E6. Derivatives and hedge accounting

AP Accounting principles

Accounting for derivatives used for hedging purposes

All derivatives are initially and continuously recognized at fair value in the balance sheet. Gains and losses on remeasurement of derivatives used for hedging purposes are recognized as described below. When using hedge accounting, the relationship between the hedging instrument and the hedged item is documented. Assessment of the effectiveness of the hedge is also documented, both when the transaction is initially executed and on an ongoing basis. Hedge effectiveness is the extent to which the hedging instrument offsets changes in value in a hedged item’s fair value or cash flow. The ineffective portion is recognized directly in profit or loss.

Cash flow hedges

Gains and losses on remeasurement of derivatives intended for cash flow hedges are recognized in equity under other comprehensive income and reversed to profit or loss at the rate at which the hedged cash flow affects profit or loss. If a hedge relationship is interrupted and cash flow is still expected, the result is recognized in equity under other comprehensive income until the cash flow affects the result. If the hedge pertains to a balance sheet item, the result is transferred from equity to the asset or liability to which the hedge relates when the value of the asset or liability is determined for the first time. In cases in which the forecast cash flow that forms the basis of the hedging transaction is no longer assessed as probable, the cumulative gain or loss that is recognized in equity under other comprehensive income is transferred directly to profit or loss. Cash flow hedges relating to energy are recognized as energy costs, that is, cost of goods sold. Cash flow hedges related to transaction exposure are recognized in consolidated net sales and expenses. Cash flow hedges relating to interest expenses are recognized in net financial items.

Hedges of net investments in foreign operations

Gains and losses on remeasurement of derivatives intended to hedge Essity’s net investments in foreign operations are recognized in equity under other comprehensive income. The cumulative gain or loss in equity is recognized in profit or loss in the event of divestment of the foreign operation.

Fair value hedges

The gain or loss from remeasurement of a derivative relating to fair value hedges is recognized in profit or loss together with changes in fair value of the hedged asset or liability. For Essity, this means that non-current loans that are subject to hedge accounting are discounted without a credit spread to the market interest rate and meet inherent interest rate derivatives’ discounted cash flows at the same interest rate.

Economic hedges

When Essity conducts hedges and the transactions do not meet requirements for hedge accounting according to IFRS 9, changes in fair value of the hedging instrument are recognized directly in profit or loss.

Outstanding derivatives

 

 

Of which

1)

Nominal SEK 69,588m (100,661; 110,115) is outstanding before the right of set-off.

SEKm

Total

Currency1)

Interest rate

Energy

 

 

 

 

 

2018

 

 

 

 

Nominal

80,623

60,744

17,935

1,944

Asset

1,255

370

489

396

Liability

443

412

1

30

 

 

 

 

 

2017

 

 

 

 

Nominal

86,503

69,073

15,885

1,545

Asset

1,555

891

425

239

Liability

592

565

12

15

 

 

 

 

 

2016

 

 

 

 

Nominal

56,599

38,695

16,094

1,810

Asset

1,259

351

561

347

Liability

705

664

11

30

Balance sheet

Essity uses financial derivatives to manage currency, interest rate and energy price risks. For a description of how Essity manages these risks, refer to the section on Risk and risk management. The table above shows the derivatives that impacted the Group’s balance sheet on December 31, 2018. For more information relating to derivatives in the balance sheet, see Note E1 Financial instruments by category.

