| 2.2.8 | Hedge accounting |
Specific derivative transactions contracted to protect the Company against financial risks. Different techniques are used in accounting for these derivatives, seeking to eliminate the effects of the volatility caused by such risks.
On initial designation of the hedge, the Company formally documents the relationship between hedging instruments and hedged items, including the risk management objectives and the strategy for conducting the transaction, together with the methods used to evaluate the effectiveness of the relationship. The Company continually assesses the contract to conclude whether the instrument is “highly effective” in offsetting changes in fair value of the hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within an effectiveness range of 80% to 125%.
The Company has derivative financial instruments designated as fair value hedges and cash flow hedges, as follows:
| a) | Fair value hedges |
Changes in the fair value of derivatives designated as fair value hedges are recorded in the statement of income, in financial income (expenses), net, together with any changes in the fair value of the hedged asset or liability attributable to the hedged risk. The Company only uses fair value hedge accounting to hedge fixed interest risk on borrowings.
If the hedge no longer meets the hedge accounting criteria, the fair value of the instrument continues to be recognized in the statement of income in a specific separate account and the fair value of the hedged item is treated as if it were not hedged and amortized to profit or loss over the period to maturity.
| b) | Cash flow hedges |
The Company uses hedge accounting for cash flow hedges in order to protect itself from cash flow variations attributed to exchange rate variation risk related to a transaction that is likely to affect the Company’s results.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recognized in shareholders’ equity under other comprehensive income. The gain or loss related to the ineffective portion is recognized in profit or loss as financial income (expense).
Amounts accumulated in equity are reclassified to the statement of income in the periods in which the hedged item affects profit or loss. However, when the forecasted transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset.
When a cash flow hedge instrument is settled, or no longer meets the criteria for hedge accounting, any cumulative gain or loss in equity at that time is realized against profit or loss (in the same line as the hedged item) in line with realization of the hedged operation against profit and loss. When the hedged transaction is no longer expected to occur, the gain or loss in equity is immediately transferred to profit or loss for the year under financial income (expense).