Risk management

Organization of risk management
Vaisala has a risk management policy that has been approved by the Board of Directors and that covers the company's strategic, operating and financial risks. Vaisala’s Strategic Management Group regularly assesses risk management policies, and the scope, adequacy and focus areas of related practices. The policy aims at ensuring the safety of the company's personnel, operations and products as well as the continuity of operations. The policy also covers intellectual capital, corporate image and brand protection. An appropriate and up-to-date risk concept is integrated in decision-making.

More detailed operational instructions are defined by the Strategic Management Group. These include approval, bidding and procurement authorizations and terms of payments.

The main principles of the investment policy in the order of their priority are a) minimizing credit loss risks, b) ensuring liquidity, and c) maximizing return on investment. The maximum term of investment is 12 months.

The usual risks related to international business affect Vaisala’s operating environment. The most significant of these are risks relating to changes in the global economy and hence in purchasing activities, currency exchange rates (with particular respect to the U.S. dollar), supply network management and production activities. Vaisala monitors these risks and prepares for them in accordance with the company's risk management policy. Vaisala's ability to tolerate risks is good and the company has a strong capital structure, ensuring capital adequacy.

Group-level insurance programs and risk-management methods have been established to deal with manageable operating risks. The insurance programs cover risks relating to property damage, business interruption, different liabilities, transport and business travel.

Near-term risks and uncertainties
The near term risks and uncertainties are estimated to relate to changes in the global economy, shifts of currency exchange rates, changes in purchasing or investment behavior or interruptions in manufacturing. Due to the uncertainty of the financial markets, supplier related risks have slightly increased during the review period. 

Significant changes in subcontractor relations, activities or operating environment may have a negative impact on Vaisala's business. Vaisala monitors these risks and prepares for them in accordance with the Company's risk management policy.

The Company is currently implementing significant development projects and organizational changes, which lay the foundation for successful execution of Vaisala's new strategy. A new Group-wide enterprise resource planning system is also under development. These efforts may constitute a short-term risk regarding Vaisala's net sales and result.

Interest rate risk
The company has no significant interest-bearing liabilities. Interest rate risk arises from the effects of interest rate changes on interest-bearing receivables and liabilities in different currencies. According to the company’s management, the interest rate risk is small, as the existing interest-bearing liabilities and receivables are but marginal compared with the scope of the company's business. Interest rate changes affect the fair value of both cash flows and investments. A change of one percentage point in the interest rate would affect the company’s result after taxes by around EUR 396 (354) thousand. Further information on interest-bearing receivables is given in Note  20.

Market risk on investment activity
The Group invests its cash reserves in short-term income funds and is therefore exposed in its operations to a price risk arising from fluctuations in the quoted market prices of income funds. Because issuers (states, municipalities and financial institutions) whose credit rating is very good are selected as the locations for fund investments, the credit risk connected with the funds is low. The funds invest in euro-denominated interest income products, so there is no currency risk. A rise in short-term market interest rates might momentarily lower the value of fund shares. A change in fair value is recognized in the income statement in ‘financial income and expenses’. If the value of income fund investments would increase or weaken by 5 per cent, with the investment holding remaining unchanged, its affect on the result after taxes would be EUR 963 (1,484) thousand. Further information on assets recognized at fair value through profit and loss is given in Note 20.

Currency risk
The international nature of operations exposes the Group to risks that arise when investments in different currencies are converted into the parent company’s functional currency. The most significant currencies for the Group are the US dollar, the Japanese yen and the British pound. The Group has many investments in its foreign subsidiaries, whose net assets are exposed to currency risks. The Group does not hedge the currency risks related to its subsidiaries' net assets.  The separate table features a sensitivity analysis (SA) on how changes in the rates of the most important currencies for the Group and in the euro, both in terms of average rate and balance sheet day rate, would affect the consolidated profit after taxes.  The SA calculation does not incorporate the effects of parent company purchases in other currencies during the financial year, or the effect of hedging measures.

The Group recognizes monetary items at net in accounting and hedges them with currency forwards to which the Group does not apply hedge accounting in accordance with IAS 39. Around one third of the Group’s net sales arises in US dollars. A significant proportion of Group purchases takes place in euros. Currency forwards are used to hedge the net position arising from these. The degree of hedging is around 50 per cent of the order book and trade receivables. Hedging is arranged by the parent company (Note 10. Financial income and expenses).

Liquidity risk
The Group aims to continuously assess and observe the level of funding required to finance the business to ensure that the Group has sufficient liquid assets for financing its operations. Group financing is arranged through the parent company, and the financing of the subsidiaries is arranged through internal loans. The parent company also provides the subsidiaries with the necessary credit limit guarantees. The parent company assumes responsibility for financial risk management and for investing surplus liquidity. The company has no other external financial liabilities other than those related to finance leasing (Note 23. Other liabilities).

