21. Financial instruments

The following disclosures provide an overview of the financial instruments held by the Group, detailed information about each type of financial instrument held and information about the accounting policies used.

Financial instruments according to classes and categories were as follows:

21.(a) Trade and Other Receivables

Trade and other receivables were as follows:

Other receivables mainly include banker’s acceptance bills for trade receivables for customers in China. These financial assets are generally required to collect contractual cash flows and are allocated to the ‘hold’ business model accordingly and are initially recognized at fair value plus transaction costs and are subsequently carried at amortized cost using the effective interest method less any impairment losses.

On the balance sheet date, trade receivables were as follows:

i. Classification as trade receivables

Trade receivables are amounts payable by customers for goods sold or services rendered in the ordinary course of business. If the receivables are expected to be settled within twelve months, they are classified as current assets. If this is exceptionally not the case, they are reported as non-current assets. Trade receivables are classified in accordance with IFRS 9. They are generally required to collect the contractual cash flows and are allocated to the ‘hold’ business model accordingly. They are recognized initially at the amount of the unconditional consideration and are subsequently carried at amortized cost using the effective interest method less any impairment losses. If trade receivables contain a significant financing component, they are initially recognized at fair value.

ii. Impairment and write-offs of trade receivables

For trade receivables, the simplified approach, which is based on the expected credit losses over the respective terms, is used. Loss rates calculated on the basis of historical and forecast data are used, taking into account the business model, the respective customer and the economic environment of the geographical region.

For this purpose, NORMA Group considers in particular the credit default swaps of the respective client’s home countries as well as industry-specific default probabilities derived from external sources. In addition, loss rates from customer-specific credit default swaps (CDS) are used, if available.

On this basis, the allowance for trade receivables and contract assets as of December 31, 2021 was determined as follows:

The impairment losses on trade receivables developed as follows from the opening balance sheet value as of January 1, 2021, to the closing balance sheet value as of December 31, 2021:

Impairment losses on trade receivables, together with those on contract assets, are recognized in operating profit as net impairment losses. Unused amounts reversed are included in the same line item. The net income recognized in fiscal year 2021 from these impairment losses amounted to EUR 219 thousand (2020: net expenses in the amount of 577 thousand).

The gross carrying amount of trade receivables that are not reasonably expected to be realizable are written off. In the fiscal year, the following losses resulted from the write-off of trade receivables:

Losses on the disposal of trade receivables through write-offs are recognized in operating profit as impairment losses, net. Unused amounts reversed are included in the same line item.

The increase in expenses for allowances for expected credit losses and for losses on disposal relates to the impact of the COVID-19 pandemic and the associated financial difficulties of some customers and the general development of risk premiums for measuring the default risks of loans.

iii. Fair value of trade receivables

Trade receivables have short-term maturities, therefore the carrying amounts on the balance sheet date correspond to their fair values, as the effects of discounting are not material.

21.(b) Trade Receivables Transferred or Available for Transfer

i. Transferred trade receivables

Subsidiaries of NORMA Group in the EMEA and Americas segments transfer trade receivables to external purchasers as part of factoring and ABS transactions. The details and effects of the respective programs are presented below.

a) Factoring transactions

In the factoring agreement concluded in 2017, that has a maximum volume of receivables of EUR 10 million (2020: EUR 18 million), NORMA Group subsidiaries in Germany, France and Poland sell trade receivables directly to external purchasers. As part of this factoring program, receivables of EUR 4,7 million were sold as of December 31, 2021 (Dec 31, 2020: EUR 7,0 million). Due to a temporary agreement, the payments under these disposals were made in full as of December 31, 2021. As of December 31, 2020, EUR 0,7 million were treated as purchase price retentions and not paid out, but rather held as security reserves and recognized as other financial assets.

The requirements for a receivables transfer were met in accordance with IFRS 9.3.2.1 since the receivables were transferred in accordance with IFRS 9.3.2.4 a). Verification in accordance with IFRS 9.3.2.6 shows that nearly all opportunities and risks were neither transferred nor retained. It follows in accordance with IFRS 9.3.2.16 that NORMA Group recognizes remaining continuing involvement.

NORMA Group is continuing to perform receivables management (servicing) for the receivables sold.

Although NORMA Group is only entitled to act as a servicer, the Company retains the right to dispose of the sold receivables, as purchasers do not have the right to resell the receivables acquired.

NORMA Group is continuing to recognize the sold trade receivables to the extent of its continuing involvement, i.e., at the maximum amount to which it continues to be liable for the late payment risk inherent in the receivables sold. Hence, NORMA Group is recognizing a corresponding financial liability.

