Derivatives and hedge accounting
Accell Group has the following derivative financial instruments:
|€ x 1,000||€ x 1,000|
|Forward exchange contracts - cash flow hedges||4,284||8,913|
|Forward exchange contracts - cash flow hedges||-1,431||-370|
|Interest rate swaps - cash flow hedges||-1,865||-1,046|
Accell Group makes estimates to determine the fair value of derivative financial instruments (see accounting policies in note 6.14).
Accell Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures and not as speculative investments. Derivatives are initially measured at fair value; any directly attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss except when the derivate is designated as a qualifying cash flow hedging instrument. Derivatives are presented as assets when the fair value is positive and as liabilities when the fair value is negative.
i. Classification of derivatives
Derivatives are only used for economic hedging purposes and not as speculative investments. The accounting policy for the cash flow hedges is set out in section iv.
ii. Hedge reserves
The hedge reserve relates to cash flow hedges and can be specified as follows:
|Cost of hedging||Spot component of currency forward||Interest rate swaps||Total cash flow hedge reserve|
|€ x 1.000||€ x 1.000||€ x 1.000||€ x 1.000|
|Balance at 1 Januari 2019||-||-3,422||779||-2,643|
|Change in fair value of hedging instrument recognized in OCI||-2,215||-7,083||1,374||-7,924|
|Reclassified to the cost of inventory||897||11,487||-||12,384|
|Reclassified to profit or loss (ineffectiveness)||5||-||-||5|
|Reclassified from OCI to profit and loss - included in the cost of materials||183||-||-||183|
|Reclassified from OCI to profit and loss - included in the net finance cost||-||-||-547||-547|
|Balance at 31 December 2019||-848||-119||1,399||432|
|Spot and forward component of currency forward||Interest rate swaps||Total cash flow hedge reserve|
|€ x 1,000||€ x 1,000||€ x 1,000|
|Balance at 31 December 2017||6,930||144||7,074|
|Initial application IFRS 9||-2,615||-||-2,615|
|Revised balance at 1 January 2018||4,315||144||4,459|
|Change in fair value of hedging instrument recognized in OCI||-14,926||1,446||-13,480|
|Reclassified to the cost of inventory||4,705||-||4,705|
|Reclassified to profit or loss (ineffectiveness)||-95||-||-95|
|Reclassified from OCI to profit and loss - included in the net finance cost||-||-600||-600|
|Balance at 31 December 2018||-3,422||779||-2,643|
In the year under review, there were no reclassifications from the cash flow hedge reserve to profit or loss with respect to the foreign currency forwards.
iii. Hedge effectiveness
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.
Forward exchange contracts
For hedges of foreign currency purchases, the group enters into hedge relationships where the critical terms of the hedging instrument exactly match the terms of the hedged item. The group therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer exactly match the critical terms of the hedging instrument, the group uses the hypothetical derivative method to assess effectiveness.
In hedges of foreign currency purchases, ineffectiveness may arise if the timing of the forecast transaction changes from the original estimate, or if there are changes in the credit risk of Accell Group or the derivative counterparty. In 2019 99% of the hedges were effective.
Interest rate swap
Accell Group holds an interest rate swap that has the same critical terms as the hedged item, such as reference rate, reset dates, payment dates, maturities and notional amount. Accell Group does not hedge 100% of its loans, therefore the hedged item is identified as a proportion of the outstanding loans up to the notional amount of the swaps.
Hedge ineffectiveness for interest rate swaps is assessed using the same principles as for hedges of foreign currency purchases. Due to the upcoming interest rate benchmark reform, Accell Group has opted to the early adoption of the exceptions set out in the amendments to IFRS 9 so current cash flow hedging can be continued. Accell Group has interest rate swaps in a cash flow hedging relationship with an underlying notional amount of € 85 million with Euribor as the interest rate benchmark. The hedged item also has Euribor as the interest rate benchmark. The impact, on the transition date to a new interest rate benchmark, on the financial statements of Accell Group is not expected to be material as the switch to the new benchmark will be at the same moment in time for the hedging instrument and the hedged item because the same counterparty is involved.
Ineffectiveness may occur due to:
- the credit value/debit value adjustment on the interest rate swaps not matching the loans, and
- differences in critical terms between the interest rate swaps and loans.
There was no ineffectiveness with respect to the interest rate swaps in 2019 and 2018, because all critical terms matched during the years.
iv. Accounting policy
When a derivative is designated and qualifies as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income (OCI) and accumulated in the hedging reserve. The cost of hedging is a separate component in the cash flow hedging reserve and reflects the gain or loss on the portion excluded from the designated hedging instrument that relates to the forward element of forward contracts. It is initially recognised in other comprehensive income and accounted for similarly to gains or losses in the cash flow hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.
Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss, as follows:
- When the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), the deferred hedging gains and losses (including forward points) are included in the initial cost of the asset. The deferred amounts are ultimately recognized in profit or loss as the hedged item affects profit or loss through cost of materials.
- The gain or loss relating to the effective portion of the interest rate swaps hedging variable rate borrowings is recognized in profit or loss within finance cost at the same time as the interest expense on the hedged borrowings.
When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss.