24 Financial instruments and associated risks

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 summarized 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 analyze the risks to which the Group is exposed, to set risk limits and controls, and to monitor and minimize 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 56 million at the same bank (2021/2022: over EUR 39 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). In addition, the Group has divided its cash and cash equivalents over multiple banks in order to mitigate risks related to high cash levels at one bank.

24.2 Credit risk

It is inherent in the nature of the activities of the organization 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 organization 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 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 recognized due to collateral.

24.2.2 Exposure to credit risk

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

Loss allowance

Debtor and unbilled services ageing analysis:

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

24.2.3 Cash and cash equivalents

At 30 September 2023, the Group held cash and cash equivalents of EUR 136,154 (30 September 2022: EUR 179,267). The cash and cash equivalents are held with bank and financial institution counterparties, which are rated at A-, at least 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. The Group has a combined credit and guarantee facility of EUR 50,000 (2021/2022: EUR 50,000), of which no drawdown was made (2021/2022: no drawdown) in the form of cash or guarantees.

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:

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 maximizing 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 2023, a general rise in interest rates by one percentage point would have a negative effect of EUR 0.1 million on the Group's profit before income tax (30 September 2022: negative effect of EUR 0.3 million), and no effect on equity (30 September 2022: 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):

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 recognized monetary assets or liabilities, hedge accounting is not applied, and any gain or loss on a hedging instrument is recognized 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 income tax for 2022/2023 (2021/2022: no effect), and no effect on equity (30 September 2022: 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 2022/2023 to other levels of fair value measurement input.

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

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 2022: up to EUR 180 per partner), and partly in the form of loans.

Average financing per partner (excluding other reserves) amounted to EUR 843 as at 30 September 2023, compared with EUR 1,161 as at 30 September 2022. Total financing by partners as at 30 September 2023 amounted to 30% of total assets (30 September 2022: 37.5%).

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.