115 Cloudberry Annual report 2022 Financial statements Note 8 Financial risks The Group’s overall financial risk management focuses primarily on maintaining a financial risk profile that provides flexibility as well as optimising return on assets. Financial risk management is centralised, guidelines for risk management and strategy for handling and using financial instruments as a part of the business activities and handling risks have been approved by the Board of Directors. The Group uses derivatives, such as interest rate swaps, power purchase agreements and currency forward swaps to manage its exposure to certain risks as described in this section. To reduce volatility in the statement of profit or loss the Group applies hedge accounting. Refer to Note 10 Hedge accounting for further information. Interest rate risk Interest rate risk is the risk that the future cash flows, or fair value of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risks through funding and cash management activities. The Group’s underlying assets will normally be loan-financed with long term debt obligations with floating rates, which is exposed to the risk of changes in market interest rates. An increase in interest rates will lead to higher financing costs and interest payments, which reduces the Group’s profitability. Changes in interest rates also expose the Group to changes in the fair value of interest rate derivatives (fair value risk). Management seeks to minimize the interest rate risk together with borrowing costs. The Group manages the borrowing cost and interest risk by either using long-term financing at fixed rates or using floating to fixed interest swaps. All long-term debt is at fixed rates. The profit or loss statement and future cash flows related to existing debt are therefore limitedly sensitive to changes in interest rates. Sensitivity analysis The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of financial assets and liabilities affected, after the impact of hedge accounting. With all other variables held constant, the Group’s profit and equity before tax is affected through the impact on floating rate borrowings, as follows: 1%-point increase in floating interest rate 2022 2021 Effect on profit before income tax - - Effect on equity 27 12 1%-point decrease in floating interest rate 2022 2021 Effect on profit before income tax - - Effect on equity (25) (12)
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