3.17. Financial instruments
Assets and financial liabilities are recognized when an entity of the Company is a party to the contractual provisions of the instrument.
Assets and financial liabilities are initially measured at fair value.
Transaction costs directly attributable to the acquisition or issue of financial assets and liabilities (except for financial assets and liabilities recognized at fair value in the income) are added or deducted from the fair value of the assets or financial liabilities, if applicable, after the initial recognition. Transaction costs directly attributable to the acquisition of financial assets and liabilities at fair value through profit or loss are expensed immediately.
3.17.1. Financial assets
Financial assets are classified into the following specific categories: financial assets at fair value through profit or loss, investments held to maturity, financial assets available for sale and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined on the date of initial recognition.
1) Financial assets at fair value through profit or loss
A financial asset is classified as held for trading if:
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(a) |
It is purchased primarily to be sold in the short term; or |
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(b) |
On initial recognition is part of a portfolio of identified financial instruments that the Eletrobras system manages as a group and has a recent actual pattern of short-term income taking; or |
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(c) |
It is a derivative that has been designated as an effective hedge instrument. |
A financial asset held for negotiation, in addition, can be designated at fair value through profit or loss on initial recognition if:
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(a) |
Such a designation eliminates or reduces significantly an inconsistent measurement or recognition that would otherwise would arise; or |
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(b) |
The financial asset is part of a managed group of assets or financial liabilities or both, and |
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(c) |
Their performance is evaluated on a fair value basis, in accordance with a documented risk management strategy or investment of the Company, and when information about the grouping is provided internally on the same basis; or |
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(d) |
It is part of a contract containing one or more embedded derivatives and IAS 39 - Financial instruments: Recognition and Measurement permits the combined contract (asset or liability) to be fully assigned to fair value through profit or loss. |
Financial assets are classified at fair value through profit or loss when they are held for negotiation with the purpose of selling in the short term or designated by fair value through profit or loss.
Financial liabilities at fair value through profit or loss are shown at fair value, and gains or losses are recognized in the income. Net gains and losses recognized in the income incorporate the dividends or interest earned by the financial asset, being included under other financial income and expenses in the statement of profit and loss.
Investments held to maturity
Investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Company has the positive intention and ability to hold to maturity. After initial recognition, investments held to maturity are measured at amortized cost using the effective interest method, less any loss due to a reduction in recoverable value.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including trade accounts receivable and others, cash and cash equivalents, amounts receivable from Portion A and others) are initially recorded at their acquisition value, which is the fair value of the price paid, including expenses transaction. After initial recognition they are measured at amortized cost using the effective interest method, less any impairment loss.
Interest income is recognized through the application of the effective interest rate.
(a) Available-for-sale financial assets
Available-for-sale financial assets correspond to non-derivative financial assets designated as available-for-sale and not classified as:
1) Financial assets at fair value through profit or loss,
2) Investments held to maturity, or
3) Loans and receivables.
Changes in the carrying amount of available-for-sale monetary financial assets related to changes in exchange rates, interest income calculated using the effective interest method and dividends on available-for-sale equity investments are recognized in income. Changes in the fair value of available-for-sale financial assets are recognized in other comprehensive income. When the investment is disposed of or has a reduction in the recoverable value, the accumulated gain or loss previously recognized in the account of other comprehensive income is reclassified to the statement of profit and loss.
3.17.2. Reduction in recoverable value of non-financial assets
Financial assets, other than those designated at fair value through profit or loss, are measured by impairment at the end of each reporting period. Impairment losses are recognized if, and only if, there is objective evidence of a reduction in the recoverable amount of the financial asset as a result of one or more events that occurred after their initial recognition, with an impact on the estimated future cash flows of that asset active.
In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security, below its cost, is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss will be taken from equity and recognized in the consolidated statement of income. Such cumulative loss is measured as the difference between the acquisition cost and the current fair value less any impairment loss on the financial asset previously recognized in profit or loss. Impairment losses recognized in the statement of income in equity instruments are not reversed through the consolidated statement of income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases, and the increase can be objectively related to an event that occurred after the impairment loss was recognized in profit or loss, the impairment loss recoverable amount is reversed by means of a statement of operations.
