The internal accounting guidelines of CPI Group, which define procedures, responsible persons and dates for individual tasks, form an integral part of the internal control system. The internal policies applied by CPI Group include mainly signing and accountability rules, the circulation of accounting records, a chart of accounts, an internal guideline on tangible and intangible fixed assets, inventory policies, rules for recognizing expenses and revenues, stocktaking guidelines, rules for recognizing adjustments and the establishment and release of provisions, rules for the preparation of financial statements, and other internal guidelines.
Continuous controls are carried out within CPI Group, focusing on links between accounts relating to fixed assets, inventories, short-term investments and settlements. The control process is regularly reviewed and if any
As of 31 December 2014, CPI Group was exposed to the following risks arising from financial assets and financial liabilities:
Credit risk
Credit risk is the risk that counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. CPI Group is exposed to credit risk mainly from its rental activities (primarily for trade receivables) and from its financing activities, including provided loans, deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.
Liquidity risk
Liquidity risk refers to the possibility of CPI Group being unable to meet its cash obligations mainly in relation to the settlement of amounts due to bondholders, bank loans and suppliers. This particularly refers to a risk arising from the Group’s loan agreements, according to which the creditor is entitled to require immediate settlement of the loan in the case of a breach of contractual conditions.
CPI Group monitors its risk of shortage of funds using different liquidity planning tools. These tools comprise e.g. the following activities:
maintaining a sufficient balance of liquid funds;
flexible utilization of bank loan, overdrafts and facilities; projection of future cash flows from operating activities. Market Risk
Market risk includes the possibility of negative changes in value of assets of CPI Group due to unexpected changes in the underlying market parameters, such as exchange rates or interest rates.
Currency risk
CPI Group is exposed to a currency risk mainly connected with the sale, purchase and financing activities denominated in Euro currencies.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The interest rate risk relates primarily to long-term debt financing of the Group, for which a floating interest rate is contracted in a substantial extent. Long-term debt financing include bank loans, issued bonds and leasing obligations.
As of 31 December 2014, CPI group was exposed to the following risks arising from its business activities: The risk of competition
CPI Group operates in a real estate market and should be responsive to changing market situation and changing behaviour of competition and customers.
The risk of losing key people
The risk of losing key people is the risk that CPI Group will not able to retain and motivate persons who are crucial for the ability of the Group to create and implement key strategies of CPI Group. Key persons include members of the CPI Group’s management.
The risk of information leakage
CPI Group employs persons having access to the business strategic information, such as planned development project, new marketing strategies and overall strategy of the Group. Leakage of such sensitive information may jeopardize the operation of the entire CPI Group and consequently its current market position can be lost which could ultimately lead to a deterioration of the Group’s financial results.
The dependence of CPI Group on rental properties
Due to the fact that CPI Group engages in the lease of real estate, its financial results depend on the existence of tenants who are willing and able to lease and operate real estate owned by CPI Group. If there was a substantial loss of tenants, this fact could adversely affect the economic and financial situation of the Group.
The risk of early termination of lease by current or future tenants
The risk of early termination of lease by the current or future tenants is the risk that in the event of an early termination of the lease CPI Group (as the lessor) will not be immediately able to find another tenant willing to enter into a lease agreement under comparable conditions. Significant part of current lease agreements represents long-term leases of commercial properties (retail shopping centres, office buildings and logistics centres) and therefore an early termination of lease by a major tenant could have a significant impact on the Group economic performance.
The risk associated with market rent development
CPI Group is exposed to the risk that the market rent may experience a downward trend in the future where the supply of rental apartments, commercial or industrial properties substantially exceeds the demand for rental of these properties. Any reduction in market rents could have a negative impact on the Group.
A significant part of the Group’s business in the Czech Republic is rental housing. Gradual rent liberalization under the Act on unilateral rent increases has had a positive impact on the financial performance of the Group. Deregulation of rent in the Czech Republic finished as of 31 December 2012, and thereafter rent for all apartments should be determined solely based on market conditions. Market rent, as opposed to regulated rent, reflects the relationship of supply and effective demand on the local housing market. CPI Group is exposed to the risk that the market rent may experience a downward trend in the future where the supply of rental apartments substantially exceeds the demand for rental housing (for example, as a result of economic recovery, the income of individuals increases and mortgage loans again become more readily available, which will in turn boost interest in becoming a homeowner). Any reduction in market rents could have a negative impact on CPI Group. Although new market rent has been negotiated with tenants well in advance, the CPI Group could not avoid potential legal proceedings from those tenants who have not agree with the rental increase.
The dependence of CPI Group on the degree of indebtedness of its target tenant groups
To a certain extent, CPI Group is dependent on the solvency of its target tenant groups, yet it is unable to influence tenants’ payment behaviour. The total increase in the indebtedness of households may lead to failure to pay the agreed rent, which could negatively affect the cash flow of the Group while increasing the cost of litigation and debt recovery.
Changes in lifestyle and living standards may adversely affect interest in rental housing
Future changes in tenants’ preferences, housing trends and higher living standards of the population in a certain location may lead to a significant reduction in interest in rental housing. The increased preference to own housing rather than renting the apartment may ultimately mean a significant loss of rental housing tenants.
The risk associated with low liquidity of real estate
The risk of investing in real estate is linked to their low liquidity. Unlike financial assets, the sale of real estate is a complex and long-term transaction which may adversely affect the profitability of investments in real estate.
Risks associated with the property insurance
CPI Group has entered into property insurance of its major assets. However, the Group cannot guarantee that the potential costs connected with natural hazards or other unexpected events will not have a negative impact on its assets and the economic and financial situation, due to loss of cash flow generating assets.
Risks associated with development projects
These risks include risk related to the construction of new projects and risk related to the location of new development projects.
Risk related to the construction of new projects
Construction of the real estate is a quite long process during which CPI Group might misestimate the market demand in the related segment or overestimate future value of developed real estate, which might impact overall profitability of the project.
Risk related to the location of new development projects
As the value of the real estate depends also on its location, improper location of new development project might have an impact on the future ability of the Group to sale or rent finished real estate.