Offsetting of outstanding derivatives

SEKm

Assets

Liabilities

 

 

 

December 31, 2018

 

 

Gross amount

1,275

463

Offsettable amount

–20

–20

Net amount recognized in the balance sheet

1,255

443

ISDA agreements whose transactions are not offset in the balance sheet

–347

–347

Collateral received

–98

 

Net after offsetting in accordance with ISDA agreements

810

96

 

 

 

December 31, 2017

 

 

Gross amount

1,669

706

Offsettable amount

–114

–114

Net amount recognized in the balance sheet

1,555

592

ISDA agreements whose transactions are not offset in the balance sheet

–471

–471

Net after offsetting in accordance with ISDA agreements

1,084

121

 

 

 

December 31, 2016

 

 

Gross amount

2,394

1,840

Offsettable amount

–1,135

–1,135

Net amount recognized in the balance sheet

1,259

705

ISDA agreements whose transactions are not offset in the balance sheet

–288

–288

Net after offsetting in accordance with ISDA agreements

971

417

Income statement

Hedges pertaining to transaction exposure had an impact of SEK 92m (–106; 64) on operating profit for the period. At year-end, the net market value amounted to SEK 0m (–9; 45). Currency hedges increased the cost of non-current assets by SEK 1m (increased: 10; reduced: 5). At year-end, the net market value amounted to SEK –1m (20; 24). Energy derivatives had an impact of SEK 396m (90; –239) on operating profit for the period. Energy derivatives had an outstanding market value of SEK 366m (225; 317) at year-end. Derivatives impacted net interest items in an amount of SEK –362m (–289; –68). The net market value of outstanding interest rate derivatives amounted to SEK 489m (413; 550) at year-end. For further information relating to net financial items, see Note E7 Financial income and expenses.

Sensitivity analysis

Essity has performed sensitivity analysis calculations on the financial instruments’ risk at December 31, 2018 using assumptions on market movements that are regarded as reasonably possible in one year’s time. If the Swedish krona had unilaterally weakened/strengthened by 5% against all currencies, outstanding financial hedges, trade payables and trade receivables would have decreased/increased profit for the period before tax by SEK 7m (54; 4).

If the Swedish krona had unilaterally weakened/strengthened by 5%, currency hedges relating to the cost of non-current assets would have increased/decreased equity by SEK 0m (0; 1). If energy prices had increased/decreased by 20%, outstanding financial hedges relating to natural gas and electricity, all other things being equal, would have decreased/increased energy costs for the period by SEK 299m (214; 203). In addition to the earnings impact, equity would have increased/decreased by SEK 136m (120; 107). However, the total energy cost for the Group would have been affected differently if the price risk related to supply contracts was taken into account.

Derivatives with hedge accounting

The various risk management strategies are presented in the Risks and risk management section. The derivatives to which hedge accounting is applied are presented below. Essity also continuously hedges the transaction exposure and energy price risks for the risks that are recognized in the balance sheet and income statement. Hedge accounting is not applied in respect of these risks. For currency derivatives, the revaluation from the risks meets derivatives in the financial positions. For energy derivatives, the result is recognized in profit or loss.

IFRS 9, which came into effect on January 1, 2018, provides the option of hedging risk components. In 2018, Essity did not utilize this option except for energy, where Essity in the Nordic region hedges the system price, which is a sub-component. The hedging ratio for the various risks for which hedge accounting is prepared is consistently 1:1.

Cash flow hedges

Cash flow hedges for currency risk are prepared for transaction exposure, large investments and energy price risks in connection with purchases of electricity and gas. For cash flow hedges, hedges are prepared whereby critical terms match the hedged item. For the cash flow hedges prepared, this means that the change in fair value of the hedging instruments and the change in the hedged item are very highly correlated. Any ineffectiveness could, for example, be due to the time or the amount of the forecast cash flow mismatching with the cash flow of the derivative. In 2018, SEK 0m (0, 0) was recognized in profit or loss as ineffectiveness concerning the cash flow hedges. Currency derivatives mature within one year, while energy derivatives mature in December 2020.

