AAK Annual Report 2018

Group’s risk management objectives and strategy. The Group also documents its assessment, both when it enters into hedging contracts and on an ongoing basis, as to whether the derivative instruments used in hedging transactions are effec- tive in terms of counteracting changes in fair value or cash flow that are attributable to the hedged items. The Company’s derivative instruments consist of OTC or ”over-the-counter” derivatives concluded with financial counterparties, listed standardized derivatives and sales and purchase contracts which are not deemed to be for own use (and consequently should be recognized as derivatives). According to IFRS 9, only contracts not designated for physical delivery may be accounted for as derivatives. AAK’s business model permits (enables) the net settlement of purchase and sales contracts entered into. The full fair value of a hedging derivative is classified as a non-current asset or liability when remaining maturity of the hedged item is more than 12 months. It is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Hedging of fair value Changes in fair value of a derivative that has been formally identified for hedging of fair value and meets the conditions for hedge accounting are recognized on the same line item in the income statement as any change in fair value attributable to the hedged risk for the hedged asset or liability. The Group applies hedging of fair value for raw materials in inventory. Changes in fair value of raw material in inventory are accounted for as a part of Current assets and liabilities in the balance sheet. The gain or loss attributable to the ineffective portion is recognized with immediate effect in “Raw materials and consumables and changes in inventory”. When forward contracts are used to hedge fair value the group generally designates only the change in fair value of the forward contract related to the spot component as the hedging instrument. The change in the forward element of the contract that relates to the hedged item is recognized within Operating profit. Sales- and purchase contracts AAK applies the fair value option to binding commitments (sales- and purchase contracts) for own use since this offset the change in fair value of derivatives not designated for hedge accounting (reducing accounting mismatch) and AAK:s business model enables the net settlement of purchase and sales contracts entered into for physical delivery (the contracts are readily convertible to cash). Assets in this category are classified as current assets as they are expected to be settled within 12 months. Determining fair value The fair value of instruments that do not have listed prices is determined using valuation techniques such as discounted cash flow models, in which all assessed and determined cash flows are discounted using a zero-coupon yield curve. The fair value of derivatives is determined using valuation techniques. The valuation is based on models that discount cash flows using forward curves for underlying variables such as raw materials and exchange rates. The assessed and determined cash flows are discounted by a zero-coupon interest rate curve. The Group’s credit risk is taken into consideration in the valuation at fair value. Accounts receivable Accounts receivable are recognized initially at fair value and thereafter at amortized cost using the effective interest method, less provisions for impairment, see above about impairment. Provisions are recognized in the income state- ment as “Other external expenses”. Equity Ordinary shares are classified as share capital. Transaction expenses that are directly attributable to new share issues or options are recognized, net of tax, in equity as a deduction from the proceeds. Premium received for share warrants issued at market price has been recognized as an increase in funds brought forward in equity as the options will be redeemed with equity instruments. Information on outstanding subscription warrants is available in Note 8. Liabilities to banks and credit institutions Borrowings are initially recognized at fair value, net of transaction costs. Borrowings are subsequently stated at amortized cost and any difference between proceeds (net of transaction costs) and redemption value is recognized in the income statement, allocated over the period of the borrowing using the effective interest method. Accounts payables Accounts payables are initially recognized at fair value and subsequently at amortized cost using the effective interest method. Provisions Provisions are recognized in the balance sheet when the Group has a present legal or constructive obligation as a result of past events, and it is more likely than not that an outflow of resources will be required to settle the obligations and the amount can be estimated reliably. No provisions are made for future operating losses. If the effect of when in time payment is made is significant, provisions are calculated through discounting the expected future cash flow at an interest rate before tax that reflects current market assess- ments of the time value of money and, if applicable, the risks associated with the debt. A provision for restructuring is recognized when the Group has adopted a comprehensive and formal restructuring plan, and the restructuring has either been started or published. Income tax Tax expenses for the period comprise both current tax due and deferred income tax. Tax is recognized in the income statement, apart from when tax is attributable to items recog- nized in other comprehensive income or directly in equity. In such cases, tax is also recognized in other comprehensive 70 2 Note Summary of significant accounting policies