3.1 Financial risk factors
The risk management function within the Fund is carried out with respect to financial risks. Financial risks are risks arising from financial instruments to which the Fund is exposed during or at the end of the reporting period. Financial risk comprises market risk (including interest rate risk and other price risk), credit risk and liquidity risk.
Risk management is carried out by the risk manager under policies approved by the Statutory Director of the Fund. The treasury manager identifies and evaluates financial risks in close cooperation with the Fund’s business units and the risk manager. The Statutory Director of the Fund provides written principles for overall risk management, as well as written policies covering specific areas, such as interest rate risk, credit risk, and the investment of excess liquidity.
Market risk
The market risk of financial instruments relates to foreign exchange risk, price risk and interest rate risk. For more information, we refer you to the Risk Management section.
(I) Foreign exchange risk
The Fund has no exposure to foreign exchange risk as it operates in a euro country only.
(II) Price risk
The Fund has no significant exposure to price risk as it does not hold any equity securities or commodities. The Fund is not exposed to price risk other than in respect of financial instruments, such as property price risk, including property rental risk.
(III) Interest rate risk
As the Fund has no external loans and borrowings, it has no exposure to related interest rate risks. The interest rate risk related to bank balances is mitigated by bank deposits.
(IV) Hedging risk
The Fund has no hedging instruments in use.
Credit risk
Credit risk is defined as the unforeseen losses on assets if counterparties should fail to meet their obligations. The creditworthiness of tenants is closely monitored by checking their credit rating and keeping a close watch on the accounts receivable. Rents are in general also payable in advance and part of the rent payable is secured by means of bank guarantees or guarantee deposits. There are no significant credit risk concentrations.
It is our policy to enter into financial transactions only with financial institutions with a credit rating of at least A+ (Standard & Poor’s). The financial risk is monitored for each individual transaction. Given the high credit rating of its counterparties, the Fund does not expect any defaults.
The carrying amounts of the financial assets represent the maximum credit risk. The combined carrying amount on the reporting date was made up as follows:
(I) The Fund’s maximum exposure to credit risk by class of financial asset was as follows:
| | 2015 | 2014 |
Trade and other receivables, net of provision for impairment (Note 14) | | |
Rent receivables from tenants | 744 | 277 |
Other financial assets | 1 | 16,392 |
Cash and cash equivalents (Note 15) | 27,626 | 19,002 |
Deposits refundable to tenants may be withheld by the Fund in part or in whole if receivables due from the tenant are not settled or in case of other breaches of contract.
(II) Analysis by credit quality of financial assets was as follows:
| | 2015 | 2014 |
Trade and other current receivables | | |
Neither past due nor impaired | 215 | 2,953 |
Total neither past due nor impaired | 215 | 2,953 |
| | | |
Past due but not impaired | | |
Less than 30 days overdue | 382 | 13,439 |
30 to 90 days overdue | - | - |
Total past due but not impaired | 382 | 13,439 |
| | | |
Individually determined to be impaired (gross) | | |
30 days to 90 days overdue | 44 | 252 |
90 to 180 days overdue | 485 | 532 |
Total individually determined to be impaired (gross) | 529 | 784 |
Less: impairment provision | (381) | (507) |
Total trade and other current receivables, net of provision for impairment | 745 | 16,669 |
There is no significant concentration of credit risk with respect to cash and cash equivalents, as the Fund holds cash accounts with a number of financial institutions.
Liquidity risk
Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the treasury manager aims to maintain flexibility in funding by keeping committed credit lines available.
The Fund’s liquidity position is monitored on a daily basis by management and is reviewed quarterly by the Statutory Director of the Fund. A summary table with maturity of financial assets and liabilities (see below) is used by key management personnel to manage liquidity risks and is derived from managerial reports at Fund level. The amounts disclosed in these tables are the contractual undiscounted cash flows. Undiscounted cash flows in respect of balances due within 12 months generally equal their carrying amounts in the statement of financial position, as the impact of discounting is not significant.
The maturity analysis of financial instruments at 31 December 2015 was as follows:
| | Demand and less than 1 month | From 1 to 3 months | From 3 to 12 months | Total |
Assets | | | | |
Trade and other receivables | 215 | 530 | - | 745 |
| | | | | |
Liabilities | | | | |
Tenant deposits | - | - | 363 | 363 |
Trade payables | 2,815 | - | - | 2,815 |
Other financial liabilities | 4,566 | 43 | 1,393 | 6,002 |
The maturity analysis of financial instruments at 31 December 2014 was as follows:
| | Demand and less than 1 month | From 1 to 3 months | From 3 to 12 months | Total |
Assets | | | | |
Trade and other receivables | 2,953 | 13,716 | - | 16,669 |
| | | | | |
Liabilities | | | | |
Tenant deposits | - | - | 1,079 | 1,079 |
Trade payables | 11,520 | - | - | 11,520 |
Other financial liabilities | 4,873 | 77 | 1,976 | 6,926 |
3.2 Fair value estimation
The Fund has no financial assets that are measured at fair value. The carrying amounts of the financial assets and liabilities and their fair values were as follows:
As at 31 December | | | 2015 | | 2014 |
| | Note | Carrying amount | Fair value | Carrying amount | Fair value |
Loans and receivables (level 2) | 14 | 745 | 745 | 16,669 | 16,669 |
Cash and cash equivalents (level 1) | 15 | 27,626 | 27,626 | 19,002 | 19,002 |
Financial liabilities measured at amortised cost and other payables (level 2) | 17 | (9,180) | (9,180) | (19,525) | (19,525) |
| | | 19,191 | 19,191 | 16,146 | 16,146 |
In addition, for financial purposes fair value measurements are categorised into level 1, 2 and 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability.
The carrying amount less impairment provision of trade receivables and trade payables approximates their fair value. All other Statement of financial position items are short-term and therefore not adjusted to their fair value.
3.3 Capital risk management
The Fund’s objectives when managing capital are to safeguard the Fund’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Funding is secured by its shareholders through capital calls for which estimations are made each year. No external funding will be obtained.
The Fund distributes the operating profit annually to its shareholders as required by tax law. Reference is made to Note 10. In order to maintain or adjust its capital structure, the Fund may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, buy back shares from shareholders or sell assets to reduce debt.