Offsetting of Financial Instruments
Hedge Accounting
Delhaize Group Annual Report 2014 87
Economic hedges: Delhaize Group does not hold or issue derivatives for speculation/trading purposes. The Group uses
derivative financial instruments - such as foreign exchange forward contracts, interest rate swaps, currency swaps and other
derivative instruments - solely to manage its exposure to interest rates and foreign currency exchange rates. Derivatives not
being part of an effective designated hedge relationship are therefore only entered into in order to achieve "economic
hedging." This means that, e.g., foreign exchange forward contracts and currency swaps are not designated as hedges and
hedge accounting is not applied as the gain or loss from re-measuring the derivative is recognized in profit or loss and
naturally offsets the gain or loss arising on re-measuring the underlying instrument at the balance sheet exchange rate (see
Note 19).
These derivatives are mandatorily classified as held-for-trading and initially recognized at fair value, with attributable
transaction costs recognized in profit or loss when incurred. Subsequently, they are re-measured at fair value. Derivatives
are accounted for as assets when the fair value is positive and as liabilities when the fair value is negative (see Note 19).
The fair value of derivatives is determined in accordance with the fair value measurement framework (see "Note 2.1"). This is
calculated on the basis of the contracting parties' relevant exchange rates, interest rates and credit ratings at the reporti ng
date. In the case of interest-bearing derivatives, the fair value corresponds to the "dirty price" or "full fair value" (i.e., including
any interest accrued).
Any gains or losses arising from changes in fair value on these derivatives are taken directly to the income statement. As
Delhaize Group enters into derivative financial instruments contracts only for economic hedging purposes, the classification
of the changes in fair value of the derivative follow the underlying (i.e., if the economically hedged item is a financial asset,
the changes in fair value of the derivative are classified as "Income from investment", Note 29.2; if the underlying is a
financial liability, the changes in fair value of the derivative are classified as "Finance costs", Note 29.1).
Derivatives are classified as current or non-current or separated into a current or non-current portion based on an
assessment of the facts and circumstances.
Embedded derivatives are components of hybrid instruments that include non-derivative host contracts. Such embedded
derivatives are separated from the host contract and accounted for separately, if (i) the economic characteristics and risks of
the host contract and the embedded derivative are not closely related, (ii) a separate instrument with the same terms as the
embedded derivative would meet the definition of a derivative, and (iii) the combined instruments are not measured at fair
value through profit or loss. The accounting for any separated derivative follows the general guidance described above.
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheet if there is a
currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis or to realize
the assets and settle the liabilities simultaneously.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group
intends 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 or (highly probable forecast) transaction, the
nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to
changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly
effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they
actually have been highly effective throughout the financial reporting periods for which they were designated.
Hedges which meet the criteria for hedge accounting are accounted for as follows:
Cash flow hedges are used to protect the Group against fluctuations in future cash flows of assets and liabilities recognized
in the balance sheet, from firm commitments (in the case of currency risk) or from highly probable forecast transactions. In
such a cash flow hedge relationship, the changes in the fair value of the derivative hedging instrument are recognized
directly in OCI to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are
recognized in profit or loss. Amounts accumulated in OCI are recycled in the income statement in the periods when the
hedged item affects profit or loss (e.g., when the forecast sale that is hedged takes place).
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the
designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously
recognized in OCI and presented in the discontinued cash flow hedge reserve in equity remains in there until the hedged
item affects profit or loss.
Fair value hedges are used to hedge the fair values of assets or liabilities recognized in the balance sheet or firm
commitments not yet recognized in the financial statements. When designated as such a fair value hedge, the gain or loss
from remeasuring the hedging instrument at fair value is recognized in profit or loss. Additionally, the gain or loss on the
hedged item, attributable to the hedged risk, is recognized in profit or loss by adjusting the carrying amount of the hedged
item. Delhaize Group usually hedges financial liabilities. As for economic hedges, the changes in the hedging instrument
follow the hedged item and, therefore, they are typically presented in the income statement as "Finance costs" (see Note
29.1).
