AAK Annual Report 2020

AAK Annual Report 2020 73 Equity instruments The Group subsequently measures all equity investments at fair value through profit or loss. Impairment The Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. The expected credit loss rates are calculated based on payment profiles and the corresponding historical credit losses experienced within the same period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. Trade receivables and contract assets are written off when there is no reasonable expectation of recovery. Indications that there is no reason- able expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group. Impairment losses on trade receivables and contract assets are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. Derivatives Derivative instruments are recognized in the balance sheet on the date of contract and at fair value, both initially and upon subsequent revaluation. The method of recognizing gain or loss arising from revaluation depends on whether the derivative is identified as a hedging instrument, and, in such event, the nature of the item being hedged. The Group has identified hedging of fair value regarding a recognized asset or liability or a firm commitment (fair-value hedging). When the transaction is undertaken, the Group documents the economic relationship between the hedging instrument and the hedged item, as well as the hedge’s role in the Group’s risk management objectives and strategy. The Group also documents its assess- ment, both when it enters into hedging contracts and on an ongoing basis, as to whether the derivative instruments used in hedging transactions are effective 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 finan- cial 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 inven- tory. 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 settle­ ment 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 deter- mined 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 receivables Accounts receivables are recognized initially at fair value and thereafter at amortized cost using the effective interest method, less provisions for impairment, see above about impair- ment. Provisions are recognized in the income statement as “Other external expenses”. Equity Ordinary shares are classified as share capital. Transaction expenses that are directly attribut- able 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. Note 2 | Summary of significant accounting policies