Search results

Download center

To generate a PDF, select pages or entire sections by checking a box on the left-hand side.

To download Consolidated financial statements’ tables in Excel format, select tables by checking a box on the right-hand side.

Constructing PDF 0%

Please wait

Cancel

PDF ready

PDF error

Please try selecting the pages you want again and click Generate pdf.

You have selected (0) sections of the Stora Enso Financial Report 2016.

Note 27 Derivatives
Accounting principles
Derivative financial instruments and hedging
Financial derivatives are initially recognised in the Consolidated Statement of Financial Position at fair value and subsequently measured at their fair value at each reporting date, though the method of recognising the resulting gains or losses is dependent on the nature of the item being hedged. When derivative contracts are entered into, the group designates them as either hedges of the exposure to changes in the fair value of recognised assets or liabilities (fair value hedges), hedges of forecast transactions or firm commitments (cash flow hedges), hedges of net investments in foreign entities or derivative financial instruments not meeting the hedge accounting criteria in accordance with IAS 39.

At the inception of a transaction, the group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all financial instruments designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The group also documents its assessment, both at the hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items.
Fair value hedges
In case of fair value hedges, the group uses either derivatives or borrowings for this purpose. The gains and losses on hedging instruments designated and qualifying as fair value hedges, and which are highly effective, are recorded in the Consolidated Income Statement, along with any changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.
Cash flow hedges
Changes in the fair value of derivatives designated and qualifying as cash flow hedges, and which are effective, are recognised in cash flow hedges reserve within OCI, the movements of which are disclosed in the Consolidated Statement of Comprehensive Income. The cumulative gain or loss of a derivative deferred in equity is transferred to the Consolidated Income Statement and classified as income or expense in the same period in which the hedged item affects the Consolidated Income Statement. In respect of hedges of exposures to foreign currency risk of future transactions resulting in the recognition of non-financial assets, the gains and losses deferred to cash flow hedges reserve within OCI are transferred from equity to be included in the initial acquisition cost of the non-financial assets at the time of recognition. The deferred amounts are ultimately recognised in the Income Statement through depreciation over the lifetime of those non-financial assets. The changes in the time value component of the currency options are classified as financial income and expense and not included in the hedge designation.

