[40] 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 2016 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 €0.1 million was reclassified to revenue, and an amount of €14.1 million was reclassified to cost of sales. In 2015, the gains / losses arising on hedging transactions amounting to a net loss of €20.9 million had largely been included in other income and other expenses. There were no significant ineffective portions in 2016, as had been the case in the previous year.
In total, foreign-currency cash flows of €362.4 million (2015: €323.6 million) were hedged and designated as hedged items, of which €284.5 million is expected by 30 September 2017 (2015: €188.0 million expected by 30 September 2016). The remaining cash flows designated as hedged items essentially fall due in the period up to 31 December 2017.
In addition, the KION Group hedges currency risk arising on translation of a foreign subsidiary’s financial statements into the Group’s reporting currency using a foreign-currency forward. For this purpose, it applies net investment hedge accounting, in which only the spot rate element of the foreign-currency forward is designated as the hedging instrument. The effectiveness of the Group’s hedging transaction is determined 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 the foreign-currency forward is recognised – on a cumulative basis and after taking into account deferred taxes – in accumulated other comprehensive income (loss) and is not reversed and recognised in the income statement until the foreign operation is sold.
The spot rate element of the foreign-currency forward designated as the hedging instrument had a fair value of minus €2.3 million as at 31 December 2016 (31 December 2015: minus €4.5 million) and, in the reporting year, resulted in an unrealised gain of €2.2 million (2015: unrealised loss of €4.5 million), which was recognised in other comprehensive income (loss). There were no ineffective portions of the net investment hedge in 2016, as had also been the case in 2015. In 2016, an expense of €3.2 million (2015: €0.3 million) arising in connection with the interest element of the foreign-currency forward was recognised under financial expenses.
In 2016, the KION Group 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 (see note [5]).