The world's leading supplier of systems for manufacturing yarn from staple fibers in spinning mills
Rieter is the world's leading supplier of systems for manufacturing yarn from staple fibers in spinning mills. The company, headquartered in Winterthur (Switzerland), develops and manufactures machinery, systems and components for processing natural and synthetic fibers as well as their blends.
Rieter's cutting-edge spinning technology contributes to sustainability in the textile value chain by minimizing the use of resources. Rieter has been in business for over 225 years, operates 18 production sites in ten countries and employs a global workforce of around 5 600.
From project-related business to risk reporting at Rieter
Automated FX management and IFRS 9: In the course of a joint development project, the textile machine manufacturer Rieter and the reporting specialist Nomentia have created a tool that not only reflects the company’s FX hedging strategy but also prepares hedge proposals. The tool even takes care of the reporting for hedge accounting in compliance with IFRS 9.
Financial risk management is one of the most exciting activities for most treasurers. However: Before you consider which hedge ratio is right for the risk appetite of a particular company and which derivatives are suitable for achieving this ratio, a financial management strategy needs to be defined, the company’s risk-bearing capacity known and you need to have a clear overview of your exposures.
The latter is a challenge for many treasurers given that they usually have to rely on data from various sources which need to be efficiently captured and processed on the basis of various logics. These challenges had largely been dealt with at Rieter and an Excel-based tool was already in use which allowed the IFRS 9 reporting requirements to be prepared in a structured manner. The amount of manual work associated with this, however, was so high that it was only possible to perform IFRS hedge accounting for a few major projects.
This was not consistent with the declared goals of FX management, protecting the EBIT margin and reducing earnings volatility. The motivation therefore was to further automate the hedging process and hedge accounting.
Changes in the underlying business and new FX strategy
The background: In 2011, the Rieter group was split into the two divisions, Textile Systems and Automotive, each of which continued operations as separately listed companies (Rieter and Autoneum). Due to the new structure, the existing hedging strategy was reviewed in 2015 to determine whether this was still consistent with the current business model and the financial objectives. This analysis revealed that several changes needed to be made in the area of FX management.
Despite Rieter only having 18 production sites around the world and cash flows in relatively few currencies, the associated internal and external transactions form a complex structure which needed to be dealt with: Nearly every Rieter subsidiary generates revenues with the other group subsidiaries, as a result of which nearly all combinations of currency pairs can arise between the various sites.
An additional challenge: The extremely diverse business operations in the individual divisions mean that FX exposures arise in different forms. While Rieter generates the majority of its revenues with customer-specific projects, the components division continues to focus on batch production. The FX exposures to be hedged in connection with project-related business at Rieter are hedged when the relevant contract is signed. The risk-bearing FX cash flows can be sourced from various SAP modules. The exposures related to the components business, however, rely on data from currency-differentiated cash flow forecasting in Nomentia; data which are sourced from various ERPs. The average DSO and DPO as well as the order backlog determine the relevant risk horizon.
Rieter launched the new FX strategy in November 2015 with the preparation of an FX policy which, put simply, defines that project-related cash flows above a defined volume are hedged, and that batch-related cash flows are hedged using a defined hedge ratio for the next three months. From January 2016, a switch was made to implementing the strategy with in-house resources, i.e. without system support. Hedge accounting in compliance with IFRS 9, however, proved to be too time-intensive and, as mentioned above, it was simply not possible for the small treasury team to deal with this manually. A tool was needed which could take care of the manual steps, from the risk assessment and the effectiveness calculation to the reporting.
A quantum leap in the hedging process
The decision was reached in September to use Nomentia as treasury middleware for risk identification and measurement. The implementation involved three phases: Until December 2016, the treasury team performed project-based hedging and IFRS 9 reports. The second phase, until April 2017, involved setting up currency-differentiated cash flow forecasting in Nomentia, which had previously been performed using the existing treasury management system. During the final phase all of the involved systems were then integrated and automated.
The following steps are now performed at least once per month in Group Treasury in order to manage risk according to the policy:
- Risk identification
- Risk valuation and measurement
- Risk planning and mitigation
- Risk controlling and communication
Nomentia imports the relevant project-related data from the ERP system, prepares these automatically, and forwards them – after approval by the authorized users based on defined steps – to an electronic trading platform for hedging.
Although it sounds relatively simple, this is a quantum leap in terms of the automation of FX hedging and accounting requirements. This tool now deals with almost all of the tasks which were previously managed manually and also makes it possible to comply with IFRS reporting requirements automatically and to a far greater extent than before.
The process in detail: The project-related data from the ERP system is exported to Nomentia via a defined workflow. The authorized user at the subsidiary initially confirms the imported projects and cash flows as well as the hedge type. Nomentia then compares the confirmed project-related cash flows with existing derivatives and proposes new hedge transactions based on a previously defined hedge ratio (which can be revised at any time). The hedge proposals take into account not only previously hedged amounts and the target hedge ratio but also, based on complex logic, consider that project-related business may be subject to schedule changes.
Once generated, the hedge proposals can be accepted by the user or modified at any time. All changes are recorded and are only accepted by the system after the user has provided a reason for the change.
The accounting-related recognition, i.e. the hedge type, is determined on the basis of the minimum thresholds defined by Rieter (also possible for each project and cash flow). Nomentia classifies cash flows as
- “No Hedge” (amount too low, no hedging),
- “Standard Hedge” (hedged but without hedge accounting recognition because impact in P&L is too low),
- or “IFRS 9 Hedge” (hedging of large cash flows above a certain threshold).
The defined hedging ratios and thresholds can be changed in the system in the event that the risk strategy is revised.
After being approved by a second user at the relevant subsidiary and the central approval from Group Treasury, Nomentia forwards the derivatives generated in the hedge proposals to the electronic trading platform. This step already involves a fully-automated allocation of the transactions executed to the hedged item, which remains in the entire multi-system hedging cycle and is the key to the automated IFRS reporting in Nomentia.
IFRS 9 reporting at the push of a button
Thanks to the distinct allocation of hedging transactions to hedged items, Rieter now needs no more time for a quarterly or annual closing than it does for a monthly closing. The report highlights everything that accountants, treasurers, and auditors are interested in: All of the relevant entries needed for accounting purposes, the hedge ratios of the various projects, the effectiveness of the IFRS 9 hedges, and the hedging documentation. Nomentia clearly highlights to what extent market value changes of hedge transactions are recognized in equity or directly to P&L. For review purposes, the report also contains details of the entire history of a cash flow, including all of the associated hedges, and therefore ensures that auditors have access to all the relevant details.
This high degree of automation in FX management allows Rieter to now hedge not only large projects but also those with much lower exposure, as the time required around the hedging process has been minimized. The result: a considerably reduced overall risk from currency fluctuations. The next step has also already been decided. Rieter intends to automatically hedge the exposures from the mass component business with serial character based on the cash flow forecast data. In this context, Rieter has worked with Nomentia to create an application that can be used to transmit internal foreign exchange transactions to Treasury in a standardized manner so that they can then be automatically sent to the electronic trading platform to be traded.