The remaining continuing involvement in the amount of EUR 43 thousand (Dec 31, 2020: EUR 64 thousand) was recognized as a financial liability and considers the maximum potential loss for NORMA Group resulting from the late payment risk of receivables sold as of the reporting date. The fair value of the guarantee/interest payments to be assumed has been estimated at EUR 4 thousand (Dec 31, 2020: EUR 5 thousand), taken through profit or loss and recognized under other liabilities.

In 2018, NORMA established a further factoring program. Under the factoring agreement concluded in December 2018 with a maximum receivables volume of USD 24 million (2020: USD 16 million), a subsidiary of NORMA Group in the US sells trade receivables directly to external purchasers. As part of this factoring program, receivables amounting to EUR 19,0 million were sold as of December 31, 2021 (Dec 31, 2020: EUR 7,9 million). Due to a temporary agreement, the payments under these disposals were made in full as of December 31, 2021, and 2020.

The requirements for the derecognition of receivables in accordance with IFRS 9.3.2.1 are met, as the receivables are transferred in accordance with IFRS 9.3.2.4 a). The examination of IFRS 9.3.2.6 shows that essentially all opportunities and risks have been transferred.

NORMA Group continues to service the receivables sold.

Although NORMA Group is not entitled to dispose of the receivables sold in any other way than within the framework of receivables management, the Company retains control over the receivables sold as the buyers do not have the actual ability to resell the acquired receivables.

b) ABS transactions

In 2014, NORMA Group entered into a revolving asset purchase agreement (Receivables Purchase Agreement) with Weinberg Capital Ltd. (special purpose entity). Within the agreed structure, NORMA Group sold trade receivables in the context of an ABS transaction which was successfully initiated in December 2014. Receivables are sold by NORMA Group to a special purpose entity.

As of December 31, 2021, domestic NORMA Group entities had sold receivables in an amount of EUR 11,4 million (Dec 31, 2020: EUR 12,2 million) under this asset-backed securities (ABS) program with a maximum volume of EUR 20 million. From the receivables sold, EUR 0,5 million (Dec 31, 2020: EUR 0,5 million) were retained as loss reserves and not paid out. These assets were recognized as other financial assets. The basis for this transaction is the transfer of trade receivables of individual NORMA Group subsidiaries to a special purpose entity with a framework of undisclosed assignment. This special purpose entity (SPE) is not consolidated under IFRS 10 because neither the power over the SPE is attributable to NORMA Group nor does NORMA Group have an essential self-interest and no connection between power and variability of the returns of the special purpose entity exists.

The requirements for a receivables transfer according to IFRS 9.3.2.1 are met, since the receivables are transferred according to IFRS 9.3.2.4 a). Verification in accordance with IFRS 9.3.2.6 shows that a substantial share of all risks and rewards were neither transferred nor retained. Therefore, according to IFRS 9.3.2.16, NORMA Group’s continuing involvement must be recognized.

This continuing involvement in the amount of EUR 205 thousand (Dec 31, 2020: EUR 219 thousand) includes the maximum amount that NORMA Group could conceivably have to pay back under the default guarantee and the expected interest payments until the payment is received for the carrying amount of the receivables transferred. The fair value of the guarantee/interest payments to be assumed has been estimated at EUR 164 thousand (Dec 31, 2020: EUR 183 thousand), taken through profit or loss and recognized under other liabilities.

NORMA Group entered into another agreement with Weinberg Capital Ltd. (program special purpose entity) in fiscal year 2018 by concluding a further revolving receivables purchase agreement on the sale of trade receivables. The agreed structure provides for the sale of trade receivables of NORMA Group as part of an ABS transaction and was successfully initiated in December 2018. The receivables are sold to a special purpose entity by NORMA Group.

As part of this ABS program with a volume of up to USD 20 million, US Group companies of NORMA Group sold receivables amounting to EUR 9,9 million as of December 31, 2021 (Dec 31, 2020: EUR 11,3 million), of which EUR 0,5 million (Dec 31, 2020: EUR 0,5 million) were not paid out as purchase price retentions, but rather held as security reserves and recognized as other financial assets. The basis for the transaction is the assignment of trade receivables of individual NORMA Group companies to a program special purpose entity as part of a silent assignment. According to IFRS 10, this program special purpose entity is not to be consolidated, as NORMA Group is not assigned any decision-making power, nor is there any material self-interest or link between decision-making power and the variability of returns from the program special purpose entity.

