19. Financial assets and derivative financial liabilities

Financial assets

TMF Group classifies its financial assets in the following categories: financial assets at amortised cost (loans and receivables) and fair value through income statement (equity instruments). The classification is determined based on TMF Group's business model for managing financial assets and contractual cash flow characteristics of the financial assets. Management determines the classification of its financial assets at initial recognition.

Financial assets at amortised cost

Loans and receivables are financial assets measured at amortised cost. Financial assets measured at amortised cost are initially measured at their fair value with transaction costs that are deducted from the fair value. These financial assets are subsequently measured at amortised cost using effective interest method.

Credit risk is managed by each business unit subject to TMF Group's established policy, procedures and control relating to credit risk management. Credit quality of a counterparty is assessed based on a credit rating scorecard.

We perform an impairment analysis at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by geographical region, product type, customer type and rating, and coverage by letters of credit or other forms of credit insurance). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed further in this note.

Financial assets at fair value through income statement

Financial assets at fair value through income statement (equity instruments) include investments in non‑listed equity shares. TMF Group holds non-controlling interest (between 2% and 10%) in these companies. Financial assets carried at fair value through income statement are initially recognised at fair value and transaction costs are expensed in the income statement. These assets are subsequently carried at fair value.

Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through income statement’ category are presented in the income statement in the period in which they arise.

These assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and TMF Group has transferred substantially all risks and rewards of ownership.

Financial assets at amortised cost

The classification of financial assets is as follows:

Exposure to credit risk

The gross carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was as follows:

Refer to note 4.4 Credit risk and note 21 Trade receivables and Unbilled services where all material credit risks and flows are described.

Offsetting

Financial assets and financial liabilities are offset, and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

Derivative financial asset and derivative financial liability

TMF Group has applied IFRS 9 for hedge accounting.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into. Subsequent to initial recognition, derivatives are measured at fair value and the accounting for the changes therein depend on whether the derivative is designated as a hedging instrument or not. TMF Group designates certain derivatives as cash flow hedges of particular risks associated with a recognised asset or liability or a highly probable forecast transaction.

At inception of designated hedging relationships, the Group documents the risk management objective and strategy for undertaking the hedge. The Group also documents the economic relationship between the hedged item and the hedging instrument, including whether the changes in cash flows of the hedged item and hedging instrument are expected to offset each other.

Cash flow hedge

When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income (“OCI”) and accumulated in the hedging reserve. The effective portion of changes in the fair value of the derivative that is recognised in OCI is limited to the cumulative change in fair value of the hedged item, determined on a present value basis, from inception of the hedge. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in income statement.

For a modification of contractual cash flows of the hedging instrument due directly from interest rate benchmark reform, the changes to the hedge documentation (such as redefining the hedged risk or the description of the hedging instrument/hedged item to make reference to the benchmark rate) does not result in discontinuation of hedge accounting.

If the hedge no longer meets the criteria for hedge accounting or the hedging instrument is sold, expires, is terminated or is exercised, then hedge accounting is discontinued prospectively. When hedge accounting for cash flow hedges is discontinued, the amount that has been accumulated in the hedging reserve remains in equity until, for a hedge of a transaction resulting in the recognition of a non-financial item, it is included in the non-financial item’s cost on its initial recognition. For other cash flow hedges, it is reclassified to income statement in the same period or periods as the hedged expected future cash flows affect income statement.

If the hedged future cash flows are no longer expected to occur, then the amounts that have been accumulated in the hedging reserve and the cost of hedging reserve are immediately reclassified to income statement.

The fair value is based on a Level 2 fair value calculation.

Interest rate hedges

On 17 July 2023, amendment and extension of the existing senior loan agreement was executed resulting in principal loans Facility B1 of €955 million and Facility B2 of $400 million. The interest for Facility B1 is 4.5% plus 3 month EURIBOR (floored at 0%). Interest for Facility B2 is 5.0% plus 3-month TERM SOFR CME. In order to mitigate exposure to the floating rate risk, TMF Group entered into derivative transactions: 

• Nomura 1 – €805 million – July 2023 – April 2025

• Goldman Sachs Bank Europe SE – $280 million – October 2023 – January 2027

• Nomura 2 – €665 million – April 2025 until January 2027

Assessment of hedge effectiveness is performed at inception of the hedge, at each reporting date and upon a significant change in the circumstances affecting the hedge effectiveness requirements, whichever comes first.

We have identified the following potential sources of ineffectiveness:

• reduction or modification in the hedged item (i.e. debt repayment)

• a change in the credit risk of TMF Group or the counter party to the purchased cap or cash flow hedge.

The hedge ineffectiveness for the year 2023 amounted nil. The hedge ratio is 1:1.

The following table details the contracts at the end of the reporting period, as well as information regarding their related hedged items.

Balance in cash flow hedge reserve for continuing hedges represents clean value. The following table details the effectiveness of the hedging relationship and the amounts reclassified from hedging reserve to income statement:

Refer to note 24 Equity in the consolidated financial statements.