PL
Integrated
Report 2021

10.21. Derivative financial instruments and hedging

Derivative instruments are recognised in the balance sheet as financial assets or financial liabilities and measured at fair value. The Group uses forward and futures contracts. The main purpose of concluding forward contracts on the FX market is to hedge future cash flows against the currency risk resulting from operating, investing and financing activities. The main purpose of concluding futures contracts for the purchase of aluminium is to hedge future cash flows related to future expenditures on the purchase of aluminium. The purpose of hedging the price of aluminium is to minimise the risk of business activities as a result of changes occurring in the macroeconomic environment related to the fluctuations in the main raw material prices. The forward/futures contracts and derivative instruments are accounted for at the purchase price and measured as at the balance sheet date at fair value and recognised in the consolidated financial statements as financial assets or financial liabilities. Gains and losses from the measurement at fair value of the financial instruments which do not comply with the hedge accounting principles are recognised directly in profit or loss. The fair value of future or forwards contracts is calculated on the basis of the present net value of future cash flows related to these contracts, quoted market prices of forward contracts calculated with the application of the present interest rates. Forward/futures contracts and derivative instruments which cannot be classified as hedging instruments are recognised as instruments held for trading.

The fair value of currency forward contracts is determined by reference to the present forward rates of contracts with similar maturity. The valuation is based on market valuations of identical transactions at commercial banks. Currency risk hedge for a probable future liability is recognised as cash flow hedge. Upon the establishment of the hedge, the Group formally assigns and documents the hedging relation as well as the purpose of risk management and the strategy for hedge establishment. The documentation contains the identification of the hedging instrument, of the hedged item or transaction, the nature of the risk being hedged as well as the manner of assessing the effectiveness of a given hedging instrument in compensating for the risk of changes of fair value of the item being hedged or cash flows related to the hedged risk. It is expected that the hedging will be highly effective in compensating for changes of fair value or cash flows resulting from the risk being hedged. The effectiveness of hedging is assessed on an ongoing basis to check whether it is highly effective in all reporting periods for which it was established.

The Group holds the following hedging instruments:

Cash flow hedge is a hedge against the variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable planned transaction and could affect profit or loss. The portion of gains or losses on a hedging instrument being an effective hedge is recognised in other comprehensive income and the non-effective part is recognised in the statement of profit or loss. If a hedged forecast transaction subsequently results in the recognition of a financial asset or a financial liability, any gains or losses related to it that were recognised in other comprehensive income and accumulated in equity are moved to the income statement in the same periods in which the acquired asset or assumed liability affects the statement of profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction related to a non-financial asset or a non-financial liability becomes a probable future liability to which fair value hedge will apply, then gains or losses that were recognised in other comprehensive income are reclassified from equity to profit or loss in the same period(s) in which the acquired non-financial asset or assumed non-financial liability affects profit or loss. Gains and losses resulting from the change of the fair value of derivative instruments which do not meet the conditions enabling the application of hedge accounting principles are recognised directly in the statement of profit or loss.

The Group ceases to apply the hedge accounting principles when the hedging instrument expired or was sold, its utilisation ended or it was exercised, or when the hedging ceased to meet the conditions enabling the application of hedge accounting principles with regard to it. In such a case, total profit or loss on a hedging instrument recognised in other comprehensive income and accumulated in equity are still recognised in equity until the forecast transaction occurs. If the Group no longer expects the forecast transaction to take place, total net profit or loss accumulated in equity are charged to the statement of profit or loss.