For certain categories of financial assets, such as accounts receivable, assets are evaluated collectively, even if they do not present evidence that they are recorded in excess of the recoverable value, when evaluated individually. Objective evidence of impairment for a loan portfolio may include: past experience of the Company in collecting payments and an increase in the number of late payments after the average period of receipt, in addition to observable changes in national economic conditions or receivables defaults.
For financial assets recorded at amortized cost, the amount of the impairment recorded corresponds to: the difference between the book value of the asset and the present value of the estimated future cash flows, discounted by the original effective interest rate of the financial asset.
For financial assets recorded at cost, the amount of the impairment loss corresponds to the difference between the book value of the asset and the present value of the estimated future cash flows, discounted by the current rate of return for a similar financial asset. This impairment loss will not be reversed in subsequent periods.
The book value of the financial asset is reduced directly by the impairment loss for all financial assets, except for accounts receivable, where the book value is reduced by the use of a provision. Subsequent recoveries of previously provisioned amounts are credited to the provision. Changes in the carrying amount of the provision are recognized in profit or loss.
For financial assets recorded at amortized cost, if in a subsequent period the value of the impairment loss decreases and the impairment can be objectively related to an event occurring after the impairment has been recognized, the previously recognized impairment loss is reversed by means of the result, provided that the carrying amount of the investment on the date of such reversal does not exceed any amortized cost if the impairment had not been recognized.
3.17.3. Write-off of financial assets
The Company writes-off a financial asset only when the contractual rights to the cash flows from the asset expire or are transferred along with the risks and benefits of ownership. If the Company does not transfer or retain substantially all the risks and rewards of ownership of the financial asset, but continue to control the transferred asset, the Company recognizes the participation retained and its liabilities on the values that it will have to pay. If retains substantially all the risks and rewards of ownership of the financial asset transferred, the Company continues to recognize this asset.
In writing off a financial asset, the difference between the book value of the asset and the sum of the consideration received and receivable and the eventual accrued gain or loss that has been recognized in the Other comprehensive income account and accrued in equity is recognized in income.
3.17.4. Financial liabilities and equity instruments
Debt and equity instruments issued by an entity of the Eletrobras system are classified as financial liabilities or equity, in accordance with the nature of the contractual agreement and the definitions of financial liabilities and equity instruments. An equity instrument is a contract that evidences a residual interest in the assets of a company after deducting all its liabilities. Equity instruments issued by the Eletrobras system are recognized when resources are received or receivable, net of direct costs of issuance.
Financial liabilities are classified as financial liabilities at fair value through income or other financial liabilities.
The other financial liabilities, which include loans and financing, suppliers, and other accounts payable are measured at amortized cost value using the effective interest method.
The effective interest method is used for calculating the amortized cost of a financial liability and to allocate its interest expense for the period. The effective interest rate is the rate that exactly discounts the estimated future cash flows (including fees and bonuses paid or received that constitute an integral part of the effective interest rate, transaction costs and other premiums or discounts) throughout the estimated life of the financial liability or, where appropriate, for a smaller period, for the initial recognition of the net book value.
3.17.5. Write-off of financial liabilities
The Company writes off financial liabilities only when the Company’s obligations are extinguished and cancelled or when they expire. The difference between the book value of financial liabilities written down and the consideration paid and payable is recognized in income.
3.17.6. Financial guarantee contracts
A financial guarantee contract consists of contract that requires the issuer to make specified payments in order to reimburse the holder for loss incurred due to the fact the debtor specified does not make the payment on the due date, according to the initial or amended terms of the debt instrument.
Financial guarantees are initially recognized in the financial statements at fair value on the date of issuance of the guarantee. Subsequently the obligations concerning guarantees are measured by the greatest value between the initial value minus the depreciation recognized, and the best estimate of the value required to liquidate the guarantee.
These estimates are defined on the basis of experience with similar transactions and in the history of past losses and in the judgment of the management of the Company. Fees received are recognized based on the straight-line method over the life of the guarantee. Any increased obligations in relation to guarantees are presented when occurring in the operating expenses (see Note 22).
