[41] Hedge accounting

Hedging currency risk

In accordance with the Corporate Treasury guideline, 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. Because the hedges are highly effective, the change in the fair value of the cash flows from the hedged items corresponds to the change in the fair value of the hedging instruments.

The main currency hedges relate to pound sterling and the US dollar. The currency forwards in existence as at 31 December 2019 were entered into at average hedging rates of £0.8950 to €1 (2018: £0.8984 to €1) and US$ 1.1445 to €1 (2018: US$ 1.2077 to €1).

On account of the short-term nature of the Group’s payment terms, reclassifications to the income statement of fair value changes previously recognised in equity in the hedge reserve 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 currency forwards used as hedges will mature in 2021 at the latest. In total, foreign-currency cash flows of €366.4 million (2018: €392.1 million) were hedged and designated as hedged items, of which €343.2 million is expected by 31 December 2020 (2018: €372.4 million expected by 31 December 2019). The remaining cash flows designated as hedged items, which amount to €23.1 million (2018: €19.7 million), fall due in the period up to 31 December 2021 (2018: 31 December 2020).

Hedging of interest-rate risk

The KION Group has issued variable-rate and fixed-rate promissory notes as part of its financing (see note [29]). 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 promissory notes. 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. Because the hedges are highly effective, the change in the fair value of the cash flows from the hedged items (cash flow hedge) and the change in the fair value of the hedged items (fair value hedge), corresponds to the change in the fair value of the hedging instruments.

Interest-rate risks arising on the variable-rate tranches of the promissory note are hedged by entering into a number of interest-rate swaps, thereby transforming the variable interest-rate exposure into fixed-rate obligations. In 2019, the weighted, hedged risk-free fixed interest rate remained unchanged year on year at 0.5 per cent. In total, variable cash flows of €0.1 million (2018: €4.1 million) were hedged and designated as hedged items, all of which are cash flows expected in 2021 to 2024.

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 (€79.5 million), which is recognised under financial liabilities, included an adjustment of €9.3 million as at 31 December 2019 (2018: €6.8 million) that was attributable to the change in fair value resulting from the hedged risk.

Change in the hedge reserve

The change in the hedge reserves within accumulated other comprehensive income (loss) is presented in > TABLE 112.