When a hedging instrument expires, or is sold, terminated or exercised, or has its designation revoked or no longer meets the criteria for hedge accounting under IAS 39, any cumulative gain or loss deferred in equity at that time remains in equity and is accounted for as an adjustment to income or expense when the committed or forecast transaction is ultimately recognised in the Consolidated Income Statement. However, if the forecast transaction is no longer expected to occur, the cumulative gain or loss reported in equity from the period when the hedge was effective is recognised in the Consolidated Income Statement immediately.
Net investment hedges
Hedges of net investments in foreign entities are accounted for similarly to cash flow hedges, the group using either derivatives or borrowings for this purpose. If the hedging instrument is a derivative, any gain or loss thereon relating to the effective portion of the hedge is recognised in equity in CTA, as disclosed in the Consolidated Statement of Comprehensive Income; the gain or loss relating to the ineffective portion is immediately recognised in the Consolidated Income Statement. In addition, exchange gains and losses arising on the translation of a borrowing that hedges such an investment are also recognised in CTA, any ineffective portion being immediately recognised in the Consolidated Income Statement.
Fair value through profit and loss derivatives
Certain derivative transactions, while providing effective economic hedges under group risk management policies, do not qualify for hedge accounting under the specific rules in IAS 39 and therefore changes in the fair value of such non-qualifying hedge instruments together with any ineffectiveness of hedge-accounted instruments are accounted for at fair value through the Consolidated Income Statement. Fair value changes of derivative instruments relating to sales, purchases and staff benefits are presented under operating profit and specified in Note 27 Derivatives and in Note 6 Personnel expenses. Fair value changes from all other derivatives are recognised in the Consolidated Income Statement under financial items.
Valuation of derivatives
Derivative financial instruments are recorded in the Statement of Financial Position at their fair values defined as the amount at which the instrument could be exchanged in an orderly transaction between market participants at the measurement date. The fair values of such financial items have been estimated on the following basis:
• Currency and equity option contract values are calculated using year-end market rates together with common option pricing models.
• The carrying amounts of foreign exchange forward contracts are calculated using forward exchange rates at the reporting date.
• The fair values of interest rate swaps are calculated using a discounted cash flow analysis.
• Interest rate option fair values are calculated using year-end interest rates together with common option pricing models.
• Commodity contract fair values are computed with reference to quoted market prices on futures exchanges.
• The fair values of commodity options are calculated using year-end market rates together with common option pricing models.
• The fair values of Total Return (Equity) Swaps are calculated using year-end equity prices as well as year-end interest rates.
Shareholders' equity – other comprehensive income
Certain derivatives are designated as cash flow hedges and measured at fair value with the fair value movements being recorded in the separate equity category of OCI: Cash Flow Hedges Reserve. The other component of OCI is the Available-for-Sale Investments Reserve representing the difference between the reporting date fair value of investments and their initial fair value at acquisition (see Note 14 Available-for-sale investments).
Cash flow hedges
In the group the estimated net amount of unrealised cash flow hedge loss net of taxes amounted to EUR 11 (EUR loss 24) million of which a loss of EUR 23 (EUR loss 9) million related to currencies and a gain of EUR 12 (EUR loss 15) million to commodities. The minority’s share of unrealised cash flow hedge result net of taxes amounted to nil (EUR gain 1 million). The unrealised gains and losses are expected to be recycled through the Income Statement within one to three years with the longest hedging contract maturing in 2027 (2027), however the majority are expected to mature in 2017. Any hedge ineffectiveness is presented as an adjustment to sales or to materials and services, depending on the underlying exposure, totalling EUR loss 2 (EUR nil) million for commodity contract hedges and nil for currency hedges in both 2016 and 2015. Derivatives used in currency cash flow hedges are mainly forward contracts and options, with swaps mainly used in commodity hedges and interest rate cash flow hedges.

In the Beihai Mill project in Guangxi, China, the group has hedged its exposures to the foreign currency risk of future transactions resulting in the recognition of non-financial assets. The gains and losses deferred to OCI cash flow hedges reserve are transferred from equity to be included in the initial acquisition cost of the non-financial assets at the time of recognition. During the year, the total amount removed from equity and included in the initial cost of non-financial assets amounted to loss of EUR 4 (EUR loss 9) million.

