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 hedge 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 hedging 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 affect the energy costs, that is, cost of goods sold. Transaction exposure’s cash flow hedges affect consolidated net sales and expenses. Cash flow hedges relating to interest expenses affect net financial items.

Hedges of net investments in foreign operations

Gains and losses on remeasurement of derivatives intended to hedge SCA’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 with changes in fair value of the asset or liability exposed to the hedged risk. For SCA, this means that non-current loans with fixed interest rates 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.

Financial hedges

When SCA conducts hedges and the transactions do not meet requirements for hedge accounting according to IAS 39, changes in fair value of the hedging instrument are recognized directly in profit or loss.

Outstanding derivatives

SEKm

Total

of which currency 1)

Interest rate

Energy

1)

Nominal SEK 110,115m (135,448; 82,957) is outstanding before the right of set-off.

2016

 

 

 

 

Nominal

56,599

38,695

16,094

1,810

Asset

1,259

351

561

347

Liability

705

664

11

30

 

 

 

 

 

2015

 

 

 

 

Nominal

84,713

64,639

18,133

1,941

Asset

1,225

660

538

27

Liability

1,090

516

121

453

 

 

 

 

 

2014

 

 

 

 

Nominal

64,773

44,793

17,718

2,262

Asset

1,839

893

931

15

Liability

1,082

575

207

300

Offsetting of outstanding derivatives

SEKm

Assets

Liabilities

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

 

 

 

December 31, 2015

 

 

Gross amount

2,236

2,101

Offsettable amount

–1,011

–1,011

Net amount recognized in the balance sheet

1,225

1,090

ISDA agreements whose transactions are not offset in the balance sheet

–472

–472

Net after offsetting in accordance with ISDA agreements

753

618

 

 

 

December 31, 2014

 

 

Gross amount

3,163

2,406

Offsettable amount

–1,324

–1,324

Net amount recognized in the balance sheet

1,839

1,082

ISDA agreements whose transactions are not offset in the balance sheet

–567

–567

Net after offsetting in accordance with ISDA agreements

1,272

515

Balance sheet

SCA uses financial derivatives to manage currency, interest rate and energy price risks. For a description of how SCA manages these risks, refer to the Board of Directors’ Report. The table above shows the derivatives that impacted the Group’s balance sheet on December 31, 2016. For more information relating to derivatives in the balance sheet, see Note E1 Financial instruments by category.

Income statement

Hedges pertaining to transaction exposure had an impact of SEK 18m (54; –158) on operating profit for the period. At year-end, the net market value amounted to SEK 45m (28; –77). Currency hedges reduced the cost of non-current assets by SEK 19m (unchanged: 0; increased: 3) At year-end, the net market value amounted to SEK 24m (–17; 4).

Energy derivatives had an impact of SEK –225m (–360; –288) on operating profit for the period. Energy derivatives had an outstanding market value of SEK 317m (–426; –286) at year-end. Derivatives impacted net interest items in an amount of SEK –68m (16; 175). The net market value of outstanding interest rate derivatives amounted to SEK 550m (417; 724) at year-end. For further information relating to net financial items, see Note E7 Financial income and expenses.

Sensitivity analysis

SCA has performed sensitivity analysis calculations on the financial instruments’ risk at December 31, 2016 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 as well as trade payables and trade receivables would have decreased/increased profit for the period before tax by SEK 113m (26; 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 46m (63; 7). 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 259m (187; 237). In addition to the earnings impact, equity would have increased/decreased by SEK 136m (73; 89). 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.

Outstanding derivatives with hedge accounting 1)

SEKm

Assets

Liabilities

Net

Tax

Hedge reserve after tax

1)

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

2)

Derivatives before offsetting.

2016

 

 

 

 

 

Derivatives with hedge accounting in hedge reserve

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

Energy risk

329

–23

306

–78

228

Currency risk

45

–10

35

–8

27

Total

374

–33

341

–86

255

Derivatives with hedge accounting without hedge reserve

 

 

 

 

 

Hedges of net investments in foreign operations

 

 

 

 

 

Currency risk 2)

704

–537

167

 

 

Fair value hedges

 

 

 

 

 

Interest rate risk

561

–8

553

 

 

Total

1,639

–578

1,061

–86

255

 

 

 

 

 

 

2015

 

 

 

 

 

Derivatives with hedge accounting in hedge reserve

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

Energy risk

2

–393

–391

102

–289

Currency risk

1

–18

–17

–4

–21

Total

3

–411

–408

98

–310

Derivatives with hedge accounting without hedge reserve

 

 

 

 

 

Hedges of net investments in foreign operations

 

 

 

 

 

Currency risk 2)

860

–259

601

 

 

Fair value hedges

 

 

 

 

 

Interest rate risk

538

–115

423

 

 

Total

1,401

–785

616

98

–310

 

 

 

 

 

 

2014

 

 

 

 

 

Derivatives with hedge accounting in hedge reserve

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

Energy risk

4

–261

–257

72

–185

Interest rate risk

–8

–8

2

–6

Currency risk

17

–9

8

–5

3

Total

21

–278

–257

69

–188

Derivatives with hedge accounting without hedge reserve

 

 

 

 

 

Hedges of net investments in foreign operations

 

 

 

 

 

Currency risk 2)

281

–1,263

–982

 

 

Fair value hedges

 

 

 

 

 

Interest rate risk

920

–171

749

 

 

Total

1,222

–1,712

–490

69

–188

The results from hedging of net investments in foreign operations are recognized in the translation reserve, refer to note E8 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 2017. With unchanged exchange rates, profit after tax will be affected in an amount of SEK 9m (0; 0). Currency derivatives relating to hedging of the cost of non-current assets have a maturity spread until June 2019. With unchanged exchange rates, the cost of non-current assets will decrease by SEK 18m (increase: 21; decrease: 3) after tax.

Derivatives pertaining to hedging of interest expenses were concluded in 2015. The derivatives intended to hedge energy costs in the Group mature during 2017 and 2018. With unchanged prices, the Group’s profit after tax will be affected positively in an amount of SEK 228m (neg: 289; neg: 185).

Hedging of net investments

SCA has hedged net investments in a number of selected legal entities in order to achieve the desired hedging level for foreign capital employed. The result of hedging positions affected equity in 2016 by a total of SEK –437m (58; –1,497). This result is largely due to hedges of net investments in EUR. The total market value of outstanding hedging transactions at the end of the period was SEK 167m (601; –982). In total at year-end, SCA hedged net investments outside Sweden amounting to SEK –11,405m. SCA’s total foreign net investments at year-end amounted to SEK 61,009m.