Hedging of net investments

Essity has hedged net investments in a number of selected legal entities in order to achieve the desired currency distribution of net debt relative to assets so that performance measures that are important to the company’s credit rating can be protected in the long term. The result of hedging positions affected equity by a total of SEK –122m (–1,968, –437). This result is largely due to hedges of net investments in USD and EUR. In 2018, SEK 0m (0, 0) was recognized in profit or loss as ineffectiveness. The total market value of outstanding hedging transactions at the end of the period was SEK 353m (170; 167). In total at year-end, Essity hedged net investments outside Sweden amounting to SEK –18,794m. The Essity Group’s total foreign net investments at year-end amounted to SEK 65,679m. Primarily currency derivatives are used to hedge net investments. Loans in foreign currency (EUR) were also used to hedge net investments in 2018.

Fair value hedges

For fair value hedges, the hedges have the same nominal amount, maturity dates and fixed interest as the hedged item. Hedge ineffectiveness is attributable, for example, to the various discount curves for the hedging instrument and the hedged item. Hedge ineffectiveness per maturity date is presented in the table below. Ineffectiveness is recognized in Net financial items under the item Fair value hedges, unrealized. See Note E7 Financial income and expenses.

 

 

2018

 

2017

 

2016

Currency and energy derivatives, SEKm

Line in the Balance sheet

Nominal amount

Carrying amount

 

Nominal amount

Carrying amount

 

Nominal amount

Carrying amount

Currency derivatives – cash flow hedges

Other non-current assets

 

 

 

60

7

 

11

0

Currency derivatives – cash flow hedges

Other current receivables

270

3

 

267

26

 

159

6

Currency derivatives – cash flow hedges

Other non-current liabilities

 

 

 

13

2

 

72

1

Currency derivatives – cash flow hedges

Other current liabilities

179

4

 

266

13

 

171

5

 

 

 

 

 

 

 

 

 

 

Energy derivatives – cash flow hedges

Other non-current assets

588

85

 

544

70

 

498

106

Energy derivatives – cash flow hedges

Other current receivables

901

262

 

712

146

 

655

135

Energy derivatives – cash flow hedges

Other non-current liabilities

128

8

 

63

3

 

13

1

Energy derivatives – cash flow hedges

Other current liabilities

281

17

 

148

11

 

188

17

 

 

 

 

 

 

 

 

 

 

Currency derivatives – hedging of net investments

Non-current financial assets

 

 

 

 

 

 

Currency derivatives – hedging of net investments

Current financial assets

10,470

143

 

4,303

60

 

12,839

704

Currency derivatives – hedging of net investments

Non-current financial liabilities

 

 

 

 

 

 

Currency derivatives – hedging of net investments

Current financial liabilities

2,726

15

 

18,599

230

 

26,276

537

Interest rate derivatives – hedging of fair value, SEKm

 

 

 

 

 

Line in the balance sheet

 

Maturity date

Nominal amount

Change in fair value, hedged item

Change in fair value, derivatives

Ineffec­tiveness

Financial assets

Financial liabilities

Variable interest

2018

 

 

 

 

 

 

 

Current derivatives

 

 

 

 

 

 

 

2019

900

7

–7

0

6

 

Stibor +0.506

Non-current derivatives

 

 

 

 

 

 

 

2020

3,083

4

–4

0

29

 

Euribor 6m +0.2827–0.2829

2021

5,139

–35

34

–1

22

 

Euribor 6m +0.5502–0.5527

2022

180

3

–3

0

6

 

Euribor 3m +0.698

2023

4,111

–13

6

–7

355

 

Euribor 6m +0.7215–0.73165

2025

3,083

–45

45

0

71

 

Euribor 6m +0.514–0.5168

 

16,496

–79

71

–8

489

 

 

2017

 

 

 

 

 

 

 

Current derivatives

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

Non-current derivatives

 

 

 

 

 

 

 

2019

900

–2

2

0

12

 

Stibor +0.506

2020

2,952

–6

7

1

33

 

Euribor 6m +0.2827–0.2829

2021

4,920

–10

12

2

 

12

Euribor 6m +0.5502–0.5527

2022

226

–4

4

0

9

 

Euribor 3m +0.698

2023

3,936

–80

114

34

346

 

