[41] 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 critical terms of the hedging instruments and the hedged items are therefore matched. The hedge ratio for these hedges is 1:1. The currency forwards used as hedges will mature in 2020 at the latest.

The main currency hedges relate to pound sterling and the US dollar. The currency forwards in existence as at 31 December 2018 were entered into at average hedging rates of £0.8984 to €1 (2017: £0.8962 to €1) and US$1.2077 to €1 (2017: US$1.1675 to €1).

The critical-terms-match method is used to measure the prospective effectiveness of the hedges. Ineffective portions can arise if the critical terms of the hedged item and hedge no longer match; this is determined using the dollar-offset method.

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.

In total, foreign-currency cash flows of €392.1 million (2017: €325.2 million) were hedged and designated as hedged items, of which €372.4 million is expected by 31 December 2019 (2017: €306.7 million expected by 31 December 2018). The remaining cash flows designated as hedged items fall due in the period up to 31 December 2020 (2017: 31 December 2019).

Hedging of interest-rate risk

The KION Group uses cash flow hedge accounting in connection with the hedging of interest-rate risk. It also uses a fair value hedge to hedge the risk of a change in the fair value of fixed-rate financial liabilities. The hedge ratio used in both cases is 1:1. The critical terms of the hedging instruments and the hedged items are matched. The interest-rate swaps used as hedges reflect the maturity profile of the hedged items and will mature in 2025.

The KION Group has issued floating-rate and fixed-rate promissory notes as part of its financing (see also note [29]). It has 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. In 2018, the weighted, hedged risk-free fixed interest rate remained unchanged year on year at 0.5 per cent. In total, variable cash flows of €4.1 million (2017: €12.9 million) were hedged and designated as hedged items, of which €3.4 million relates to cash flows that are expected in 2020 to 2023 (2017: €10.2 million expected in 2019 to 2022). The remaining cash flows of €0.7 million (2017: €2.6 million expected as from 2023) are likely to materialise in 2024. Because the hedge is highly effective, the change in the fair value of the hedged item corresponds to the change in the fair value of the hedging instrument.

Moreover, the risk of a change in the fair value of a fixed-rate tranche of the promissory note that was issued in 2018 and will mature in 2025 is hedged using an interest-rate swap, thereby creating a EURIBOR-based variable-rate obligation. The carrying amount of the hedged promissory note tranche (€100.0 million), which is recognised under financial liabilities, included an adjustment of €6.8 million as at 31 December 2018 that was attributable to the change in fair value resulting from the hedged risk. Because the hedge is highly effective, this change in fair value corresponds to the change in the fair value of the hedging instrument.

The critical-terms-match method is used to measure the prospective effectiveness of the hedges. Ineffective portions can arise if the critical terms of the hedged item and hedge no longer match; this is determined using the dollar-offset method.

Change in the hedge reserve

The change in the hedge reserves within other comprehensive income (loss) is presented in > TABLE 119. Because the cash flow hedges are highly effective, the change in the fair value of the hedged items corresponds to the change in the fair value of the hedging instruments. These changes in fair value can be seen from the unrealised gains and losses in other comprehensive income (loss).