3.17.7. Derivative financial instruments
The Company has derivative financial instruments to manage its exposure to interest rate and foreign exchange risks, including contracts and interest rate swaps. Note 44 includes more detailed information about the derivative financial instruments.
Derivatives are initially recognized at fair value on the date of the contract, and are subsequently remeasured at fair value at each reporting period. Any gains or losses are recognized in income immediately, unless the derivative is designated and effective as a hedge instrument; in this case, the moment of recognition in income depends on the nature of the hedging relationship (see Item 3.17.9).
3.17.8. Embedded derivatives
Derivatives embedded in non-derivative, principal contracts are treated as a separate derivative when their risks and characteristics are not closely related to those of the principal contracts and these are not measured at fair value through profit or loss.
3.17.9. Hedge accounting
The Company has a policy for hedging and derivative financial instruments accounting designated as hedging operations, which are initially recognized at fair value on the date on which the derivative contract is taken out, being also subsequently revalued at fair value. Derivatives are presented as financial assets when the fair value of the instrument is positive, and as liabilities when the fair value is negative.
At the beginning of the hedging relationship, the Company documents the relationship between hedging instrument and the hedged item, with its objectives in risk management and its strategy to assume various hedging transactions. Additionally, at the beginning of the hedge and in an ongoing manner, the Company documents if the hedge instrument used in a hedging relationship is highly effective in offsetting changes in fair value or cash flow of the hedged item attributable to the risk of the hedge.
For the purpose of hedge accounting, the Company uses the following classifications:
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(a) |
Hedges at the fair value |
Changes at the fair value of the derivatives are designated and classified as fair value hedges are recorded in income with any changes in the fair value of the hedged items attributable to the risk covered. Changes in the fair value of the hedging instruments and the hedged item, attributable to the risk of hedging are recognized in income.
The hedge accounting is discontinued prospectively when the Company cancels the hedging relationship, the hedging instrument expires or is sold, terminated or exercised, or when it is not longer classified as hedge accounting. The adjustment to fair value of the hedge item, originating from the risk of hedging, is recorded in profit or loss from that date.
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(b) |
Cash flow hedges |
The effective portion of changes in the fair value of derivatives, which is designated and qualified as hedging of cash flow, is recognized in the other comprehensive income account. The gains or losses related to the part not effective are recognized immediately in income.
The values previously recognized in other comprehensive income account and accrued in equity are reclassified to the income in the financial year in which the item which is the subject of the hedge is recognized in income.
The hedge accounting is discontinued when the Company cancels the hedging relationship, the hedging instrument expires or is sold, terminated or exercised, or it is not longer classified as hedge accounting. Any gains or losses recognized in other comprehensive income and accrued in equity, as of that date, remain in equity and are recognized when the forecasted transaction is ultimately recognized in income. When nothing more is expected than the projected transaction to occur, the gains or losses accrued and deferred in equity are recognized immediately in income.
The Company uses derivative financial instruments for its management of financial risks, as described in Note 44. Beginning on October 1, 2013, the Company adopted accounting procedures for hedging in conformance with the provisions of IAS 39 for the purpose of reducing the volatility in the financial statements generated by the marketing of derivative financial instruments and greater transparency of the Risk Management activities of the Company.
From the initial date, the Company has designated its hedges of interest rates as a Cash Flow Hedge, and for this reason, the effective variation of the fair value of the hedging instruments will be represented in the Other comprehensive income account. As the debt protected is recognized in the financial results, the variation of the fair value represented in Other comprehensive income of the hedge is recognized in the financial results based on the effective interest rate. Each quarter effectiveness tests are performed to assess whether the derivative instruments effectively protect and should continue to protect related debt. If during the effectiveness test there is an ineffective portion, this value is recognized immediately in the financial results.
Each hedge relationship is documented so that the debt protected is identified, the derivative, the objective, the strategy of risk management, the contractual terms are designated for Hedge Accounting and the method of measurement of prospective and retrospective effectiveness is indicated.