Euribor 6m +0.7215–0.73165

2025

2,952

–40

35

–5

25

 

Euribor 6m +0.514–0.5168

 

15,886

–142

174

32

425

12

 

2016

 

 

 

 

 

 

 

Current derivatives

 

 

 

 

 

 

 

2017

419

–45

45

0

5

5

USDLibor +0.8

Non-current derivatives

 

 

 

 

 

 

 

2019

900

12

–12

0

15

 

Stibor +0.506

2020

2,867

38

–35

3

38

 

Euribor 6m +0.2827–0.2829

2021

4,779

–16

13

–3

 

3

Euribor 6m +0.5502–0.5527

2022

271

48

–48

0

13

 

Euribor 3m +0.698

2023

3,823

160

–148

12

426

 

Euribor 6m +0.7215–0.73165

2025

2,867

140

–128

12

64

 

Euribor 6m +0.514–0.5168

 

15,926

337

–313

24

561

8

 

Derivatives with hedge accounting1)

SEKm

Asset

Liability

Net

Tax

Hedge reserve after tax

Recirculated before tax

Line in the income statement/balance sheet

1)

Outstanding derivatives with hedge accounting are included in the table Outstanding derivatives.

2)

Derivatives before offsetting.

3)

Cost of goods sold.

4)

Cost of goods sold, Net sales and Buildings, land, machinery and equipment

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

Derivatives with hedge accounting in hedge reserve

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

Energy risk

347

–25

322

77

245

–377

3)

Currency risk

3

–4

–1

0

0

4)

Total

350

–29

321

77

245

 

 

Derivatives with hedge accounting without hedge reserve

 

 

 

 

 

 

 

Hedges of net investments in foreign operations

 

 

 

 

 

 

 

Currency risk2)

143

–15

128

 

 

 

 

Fair value hedges

 

 

 

 

 

 

 

Interest rate risk

489

 

489

 

 

 

 

Total

982

–44

938

77

245

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

Derivatives with hedge accounting in hedge reserve

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

Energy risk

216

–14

202

–50

152

–69

3)

Currency risk

33

–15

18

–4

14

23

4)

Total

249

–29

220

–54

166

 

 

Derivatives with hedge accounting without hedge reserve

 

 

 

 

 

 

 

Hedges of net investments in foreign operations

 

 

 

 

 

 

 

Currency risk2)

60

–230

–170

 

 

 

 

Fair value hedges

 

 

 

 

 

 

 

Interest rate risk

425

–12

413

 

 

 

 

Total

734

–271

463

–54

166

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

Derivatives with hedge accounting in hedge reserve

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

Energy risk

241

–18

223

–59

164

269

3)

Currency risk

6

–6

–14

4)

Total

247

–24

223

–59

164

 

 

Derivatives with hedge accounting without hedge reserve

 

 

 

 

 

 

 

Hedges of net investments in foreign operations

 

 

 

 

 

 

 

Currency risk2)

704

–537

167

 

 

 

 

Fair value hedges

 

 

 

 

 

 

 

Interest rate risk

561

–8

553

 

 

 

 

Total

1,512

–569

943

–59

164

 

 

The results from hedging of net investments in foreign operations are recognized in the translation reserve, refer to Note E8 Shareholders’ equity. The results from fair value hedges are recognized directly in profit or loss.

Hedge reserve in equity

Currency derivatives relating to hedging of transaction exposure mature mainly during the first quarter of 2019. With unchanged exchange rates, profit after tax will be affected in an amount of SEK 0m (neg. 1; pos. 2). Currency derivatives relating to hedging of the cost of non-current assets have a maturity spread until November 2019. With unchanged exchange rates, the cost of non-current assets will increase by SEK 1m (decrease: 15; increase: 2) after tax. The derivatives intended to hedge energy costs in the Group mature during 2019 and 2020. With unchanged prices, the Group’s profit after tax will be affected positively in an amount of SEK 245m (pos: 152; pos: 164).