In 2015, the group entered into new interest rate swap derivatives with a total nominal value of EUR 150 million. The swaps have been designated as cash flow hedges of newly issued EUR bond notes maturing in 2025 and 2027 with hedge result being booked to Cash Flow Hedges Reserve within OCI. During 2015 the group closed majority of its non-hedge accounted interest rate swaps and all of its outstanding non-hedge accounted interest rate options and interest rate collars.
Equity accounted investments
Associate companies record hedges and pensions-related amounts directly in equity, and the group records its share of these amounts also in equity in the “OCI of Equity Accounted Investments” classification.
OCI equity accounted investments
Year Ended 31 December
EUR million 2016 2015
Bergvik Skog AB -19 -17
Tornator Oyj - -2
Total -19 -19
Fair values of derivatives
Hedge gains and losses in financial items
Year Ended 31 December
EUR million 2016 2015
Net losses on fair value hedges - -2
Fair value changes in hedged items - 1
Net Losses on Fair Value Hedges in Financial Items - -1
Non-qualifying Hedges
Net losses/gains on interest rate derivatives -4 1
Net gains on currency derivatives 30 1
Net Gains in Financial Items 26 2
Derivatives used in fair value hedges are mainly interest rate swaps.
Hedge gains and losses in operating profit
Year Ended 31 December
EUR million 2016 2015
Fair Value Hedge Accounted
Net losses on fair value hedges - -16
Fair value changes in hedged items - 16
Net Gains on Fair Value Hedges - -
Cash Flow Hedge Accounted
Currency hedges 8 -120
Commodity contract hedges 3 -39
Total 11 -159
As adjustments to Sales 16 -128
As adjustments to Materials and services -5 -31
Realised from OCI through Income Statement 11 -159
Commodity contract hedge ineffectiveness -2 -
Net Gains/Losses from Cash Flow Hedges 9 -159
Non-qualifying Hedges
Currency hedges -9 -14
Commodity contract hedges - -5
Net Losses on Non-Qualifying Hedges -9 -19
Net Hedge Losses in Operating Profit - -178
In 2016 the group ceased hedge accounting for one of its subsidiaries due to the fact that the forecasted future transactions were no longer expected to occur. This resulted to a loss of EUR 2 million being booked to operating profit and the loss being presented in the above table as ineffectiveness from cash flow hedges.
Fair values of derivative instruments
As at 31 December
EUR million Positive
Fair Values
Negative
Fair Values
Net Fair Values Net Fair Values
2016 2015
Cash flow hedge accounted
Currency forward contracts 8 -17 -9 -2
Currency options 4 -23 -19 3
Commodity contracts 16 -1 15 -17
Interest rate swaps 1 -8 -7 -2
Non-qualifying hedges
Interest rate swaps - - - 7
Currency forward contracts 12 -7 5 -16
Commodity contracts - - - -1
Equity swaps (TRS) 3 - 3 -3
Total 44 -56 -12 -31
Positive and negative fair values of financial instruments are shown under Interest-bearing Receivables and Liabilities and Non-current Debt with the exception of TRS, which is shown under Operative Receivables and Liabilities.
The presented fair values in the previous table include accrued interest and option premiums.
Nominal values of derivative financial instruments
As at 31 December
EUR million 2016 2015
Interest Rate Derivatives
Interest rate swaps
Maturity under 1 year - 301
Maturity 2–5 years - -
Maturity 6–10 years 181 187
Maturity over 10 years 25
Total 206 488
Foreign Exchange Derivatives
Forward contracts 1 783 1 706
Currency options 1 525 2 044
Total 3 308 3 750
Commodity Derivatives
Commodity contracts 319 250
Total 319 250
Total Return Swaps
Equity swaps (TRS) 25 27
Total 25 27
The following table analyses the group’s derivative financial instruments to be settled on a gross basis into relevant maturity groupings based on the remaining contract period at the reporting date. For Stora Enso maturities are for one year only.
Contractual derivatives maturity repayments gross settlement
As at 31 December 2016 As at 31 December 2015
EUR million 2017 2018+ 2016 2017+
Currency Forwards and Options: Cash Flow Hedges
Outflow 1 214 - 1 087 -
Inflow 1 190 - 1 080 -
Currency Forwards and Options: Fair Value in Income Statement
Outflow 1 053 92 1 365 -
Inflow 1 054 81 1 350 -
Contractual payments for net-settled derivative financial liabilities were in the following maturity groupings: within one year EUR 23 (EUR 37) million and within two to five years EUR 10 (EUR 22) million.

The group enters into derivative transactions under master netting agreements agreed with each counterparty. In case of an unlikely credit event, such as default, all outstanding transactions under the agreements are terminated and only a single net amount per counterparty is payable in settlement of all transactions. The agreements do not meet the criteria for offsetting in the Statement of Financial Position due to the reason that offsetting is enforceable only on the occurrence of certain future events.
Financial impact of netting for instruments subject to an enforceable master netting agreement 2016
Not offset in the Statement of Financial Position
EUR million Gross amount of recognised financial instruments Related liabilities (-) or assets (+) subject to Master Netting Agreements Collateral received (-) or given (+) Net Exposure
Derivative assets 40 -40 - -
Derivative liabilities -56 40 - -16
Financial impact of netting for instruments subject to an enforceable master netting agreement 2015
Not offset in the Statement of Financial Position
EUR million Gross amount of recognised financial instruments Related liabilities (-) or assets (+) subject to Master Netting Agreements Collateral received (-) or given (+) Net Exposure
Derivative assets 33 -33 - -
Derivative liabilities -71 33 - -38

Dear reader,

The Stora Enso Financial Report is optimised for mobile devices, but for the best experience, we recommend that you use a larger screen size.