The requirements for derecognition of receivables in accordance with IFRS 9.3.2.1 are met, as the receivables are transferred in accordance with IFRS 9.3.2.4 a). The audit of IFRS 9.3.2.6 shows that almost all opportunities and risks have neither been transferred nor retained. In accordance with IFRS 9.3.2.16, NORMA Group must therefore recognize the remaining continuing involvement.

A continuing involvement of EUR 199 thousand (Dec 31, 2020: EUR 253 thousand) was recognized as other financial liability and comprises the maximum amount that NORMA Group might have to repay under the assumed default guarantee and the expected interest payments until receipt of payment in respect of the carrying amount of the receivables transferred. The fair value of the guarantee or of the interest payments to be assumed was included in the carrying amount and recognized as other liabilities in the amount of EUR 144 thousand (Dec 31, 2020: EUR 175 thousand).

ii. Trade receivables available for transfer

In the opinion of the Group, trade receivables included in these programs but not yet disposed of at the end of the reporting period cannot be allocated to either the ‘hold’ or the ‘hold and sell’ business models. They are therefore included in the fair value through profit and loss (FVTPL) category.

21. (c) Cash and Cash Equivalents

Cash and cash equivalents are measured at their nominal value and include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less and which are subject only to insignificant risks of change in value. Bank overdrafts are shown within borrowings in current liabilities in the Consolidated Statement of Financial Position.

21. (d) Other Financial Assets

Other financial assets were as follows:

Receivables from the ABS program and from factoring include reserves for the trade receivables sold. Note 21. (B) ‘Trade receivables transferred or available for transfer’

Other financial assets are generally required to collect the contractual cash flows and are accordingly allocated to the ‘hold’ business model. They are initially recognized at fair value plus transaction costs and are subsequently carried at amortized cost using the effective interest method less impairment. As of December 31, other financial assets include in particular a bid bond for a bid submitted for the acquisition of a piece of land in China.

21. (e) Financial Liabilities and Net Debt

i. Trade and other liabilities

Trade and other payables are as follows:

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

NORMA Group participates in a reverse factoring program. The liabilities included in this program are reported under trade payables and similar liabilities, as this corresponds to the economic content of the transactions.

All trade payables and liabilities from reverse factoring programs are due to third parties within one year. As a result, these have short-term maturities, therefore the carrying amounts on the balance sheet date correspond to their fair values, as the effects of discounting are not material.

Refund liabilities

Reimbursement liabilities are recognized for volume discounts and similar bonus agreements payable to customers. These arise from retrospective volume rebates or similar agreements that are based on total sales or on a specific product sale of a twelve-month or shorter period. Refund liabilities are recognized for discounts expected to be payable to the customer for sales completed by the end of the reporting period. For further details, please refer to Note 3 ‘Summary of Significant Accounting Principles’.

All reimbursement liabilities are due to third parties within one year. The carrying amounts on the balance sheet date therefore correspond to their fair values, as the effects of discounting are not material.

ii. Bank borrowings

The borrowings were as follows:

Borrowings are recognized initially at fair value, net of directly attributable transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in profit or loss over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

The maturity of the syndicated bank facilities and the promissory note on December 31, 2021, and 2020, was as follows:

a) Fair value of bank borrowings

The fair value calculation of the fixed-interest promissory note, which is recognized at amortized cost and for which the fair value is stated in the notes, was based on the market yield curve according to the zero coupon method considering credit spreads (level 2). Interest accrued on the reporting date is included.

b) Financial covenant

The Group is subject to the financial covenant total net debt cover (net debt in relation to adjusted Group EBITDA), which is monitored on an ongoing basis. This financial covenant is based on the Group’s Consolidated Financial Statements as well as on special definitions of the bank facility agreements.

In the event of non-compliance with a financial ratio, the credit agreement provides for several possibilities of cure in the form of exemption provisions of the shareholder measures. If there is a breach of a condition which is not remedied, the syndicated loan may possibly be called in.

There were no covenant breaches in 2021 and 2020.

iii. Other financial liabilities

Other financial liabilities were as follows:

The fair values of finance lease liabilities are calculated as the present values of the payments associated with the debts based on the applicable yield curve and NORMA Group’s credit spread curve (level 2).