With the company's current balance sheet structure, liquidity risks are non-existent.

Counterparty risk
Liquid assets are directed, within set limits, to investments whose creditworthiness is good. The investments and investment limits are redefined annually. Further information on the classification of investments is given in Note 21. Cash and cash equivalents.

Credit risk
The Group applies a stringent credit issuance policy. Credit risks are hedged by using letters of credit, advance payments and bank guarantees as terms of payment. According to Group management, the company has no material credit risk concentrations, because no individual customer or customer group represents an excessive risk, thanks to global diversification of the company's customer pool. Total credit losses arising from accounts receivable and recognized for the financial year amounted to EUR 0.4 million (0.3), and the total net credit loss for the financial year was EUR 0.4 million (-0.1). The credit losses resulted from an unexpected change in the financial environment of a customer. The maximum amount of the Group’s credit risk corresponds with the carrying amount of financial assets at the end of the financial year. The periodic distribution of accounts receivable items is presented in Note 19 in the Notes to the Financial Statements.

Management of capital assets
Management of the Group’s capital assets aims at ensuring normal company operation and increasing shareholder value with an optimum capital structure.  The goal is to attain the best possible returns over the long term.  An optimum capital structure also ensures lower capital costs. Capital structure can be affected through dividend distribution and share issues, for example. The Group can alter or adjust the amount of dividend payable to shareholders, the amount of capital returned to them or the number of new shares issued, or it may decide to sell or divest asset items to reduce its liabilities. The company has no significant financial liabilities. The shareholders’ equity indicated in the consolidated balance sheet represents the capital assets managed. The Group does not apply external capital requirements.

Internal Control
Vaisala aims to be a good corporate citizen, and an appropriate level of documented internal control policies support this. According to the Finnish Corporate Governance Code, the purpose of internal control is to ensure the effective and profitable operations of the company, reliable information and compliance with the relevant regulations and operating principles. Internal control aims to improve the efficient fulfillment of the Board’s supervision obligation.

Internal control is a process carried out by the Board of Directors, management and other employees within Vaisala. It is designed to provide reasonable assurance that:
- operations are effective, efficient and aligned with strategy,
- financial reporting and management information is reliable, complete and timely, and
- the Group is in compliance with applicable laws and regulations as well as Vaisala internal policies and ethical values, including sustainability.

The Vaisala internal control framework consists of:
- the internal control, risk management and corporate governance policies and principles set by the Board of Directors,
- management overseeing the implementation and application of the policies and principles
- finance department and business controllers monitoring the efficiency and effectiveness of the operations and reliability of the financial and management reporting
- enterprise risk management process identifying, assessing and mitigating risks threatening the realization of Vaisala’s objectives
- compliance procedures making sure that all applicable laws, regulations, internal policies and ethical values, including sustainability, are adhered to
- effective control environment at all organizational levels including control activities tailored for each process and creating group minimum requirements for business and geographical areas
- shared ethical values and internal control culture among all employees
- internal audit assignments reviewing the effectiveness of the internal controls as needed.

Internal Control roles and responsibilities
Board of Directors
- Is ultimately responsible for the administration and the proper organization of the operations of the company
- Ensures that the company has duly endorsed the corporate values applied to its operations.
- Approves the internal control, risk management and corporate governance policies.
- The Board of Directors or the President and CEO can assign Vaisala’s external auditors or other external service provider to perform internal audit assignments as needed.

President and CEO
- Is in charge of the day-to-day management of the company in accordance with the instructions and orders given by the Board
- Sets the ground of the internal control environment by providing leadership and direction to senior managers and reviewing the way they're controlling the business
- Ensures that the accounting practices of the company comply with the law and that the financial matters are handled in a reliable manner.
   
Management Group
- Senior managers assign responsibility for establishment of more specific internal control policies and procedures to personnel responsible for the unit's functions. Of particular significance are financial officers and their staffs, whose control activities cut across, as well as up and down, the operating and other units of the group.

Finance and control function
- Helps units and functions to set up adequate control activities
- Together with risk management director, facilitates the enterprise risk management process and reporting its results to the management
- Operatively follows-up the adequacy and effectiveness of control activities.

Internal audit assignments
- Examines and evaluates the adequacy and effectiveness of the organization's governance, risk management process, system of internal control structure, and the quality of performance in carrying out assigned responsibilities to achieve the organization's stated goals and objectives.

General Counsel, business area and corporate function directors
- Are responsible for making sure that all functions and employees in their responsibility areas adhere to applicable laws, regulations and internal policies.