Hedge accounting
Hedging currency risk
In accordance with its treasury risk policy, the KION Group applies cash flow hedge accounting in hedging the currency risks arising from highly probable future transactions and firm obligations not reported in the statement of financial position in various currencies. Foreign-currency forwards with settlement dates in the same month as the expected cash flows from the Group’s operating activities are used as hedges.
The effectiveness of the Group’s hedging transactions is assessed on the basis of forward rates using the hypothetical derivative approach under the cumulative dollar-offset method. The effective portion of the changes in the fair value of foreign-currency forwards is recognised in accumulated other comprehensive income (loss) and only reversed when the corresponding hedged item is recognised in income.
On account of the short-term nature of the Group’s payment terms, reclassifications to the income statement and the recognition of the corresponding cash flows generally take place in the same reporting period. A foreign-currency receivable or liability is recognised when goods are despatched or received. Until the corresponding payment is received, changes in the fair value of the derivative are recognised in the income statement such that they largely offset the effect of the measurement of the foreign-currency receivable or liability at the reporting date.
The changes in fair value recognised and reclassified in other comprehensive income in 2017 are shown in the consolidated statement of comprehensive income. In matching transactions with the recognition of the hedged item, income from hedging transactions amounting to €1.5 million (2016: €0.1 million) was reclassified to revenue, and an amount of €4.0 million (2016: €14.1 million) was reclassified to cost of sales. There were no significant ineffective portions in 2017, as had been the case in the previous year.
In total, foreign-currency cash flows of €325.2 million (2016: €362.4 million) were hedged and designated as hedged items, of which €306.7 million is expected by 31 December 2018 (2016: €357.3 million expected by 31 December 2017). The remaining cash flows designated as hedged items fall due in the period up to 31 December 2019 (2016: 31 December 2018).
The hedging that had still been in place in 2016 for the currency risk arising on translation of a foreign subsidiary’s financial statements into the Group’s reporting currency (net investment hedge) expired at the start of 2017. Only the spot rate element of the foreign-currency forward was designated as the hedging instrument. In the reporting year, an unrealised loss of €0.2 million (2016: unrealised gain of €2.2 million) was recognised in other comprehensive income (loss) in connection with this hedging. This effective portion of the hedge recognised in other comprehensive income (loss) is not reversed and recognised in the income statement until the foreign operation is sold. There were no ineffective portions of the net investment hedge in 2017, as had also been the case in 2016. The effectiveness of the Group’s hedging transaction was determined on the basis of forward rates using the hypothetical derivative approach under the cumulative dollar-offset method. In 2017, an expense of €0.7 million (2016: €3.2 million) arising in connection with the interest element of the foreign-currency forward was recognised under financial expenses.
In 2016, the KION Group had made use of transaction-related foreign-currency forwards to hedge currency risk in connection with the acquisition of Dematic. The notional amount of these currency forwards totalled €2.3 billion. Currency forwards with a total notional amount of €1.9 billion served to hedge the purchase price obligation for the shares and were accounted for as cash flow hedges. The resulting changes in exchange rates were included in the reclassified changes in fair value under gains/losses on hedge reserves and were recognised as a basis adjustment.
Hedging of interest-rate risk
The KION Group uses cash flow hedge accounting in connection with the hedging of interest-rate risk.
The KION Group issued a promissory note in 2017 as part of its financing. It hedged the interest-rate risk arising on the variable-rate tranches of the promissory note by entering into a number of interest-rate swaps, thereby transforming the variable interest-rate exposure into fixed-rate obligations.
The effectiveness of the Group’s hedging transactions is assessed using the hypothetical derivative approach under the cumulative dollar-offset method. In 2017, the effective portion of the changes in fair value of the interest-rate swaps resulted in an unrealised loss of €1.3 million, which was recognised – after taking deferred taxes into account – in other comprehensive income (loss). There were no ineffective portions.
In total, variable cash flows of €12.9 million were hedged and designated as hedged items, of which €10.2 million relates to cash flows that are expected in 2019 to 2022. The remaining cash flows of €2.6 million are likely to materialise from 2023 onwards.
The KION Group did not have any interest-rate hedges in 2016.