Disclosures Future cash flows

Disclosures Future cash flows – The amount, timing and uncertainty of future cash flows surrounding hedging arrangements and financial instruments at least since the financial meltdown in 2008 caused a significant increase of disclosures of which this is (partly) one.

Further to the risk management / hedging strategy high level disclosure, entities have to disclose the ‘terms and conditions of hedging instruments and how they affect the amount, timing and uncertainty of future cash flows’. More precisely, an entity has to disclose, by category of risk:Disclosures Future cash flows

  • A profile of the timing of the nominal amount of the hedging instrument
  • If applicable, the average price or rate of the hedging instrument, which could be a strike price or a forward rate

Entities also have to disclose a description of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term. This would include an update of new sources of ineffectiveness that emerge in a hedging relationship over the term.

Finally, if an entity has previously designated forecast transactions as hedged items in a cash flow hedging relationship and these are no longer expected to occur, this fact and a description of the forecast transaction have to be disclosed.

Disclosure of the profile of nominal amounts of hedging instruments and their average prices, as required by paragraph 23B of IFRS 7, would not be very meaningful when an entity applies a dynamic hedging process in which both the amount of hedged item and hedging instrument change frequently. 

Consequently, an entity using a dynamic hedging process is exempt from providing these disclosures. Instead, such an entity must disclose:

  • A description of what the ultimate risk management strategy is in relation to those dynamic hedging relationships.
  • A description of how it reflects this risk management strategy by using hedge accounting and designating those particular hedging relationships.
  • An indication of how frequently the hedging relationships are discontinued and restarted as part of the entity’s process in relation to those hedging relationships.

If, at the reporting date, the volume of hedging relationships to which the above exemption applies is not representative of the normal volumes hedged during the period, an entity has to disclose this fact and the reason it believes the volumes are not representative.

Here is an example from the Financial Statements 2018 of Rio Tinto plc:

Something else -   Disclosures Hedges Financial position

The Group is holding the following notional aluminium forward sales contracts embedded in the power contracts:

At 31 December 2018

Within 1 year

Between 1 and 5 years

Between 5 and 10 years

After 10 years

Notional amount (in tonnes)

56,481

286,666

358,416

65,548

Notional amount (in USD millions)

114

634

870

168

Average hedged rate (in USD per tonne)

2,013

2,210

2,426

2,562

The impact of the hedging instrument on the Group balance sheet is as follows:

At 31 December 2018

Notional amount

USD M

Carrying value

USD M

Change in fair value used for measuring ineffectiveness

USD M

Aluminium embedded derivatives separated from the power contract

1,786

8

205

Reporting line – Other financial asset

54

Reporting line – Other financial liability

46

Note to above table – Aluminium embedded derivatives (forward contracts and options) are contained within certain aluminium smelter electricity purchase contracts.

The impact of the hedged item on the Group balance sheet is:

At 31 December 2018

Change in fair value used for measuring ineffectiveness

USD M

Cash flow reserve

USD M

Highly probable forecast aluminium sales Disclosures Future cash flows

-182

179

The effect of the cash flow hedge in the statement of profit or loss and other comprehensive income (OCI) is: Disclosures Future cash flows

At 31 December 2018

Total hedging gain recognised in OCI

USD M

Ineffectiveness recognised in profit or loss

USD M

Amount reclassified from OCI to profit or loss

USD M

Highly probable forecast aluminium sales

181

24

2

Allocation – Net operating costs Disclosures Future cash flows

24

Allocation – Revenue Disclosures Future cash flows

2

There was no cost of hedging recognised during 2018 relating to this hedge relationship. Disclosures Future cash flows

Details of commodity derivatives, not designated as hedges held at 31 December 2018 are set out in section B. Disclosures Future cash flows

Sensitivities Disclosures Future cash flows

The Group’s commodity derivatives are impacted by changes in market prices. Disclosures Future cash flows

The table below summarises the impact that changes in aluminium market prices have on aluminium forward and option contracts embedded in power supply agreements outstanding at 31 December 2018. There will be an offsetting change in future Group earnings with any changes in price.

Something else -   Presentation Cash flow hedges

Change in market prices

2018

USD M

2017

USD M

Effect on net earnings

+10%

-102

-203

-10%

35

212

Effect on equity

+10%

-101

-10%

103

The Group’s “own use contracts” are excluded from the sensitivity analysis as they are outside the scope of IFRS 9. Such contracts to buy or sell non-financial items continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the business unit’s expected purchase, sale or usage requirements.

Disclosures Future cash flows

 

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