Chapters
Annual Report 2020

23. Derivatives

Accounting Policy

The Group uses derivatives in the management of its interest and foreign currency cash flow risks. Derivatives are only used for economic hedging purposes and not as speculative investments.

Derivatives are initially recognized in the consolidated Balance Sheet at fair value on the date a derivative contract is entered into (trade date) and are subsequently remeasured at their fair value. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is derived from valuations performed by financial institutions and other third parties, using valuation techniques such as mathematical models (Black-Scholes). The Group uses its judgment to make assumptions that are mainly based on market conditions existing at each reporting date.

The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and, if so, the nature of the item being hedged.

Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized immediately in the consolidated Income Statement as finance income and finance costs.

The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months. It is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.

Hedge accounting

The Group designates certain derivatives as either:

  • hedges of highly probable forecast transactions (cash flow hedges);
  • hedges of the fair value of recognized assets and liabilities or a firm commitment (fair value hedges).

The Group assesses and documents, both at the inception of the transaction and on an ongoing basis through periodic prospective effectiveness assessments, the existence of an economic relationship between the hedging instrument and hedged item based on the amount and timing of the respective cash flows. The Group also documents its risk management objective and strategy for undertaking various hedge transactions.

When all relevant criteria are met, hedge accounting is applied to remove the accounting mismatch between the hedging instrument and the hedged item. This will effectively result in recognizing interest expense at a fixed interest rate for the hedged floating rate loans and inventory at the fixed foreign currency rate for the hedged purchases.

The Group only designates the spot component of foreign currency forwards in hedge relationships. The spot component is determined with reference to relevant spot market exchange rates. The differential between the contracted forward rate and the spot market exchange rate is defined as the forward points. The changes in the forward element of the foreign currency forwards are recognized in the consolidated Income Statement.

Cash flow hedge

On the date a derivative contract is entered into, the Group designates interest rate swaps and foreign currency forwards (hedge instruments) as a hedge of the exposure to the fluctuations in the variable interest rates on borrowings and foreign currency exchange rates on future transactions, respectively (hedged items).

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the consolidated Other Comprehensive Income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated Income Statement. Amounts accumulated in the consolidated Other Comprehensive Income are recycled in the consolidated Income Statement in the periods when the underlying hedged item affects profit or loss.

However, when the projected transaction that is hedged, results in the recognition of a non-financial asset (for example inventory), the gains and losses previously deferred in the consolidated Other Comprehensive Income are transferred from equity and included in the initial measurement of the cost of the asset as a basis adjustment.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in the consolidated Other Comprehensive Income at that time remains in equity and is recognized when the projected transaction is ultimately recognized in the consolidated Income Statement or for a non-financial asset, within the cost of the asset. When a projected transaction is no longer expected to occur, the cumulative gain or loss that was reported in the consolidated Other Comprehensive Income is immediately transferred to the consolidated Income Statement in finance costs or finance income.

Fair value hedge

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the consolidated Income Statement as finance costs or finance income, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

The fair value of the derivatives is as follows:

in thousands of EUR

31 December 2020

31 December 2019

Assets

Liabilities

Assets

Liabilities

Non-current

Interest rate derivatives – cash flow hedges

-

8,174

-

7,935

-

8,174

-

7,935

Current

Interest rate derivatives – cash flow hedges

-

3,142

-

3,303

Currency derivatives – cash flow hedges

728

7,246

1,581

2,803

728

10,388

1,581

6,106

Total derivatives

728

18,562

1,581

14,041

The Group’s risk management strategy has not changed due to the COVID-19 pandemic. During 2020, GrandVision considered the impact of COVID-19 on its existing hedges on a Group level, in particular, whether the currency derivatives continued to meet the criteria for hedge accounting. The accounting treatment depends on the conclusion on the probability of the forecasted transactions occurring. Based on the analysis, all the effectiveness criteria continued to be met and thus, GrandVision continued to apply Hedge Accounting for all the currency derivatives throughout the year.

In both 2020 and 2019, the derivatives met the requirements for hedge accounting in full. There has not been any ineffectiveness on the hedges in 2020 and 2019.

In note 3.1.3 the maturity of the expected cash flows of the derivatives to occur is shown.

Interest rate derivatives

The Group’s main interest rate risk arises from long-term borrowings with variable rates, which expose the Group to cash flow interest rate risk. The Group's policy is to maintain a minimum of 60% of its net debt on a forward looking 12 months basis, related to interest rate risk at fixed rate, using floating-to-fixed interest rate swaps. The Group also uses 0% floors to hedge its exposure to negative interest rates.

The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the interest rate, reset dates, payment dates, maturities and notional amount. As the Group only hedges 60% of the cash flows related to interest rate risk, the hedged items are therefore identified as a proportion of the outstanding borrowings up to the notional amount of the swaps.

The nominal amount of the bank borrowings (see note 22) hedged by interest rate derivatives amounts to €425 million (2019: €475 million) which includes €325 million (2019: €375 million) of 0% floors to hedge the impact of negative interest rates.

The effects of the interest rate swaps on the Group’s consolidated Balance Sheet and consolidated Income Statement are as follows:

in thousands of EUR

31 December 2020

31 December 2019

Carrying amount (liabilities)

- 11,316

- 11,238

Notional amount

425,000

475,000

Maturity Date

March 2021 - December 2026

September 2020-December 2026

Hedge ratio

1:1

1:1

Change in fair value of outstanding hedging instruments since 1 January

- 79

- 5,805

Change in value of hedged item used to determine hedge effectiveness

79

5,805

Weighted average hedged rate for the year

0.60%

0.59%

Currency derivatives

The Group has transactional cash flows relating to future commercial transactions and recognized assets and liabilities denominated in multiple currencies which are exposed to the volatility of these currencies against the euro. The treasury policy is to hedge between 25% and 80% of the transactional cash flows based on a rolling 12-month forecast using foreign currency forward contracts. Foreign currency forwards are aimed at reducing the exposure to adverse currency change by hedging the spot component.

For hedges of foreign currency purchases, the Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the notional amounts, the foreign currency spot components, payment dates and maturities.

The foreign currency related hedging instruments are as follows:

in thousands of EUR

31 December 2020

31 December 2019

Carrying amount (assets)

728

1,581

Carrying amount (liabilities)

- 7,246

- 2,803

Notional amount of outstanding foreign exchange contracts:

-United States Dollar (USD)/Euro (EUR)

94,829

84,215

-British Pound Sterling (GBP)/ Euro (EUR)

19,148

22,986

-Norwegian Krone (NOK)/Danish Krone (DKK)

3,788

2,377

-Swedish Krona (SEK)/Danish Krone (DKK)

6,209

4,497

-Other/Euro (EUR)

45,593

88,405

-Other /United States Dollar (USD)

6,511

6,305

Maturity Date

January 2021 - December 2021

January 2020 - December 2020

The weighted average hedge rates for the 2020 and 2019 years can be specified as follows:

2020

2019

-United States Dollar (USD)/Euro (EUR)

1.1654

1.1479

-British Pound Sterling (GBP)/ Euro (EUR)

0.9000

0.8937

-Norwegian Krone (NOK)/Danish Krone (DKK)

1.4474

1.3579

-Swedish Krona (SEK)/Danish Krone (DKK)

1.4035

1.4365