Lease liability

133,518

144,919

24,460

64,407

56,052

 

430,332

466,814

281,167

102,032

83,616

      

30 September 2020

     

Loans and borrowings from partners

93,876

117,347

63,433

27,343

26,571

Loans and borrowings from employee bonds

1,874

1,874

1,874

Trade and other payables

95,445

95,445

95,445

Employee benefits

24,338

24,338

23,415

193

730

Lease liability

142,608

155,802

28,707

64,472

62,623

 

358,141

394,806

212,874

92,008

89,924

24.4 Market risk

Market risk is the risk that changes in market prices, such as exchange rates and interest rates, will affect the income of the Group or the value of its assets. The aim is to maintain these market risks within acceptable limits, while maximising income. In the longer term, however, permanent changes in exchange and interest rates will have an impact on consolidated profits.

24.4.1 Interest rate risk

Interest rate risk mainly relates to interest-bearing financial liabilities as a result of the funding positions by former and current partners. Financial assets of the Group consist primarily of investments in non-current assets, trade receivables and cash and cash equivalents. Trade and other receivables do not bear interest.

It is estimated that as at 30 September 2021, a general rise in interest rates by one percentage point would have a negative effect of EUR 0.4 million on the Group's profit before tax (30 September 2020: no effect), and no effect on equity (30 September 2020: no effect).

The table below presents the effective interest rates for interest-bearing financial assets and financial liabilities at the reporting date and the contractual maturities for these assets and liabilities (excluding interest receipts and payments):

EUR 000

Effective interest rate

<1 year

>1 year < 2 years

>2 years < 3 years

>3 years < 4 years

>4 years < 5 years

Longer than 5 years

Total carrying amount

2020/2021

        

Fixed-rate interest:

        

Coöperatie KPMG U.A.

0.0%

-801

7,270

6,469

Current account Coöperatie KPMG U.A. relating to partners

1.2%

-72,400

-72,400

Loans payable to partners

6.3%

-20,593

-4,290

-6,439

-4,328

-10,487

-23,911

-70,048

Loans payable to former partners

0.7%

-4,051

-423

-319

-186

-102

-538

-5,619

Lease liability

7.6

-22,173

-22,162

-17,116

-11,839

-8,417

-51,811

-133,518

Variable rate interest:

        

Cash and cash equivalents

-0.5%

164,594

164,594

Employee bonds

8.1%

-2,531

-2,531

         
  

42,045

-26,875

-23,874

-16,353

-19,006

-68,990

-113,053

         

2019/2020

        

Fixed-rate interest:

        

Coöperatie KPMG U.A.

0.0%

3,899

611

611

611

611

6,539

12,882

Current account Coöperatie KPMG U.A. relating to partners

3.1%

-37,192

-37,192

Loans payable to partners

6.9%

-16,312

-5,586

-4,017

-4,717

-5,004

-22,611

-58,247

Loans payable to former partners

2.0%

-9,548

-481

-373

-248

-101

-569

-11,320

Lease liability

8.2%

-25,968

-22,372

-16,696

-12,071

-8,029

-57,472

-142,608

Variable rate interest:

        

Cash and cash equivalents

-0.2%

85,181

85,181

Employee bonds

2.9%

-1,874

-1,874

         
  

-1,814

-27,828

-20,475

-16,425

-12,523

-74,113

-153,178

Part of the current account relating to partners is non-interest bearing.

24.4.2 Currency risk

In the normal course of business, foreign currency risks are limited as transactions are carried out in foreign currency on a limited basis, and assets and liabilities are usually denominated in euros.

When derivative financial instruments are used to economically hedge exposure to foreign exchange risks associated with recognised monetary assets or liabilities, hedge accounting is not applied, and any gain or loss on a hedging instrument is recognised in the statement of profit or loss and other comprehensive income.

It is estimated that a general drop in the value of the euro by one percentage point relative to other currencies would have no effect on the Group’s profit before tax for 2020/2021 (2019/2020: no effect), and no effect on equity (30 September 2020: no effect).

24.5 Fair value

The principal methods and assumptions used to estimate the fair values of financial instruments are set out below. For all instruments below, the fair value measurement is based upon level 3, unobservable inputs. There were no transfers of levels during 2020/2021 to other levels of fair value measurement input.

Fair values per class of financial assets and liabilities can be summarised as follows:

 

Financial assets at fair value through profit or loss

Financial assets at fair value through OCI

Financial assets at amortised cost

Other financial liabilities

EUR 000

Carrying amount

Fair value

Carrying amount

Fair value

Carrying amount

Fair value

Carrying amount

Fair value

2020/2021

        

Other financial assets

Total financial assets

         

Loans payable to (former) partners

141,598

141,598

Employee bonds

2,531

2,531

Total financial liabilities

144,129

144,129

         

2019/2020

        

Other financial assets

Total financial assets

         

Loans payable to (former) partners

93,876

93,876

Employee bonds

1,874

1,874

Total financial liabilities

95,750

95,750

24.5.1 Cash and cash equivalents

In view of the short maturity of deposits, the fair value of cash and cash equivalents is equal to nominal value.

24.5.2 Interest-bearing loans and borrowings

In determining the value of the obligations to partners and former partners the present value of future cash flows is calculated using a discount rate before tax that reflects current market assessments of the time value of money and the specific risks relating to the liability. As interest on loans and borrowings is determined based on market rates, fair value is approximately equal to the carrying amount.

Considering that the obligations to employees have a maturity of less than one year, face value is considered to be a reflection of fair value.

24.5.3 Trade and other receivables/trade and other payables

For receivables and payables with a maturity of less than one year, face value is considered to be a reflection of fair value.

24.6 Capital management

The Board of Management's policy is to maintain a strong capital position (equity and partner financing) in order to retain the confidence of clients, creditors and finance providers, and to ensure the future development of business activities. The Group is largely financed by Coöperatie KPMG U.A., partly in the form of a contribution of up to EUR 180 per partner to the Group's equity (30 September 2020: up to EUR 180 per partner), and partly in the form of loans.

Average financing per partner (excluding other reserves) amounted to EUR 1,092 as at 30 September 2021, compared with EUR 731 as at 30 September 2020. Total financing by partners as at 30 September 2021 amounted to 35.5% of total assets (30 September 2020: 28.3%). The increase mainly relates to short-term loans.

The Group may repurchase shares from Coöperatie KPMG U.A. and sell them back to Coöperatie KPMG U.A. in connection with partners who are leaving or joining the Group. These transactions are carried out at nominal value plus a share premium. As from financial year 2015/2016, the Group started strengthening its capital structure, which included an increase in long-term partner financing through its shareholder.