31. Derivatives and hedge accounting
SELECTED ACCOUNTING PRINCIPLES
Derivative financial instruments within the scope of IFRS 9 Financial Instruments are classified as financial assets/liabilities measured at a fair value through profit or loss, except for derivatives designated as hedging instruments and covered by hedge accounting. Contracts to buy or sell a non-financial item that can be settled net, that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s requirements, as excluded from the scope of IFRS 9 Financial Instruments are not subject to valuation as at the balance sheet date.
Derivatives classified as “financial assets/financial liabilities measured at fair value through profit or loss” are measured at a fair value, taking into account their market value as at the balance sheet date. Changes in the fair value of these instruments are recognized in the result of the period (commodity derivatives in operating income/expenses, other derivatives in financial income/expenses). Derivatives are disclosed as assets if their value is positive or as liabilities if their value if negative.
As at the end of the reporting period, Interest Rate Swaps (IRS) acquired and held to hedge the interest rate risk relating to debt are subject to hedge accounting. Other derivative instruments held by the Company as at the balance sheet date are not subject to hedge accounting.
Hedge accounting
In order to hedge the interest rate risk, the Group uses IRS (Interest Rate Swap) contracts. These instruments hedge cash flows related to the debt. Such transactions are subject to hedge accounting.
At the inception of the hedge the Group formally designates and documents the hedging relationship as well as the risk management objective and the strategy underlying establishing of the hedge.
Cash flow hedges are accounted for as follows:
- the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in other comprehensive income; and
- the ineffective portion of the gain or loss on the hedging instrument shall be recognised in profit or loss for the period.
The gains/losses on the revaluation of a hedging instrument recognised in other comprehensive income are recognised directly as the profit or loss of the current period when the hedged item affects profit or loss of the current period or is included in the initial cost of acquisition of the assets (capitalisation of external financing costs). For IRS, interest costs arising from debt are adjusted accordingly.
PROFESSIONAL JUDGEMENT AND ESTIMATES
The Group measures fair value at each balance sheet date. The methodology is presented in the table below. The Group tests the effectiveness of the hedge at each balance sheet date.
| Instrument | Methodology for determining the fair value | As at 31 December 2022 |
|---|---|---|
| Derivatives subject to hedge accounting | ||
| IRS | The difference in discounted interest cash flows based on a floating interest rate and a fixed interest rate. The data input is the interest rate curve from the Refinitiv service. | IRS (Interest Rate Swap) instruments are used to hedge a portion of the interest rate risk on the cash flows associated with the exposure to WIBOR 6M designated under the dynamic risk management strategy, i.e:
In accordance with the terms of the transaction, the Company pays interest accrued based on a fixed interest rate in PLN, while receiving payments at a floating interest rate in PLN. |
| Derivatives measured at a fair value through the profit and loss other than subject to hedge accounting | ||
| CCIRS | The difference in the discounted interest cash flows of the stream paid and the stream received, in two different currencies, expressed in the valuation currency. The input data are interest rate curves, basis spreads and the NBP fixing for the relevant currencies from the Refinitiv service. | CCIRS (Coupon Only Cross Currency Swap fixed-fixed) derivatives involve an exchange of interest payments on the total nominal amount of EUR 500 million. The transaction matures in July 2027. Under the terms of the transaction, the Company pays interest based on a fixed interest rate in PLN, while receiving payments at a fixed interest rate in EUR. CCIRS derivatives aimed at securing the currency flows generated by interest payments on Eurobonds issued. |
| Commodity forward/futures | The fair value of forward transactions for the purchase and sale of CO2 emission allowances, electricity and other commodities is determined based on prices quoted in an active market or based on cash flows representing the difference between the price reference index (forward curve) and the contract price. | Commodity derivatives (futures, forward) comprise forward transactions for the purchase and sale of CO2 emission allowances and other commodities. |
| Currency forward | The difference in discounted future cash flows between the forward price as at the valuation date and the transaction price, multiplied by the nominal value of the contract in foreign currency. The input date comprise the NBP fixing and the interest rate curve implied from the FX swap transaction for the relevant currency from the Refinitiv service. | FX forward derivatives to hedge currency flows generated from operations. |
The measurement of derivatives as at the respective balance sheet dates is presented in the table below:
| As at 31 December 2022 | As at 31 December 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Total | Charged to profit or loss |
Charged to revaluation reserve from valuation of hedging instruments |
Total | Charged to profit or loss | Charged to revaluation reserve from valuation of hedging instruments | |||
| Assets | Liabilities | Assets | Liabilities | |||||
| Derivatives subject to hedge accounting | ||||||||
| IRS | 592 | − | 34 | 558 | 371 | − | − | 371 |
| Derivatives measured at fair value through profit or loss | ||||||||
|
CCIRS |
21 | − | 21 | − | 26 | (1) | 25 | − |
|
Commodity forwards/futures |
236 | (232) | 4 | − | 485 | (494) | (9) | − |
|
Currency forwards |
− | (109) | (109) | − | 115 | − | 115 | − |
|
Total |
849 | (341) | 997 | (495) | ||||
|
Non-current |
390 | (10) | 532 | (116) | ||||
|
Current |
459 | (331) | 465 | (379) | ||||
The derivatives shown in the table above include futures contracts covered within the scope of IFRS 9 Financial Instruments. The derivatives acquired and held to hedge own needs as excluded from the scope of IFRS 9 Financial Instruments are not subject to measurement as at the balance sheet date.