Material financial risks include currency risks and tax risks.
Due to the global nature of its business activities as well as the Group’s internal financing activities, HUGO BOSS is exposed to currency risks that may have an impact on the Group’s net income and equity.
In the operating business, currency risks primarily arise due to products being procured and sold in different currencies at unequal amounts (transaction risk). Significant cash flows in foreign currencies primarily arise from the Group’s global sales and sourcing activities in foreign currencies. Currency risks in financing result from financial receivables, liabilities and loans 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 against it, as the impact on the Group’s statement of financial position and the Group’s income statement is not cash-effective. Notes to the Consolidated Financial Statements, Currency Translation
Currency risks are managed centrally by the Group Treasury department. Corporate guidelines form the basis for the selection and scope of hedging and, at the same time, are intended to ensure strict functional separation of trading, settlement and control of all financial market transactions. The primary objective is to mitigate currency exposure using natural hedges. In this way, foreign currency exposures from business operations across 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. 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 and are traded over the counter.
In accordance with the requirements of IFRS 7, HUGO BOSS has calculated the impact of transaction risk on the Group’s net income and equity. This is determined based on the balance sheet currency exposure as of December 31, 2021. 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.
HUGO BOSS applies the value-at-risk method to quantify and manage currency risk. In this context, it can be assumed that the total financial currency exposure and its hedging ratio as of the reporting date are representative for the entire reporting period. In principle, there may be differences between the values determined using the value-at-risk method and the actual effects on the Group’s net income.
Aggregated across all currencies considered, the diversified portfolio risk for the Group’s net income after hedging amounts to EUR 8 million (2020: EUR 7 million). Hedging costs for concluding forward exchange transactions are not included. The largest foreign currency exposure results from the balance sheet exposure towards the U.S. dollar, pound sterling and renminbi. Due to the hedge accounting implemented in the Group, the sensitivity of the Group’s equity does not correspond to that of the Group’s net income. If the euro had appreciated or depreciated against the Turkish lira by the standard deviation, the Group’s equity would have decreased or increased by EUR 2 million in the reporting year (2020: EUR 1 million).
Management assumes that significant changes in the exchange rates relevant for HUGO BOSS are also possible in fiscal year 2022. Based on the results of the value-at-risk analysis, the impact of the transaction risk on the Group’s net income is considered to be low. However, a significant level of translation risk cannot be ruled out. Overall, Management therefore assumes currency risks to be likely and, if materializing, significant.
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, but 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 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