13. Derivative financial instruments

Accounting policies

The Group uses derivatives with the sole intention of managing any financial risks to which it is exposed. In accordance with its financial policies, the Group does not enter into speculative positions.

Whenever available, fair values are estimated based on quoted instruments. In the absence of market prices, fair values are estimated through discounted cash flow methods or option valuation models, in accordance with generally accepted assumptions.

Derivative financial instruments are recognised on the date they are negotiated (trade date), at their fair value. Subsequently, the fair value of derivative financial instruments is valued on a regular basis, and the gains or losses resulting from this valuation are recorded directly in the income statement, except in relation to cash flow hedge and net investments in foreign entities hedge derivatives, whose changes in fair value are recorded in equity in other comprehensive income. Recognition of changes in the fair value of hedge instruments depends on the nature of the hedged risk and the type of hedge used.

Derivatives not designated as hedging instruments

Although derivatives entered by the Group correspond to effective economic hedges against risks to be hedged, not all of them qualify as hedge instruments for accounting purposes, according to IFRS 9 rules. Those that do not qualify as hedge instruments are booked on the balance sheet at fair value and changes to that amount are recognised in the profit and loss.

Hedge accounting

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements. A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:

1. There is ‘an economic relationship’ between the hedged item and the hedging instrument;
2. The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship;
3. The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.

The hedges that meet all the qualifying criteria for hedge accounting are accounted for, as described below:

Interest rate and energy price risk (cash flow hedge)

Whenever expectations surrounding movements in interest rates so justify, the Group tries to anticipate any adverse impact through the use of derivatives. The selection process that each instrument is subject to favours economic contribution more than anything else. The implications of adding any new instrument to a portfolio of derivatives are also taken into account, namely in terms of volatility impact on earnings.

As far as electricity prices are concerned, as there are a number if renewal energy operators on the market, willing to establish virtual power purchase agreements (VPPA) for the delivery of green energy, the Group enters into these contracts, which allow it to ensure a price setting for energy from a renewal source. Since these are not direct contracts between the energy distributor of the Group companies, they qualify as derivative instruments.

The instruments that qualify as cash flow hedging instruments are booked at fair value on the balance sheet and, to the degree that they are considered effective, changes to their fair value are recognised in other comprehensive income, in the cash flow hedge reserve. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when the forecast transaction or event that is hedged takes place). However, in the case of a hedge of a forecast transaction that results in the recognition of a non-financial asset (for example: inventory), the gains or losses previously deferred in equity are transferred and included in the initial measurement of the asset.

The gain or loss relating to the ineffective portion is recognised immediately in the income statement. This way, in net terms, all costs associated with the interest rate risk to the underlying exposure are carried at the interest rate of the hedging instruments. Regarding the energy price risk, the monthly price adjustment/compensation mechanism allows stabilizing contracted green energy costs for each period.

When a hedge instrument expires or is sold, or when the hedge ceases to meet the criteria required for hedge accounting, the changes in the fair value of the derivative, that are accumulated in other comprehensive income, are recognised in the results when the hedged operation also affects the results.

The instruments that do not qualify as cash flow hedging instruments are booked at fair value on the balance sheet, with changes recognised directly in financial results (other operating gains or losses, in the case of energy price derivatives).

Foreign exchange risk (net investments in foreign entities hedge)

With respect to foreign exchange risks, the Group follows a natural hedge policy, raising debt in local currency whenever market conditions are judged to be convenient (namely, taking into consideration the level of interest rates).

Exchange rate fluctuations in loans contracted in foreign currencies for the purpose of funding investments in foreign operations are taken directly to the currency translation reserve in other comprehensive income (note 2.2.).

Cross currency swaps that are entered into with the purpose of hedging investments in foreign entities that qualify as hedging instruments are booked at fair value on the balance sheet. To the degree that they are considered effective, changes to their fair value are recognised directly in the currency translation reserve (note 2.2.). The cumulative gains and losses recognised in other comprehensive income are transferred to results of the year when foreign entities are disposed.

Derivatives held for trading

Currency forwards

The Group hedges its exposure to foreign exchange risk inherent to the purchase of stocks in foreign currency. For this purpose, in 2023, the Group had contracted currency forwards in euros and American dollars, with maturity until February 2024, with notional amounting of €4.6 million and 2.7 million American dollars.

Additionally, in 2023, a derivative was contracted to cover the exchange rate risk of a Euro deposit made by a subsidiary in Poland, with maturity in March 2024 and notional of €89.8 million.

Swap for energy price

The Group provides economic coverage of the energy price risk inherent to its commercial activity, for part of its needs. For this purpose, one of the Group´s subsidiaries entered into a VPPA, settled in euros, which allows it to fix the price of electricity, for a portion of its estimated consumption, over a period of 15 years, while ensuring that the volumes purchased are of renewal origin. On the date of execution of the VPPA, its fair value was zero, with no cash flow between the parties.

Cash flow hedge

Currency forwards

On 31 December 2023 the Group had contracted currency forwards in euros and American dollars, for future purchase of stocks, with notional amounting of €10.7 million and 1.2 million American dollars, with maturity until June 2024.

Hedging of investments in foreign entities

Currency forwards

The Group hedges the economic risk of its exposure to the exchange rate of zloty. To do so, the Group entered into currency forwards, with maturities in April 2024.

Impacts on the Financial Statements