The information on NORMA Group’s leasing liabilities for fiscal year 2021 is presented under Note 20. ‘Leases’.

a) Liabilities from the ABS and factoring

The liabilities from ABS and factoring include liabilities from continuing involvement in the amount of EUR 447 thousand (Dec 31, 2020: EUR 536 thousand), liabilities from fair values of default and interest guarantees in the amount of EUR 314 thousand (Dec 31, 2020: EUR 366 thousand) recorded under the ABS and factoring programs and liabilities from customer payments for receivables already sold under the ABS and factoring programs in the amount of EUR 6.976 thousand (Dec 31, 2020: EUR 7.029 thousand) as part of the debtor / receivables management performed by NORMA Group.

iv. Maturity of financial liabilities

The financial liabilities of NORMA Group have the following maturity:

v. Net debt

Net debt of NORMA Group is as follows:

NORMA Group’s financial liabilities are 3,7% below the level of December 31, 2020. The decrease in loans payable was mainly due to the net repayment of loans in fiscal year 2021. In addition to the scheduled repayment of promissory note loans in the amount of EUR 70,281 thousand, liabilities from the Commercial Paper program were taken up in the amount of EUR 45,000 thousand. Currency effects relating to the US dollar had an increasing effect.

Lease liabilities decreased compared to year-end 2020, changes due to repayments, additions due to recognition of right-of-use assets and interest effects lead in a net reduction in the current fiscal year. Exchange rate effects, mainly on the liabilities in US dollar, increased the liabilities. By contrast, reassessments of renewal options led to a decrease of the lease liabilities in 2021.

The decrease in other financial liabilities was mainly due to the repayment of ABS and factoring liabilities and the repayment of liabilities in connection with the minority interests in Fengfan acquired in fiscal year 2020.

As of December 31, 2021, net debt decreased by EUR 19.873 thousand (5,9%). The main reason for this were the net cash inflows from cash provided by operating activities of EUR 108.386 thousand as well as net cash outflows from the procurement and sale of non-current assets of EUR 45.157 thousand and from the payment of dividends of EUR 22,304 thousand. This positive development was offset by current interest expenses in the fiscal year and the valuation-related increase in liabilities from derivatives.

This positive development was offset by current interest expenses in the first nine months of 2021, the increase in lease liabilities due to additions in the area of rights of use and the valuation-related increase in liabilities from derivatives.

Cash-neutral negative net currency effects from foreign currency loans, cash and cash equivalents, lease liabilities and other financial liabilities had a negative impact on net debt.

21. (f) Derivative Financial Instruments

Derivative financial instruments held for hedging purposes are carried at fair value. They are fully classified in level 2 of the fair value hierarchy.

The derivative financial instruments are as follows:

Further details on the use of hedging instruments can be found in  Note 5. ‘Financial risk management.’

i. Effects of accounting for cash flow hedges on the net assets, financial position and results of operations

The effects of foreign currency and interest rate-related hedging instruments on the net assets, financial position and results of operations are as follows:

The effective part as well as the accrued and recognized costs of hedging recognized in other comprehensive income excluding taxes developed as follows:

Amounts due to interest rate swaps recognized in the hedging reserve in equity will be released in profit or loss before the repayment of the loans.

In fiscal years 2021 and 2020, no ineffective portion of cash flow hedges relating to foreign exchange derivatives and interest rate swaps was recognized in profit or loss.

ii. Effects of accounting for fair value hedges on the net assets, financial position and results of operations

The effects of foreign currency-related hedging instruments on the net assets, financial position and results of operations were as follows:

An overview of the gains and losses arising from the hedging of fair value changes that were recognized in the financial result is shown below:

21. (g) Financial Instruments at Fair Value

The tables below provide an overview of the classification of financial assets and liabilities measured at fair value in the fair value hierarchy under IFRS 13 as of December 31, 2021, as well as December 31, 2020:

No transfers between the different levels occurred in 2021 and 2020.

The fair value of interest swaps is calculated as the present value of estimated future cash flows. The fair value of forward foreign exchange contracts is determined using a present value model based on forward exchange rates. The fair value of the forward exchange transactions is calculated using the forward exchange rate on the balance sheet date and the result is then presented at the discounted present value

Trade receivables held for sale as part of the factoring and ABS transaction and measured at fair value through profit or loss have short-term maturities. In addition, the calculated credit risk of the counterparty is not material, therefore the carrying amounts at the balance sheet date correspond to their fair values.

21. (h) Net Gains and Losses on Financial Instruments

The net gains or losses on financial instruments (by measurement category) in accordance with IFRS 7.20 (a) were as follows:

Net gains and losses on financial assets measured at amortized cost include impairment losses on trade receivables and interest income from short-term deposits with banks. Net gains and losses on financial liabilities measured at cost include interest expenses and fees from loans and borrowings.

Currency effects from the translation of financial assets and liabilities according to IAS 21 are shown within Note 14 ‘Net Foreign Exchange Gains/Losses.’

21. (i) Total Interest Income and Expense from Financial Instruments