m. Financial Instruments under IAS 39 and IFRS 7
Financial assets
A financial instrument is a contract between two entities which creates a financial asset at one entity and a financial liability or equity instrument at another entity. If the Group qualifies as a party to the contract concerning the contract regulations, a financial asset or financial liability is recognized in the consolidated balance sheet in accordance with the substance of the contractual arrangement. Financial instruments include cash and cash equivalents, marketable securities, trade and other accounts receivable and payable, non-current receivables, borrowings, issued bonds and other investments.
Financial instruments are recognized and derecognized on a trade. This is the day of purchase or sale of an investment on which the contract terms require delivery of the investment within the timeframe established by the market concerned, and financial instruments are initially measured at fair value plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value without transaction costs. Financial instruments are offset when the Group has a legally enforceable right to offset and intends to settle either on a net basis or to realize the asset and settle the liability simultaneously.
Financial assets can be classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity investments’, ‘loans and receivables’ and ‘available-for-sale’ (AFS) financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Andritz Group classifies its financial assets either under FVTPL, loans and receivables or AFS.
Financial assets at FVTPL
The Andritz Group classifies its financial assets at FVTPL if the financial asset is held for trading, which applies only to derivatives. The Group uses derivative financial instruments to manage its foreign exchange rate risk, exposure to changes in fair value and commodity price risk, including foreign exchange forward contracts, interest rate swaps and commodity forwards. Financial assets at FVTPL are stated at fair value, with any resulting gain or loss recognized in profit or loss.
Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. Depending on the fair value of the derivative, it is either recognized under ‘other receivables’ or ‘other liabilities’, respectively bank loans and other financial liabilities.
AFS financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. Equity securities (eg. shares), debt securities (eg. bonds) and other investments (e.g. fund shares) held by the Andritz Group are designated as AFS financial assets.
AFS are stated at fair value. Resulting gains and losses arising from changes in fair value are recognized directly in equity in the investments revaluation reserve (IAS 39 reserve) with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognized directly through profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in the investments revaluation reserve is included in profit or loss for the period. Dividends on AFS equity instruments are recognized in profit or loss when the Group’s right to receive payments is established.
The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the balance sheet date. The change in fair value attributable to translation differences that result from a change in amortized cost of the asset is recognized in profit or loss, and other changes are recognized in equity.
Loans and receivables
The Andritz Group classifies trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market as ‘loans and receivables’. Loans and receivables are measured at amortized costs less any impairment.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortized costs, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized through profit or loss.
The previously recognized impairment loss is reversed through profit or loss up to the extent of the initial impairment, if in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. An exception are AFS equity instruments, any increase in fair value subsequent to an impairment loss is recognized directly in equity.
Financial liabilities and equity instruments issued by the Group
Classification as debt or equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments are recorded at the proceeds received, net of direct issue costs.
Financial liabilities
Financial liabilities can be classified either as financial liabilities at FVTPL or other financial liabilities.
Financial liabilities at FVTPL
The Andritz Group classifies financial liabilities at FVTPL if the financial liability is held for trading, which applies only to derivatives. The Group enters into a variety of derivative financial instruments to manage its exposure to changes in fair value, foreign exchange rate risk and commodity price risk, including foreign exchange forward contracts, interest rate swaps and commodity forwards. Financial liabilities at FVTPL are stated at fair value, with any resulting gain or loss recognized in profit or loss.
Other financial liabilities
Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Subsequently they are measured at amortized costs using the effective interest method, with interest expense recognized on an effective yield basis.
Fair value of financial instruments
The fair value of financial assets (liabilities) is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. In this context, a quoted market price is the best evidence for the fair value, if financial assets (liabilities) are traded on active markets. In case an active market does not exist, generally accepted valuation techniques are used to determine what the price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, and if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If no quoted market price (eg. equity instruments) and no reliable valuation techniques are available, the financial instrument is measured at cost.
Effective interest method and amortized costs
The effective interest method is a method of calculating the amortized costs of a financial asset (liability) and of allocating interest income (expenses) over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset (liability), or, where appropriate, a shorter period. Interest is recognized on a time proportion basis that reflects the effective interest rate of the asset (liability). Dividends are recognized when the shareholders’ right to receive payment is established.
Hedge accounting
The Group designated the bonds issued and the corresponding interest rate swaps into a hedging relationship accounted for as a fair value hedge.
At the inception of the hedge relationship, the Andritz Group documented the relationship between the hedging instrument and hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the swaps are highly effective in offsetting changes in fair values or cash flows of the hedged item.
All investments in a foreign entity are long-term investments and presently a sale of such an investment is not expected for the foreseeable future. According to the Group’s hedging policy, there are no hedges of net investments in foreign currencies.
Fair value hedge
Applying the rules for hedge accounting has the impact that the gain or loss from remeasuring the hedging instrument at fair value is recognized through profit or loss. The gain or loss on the hedged item attributable to the changes of the hedged risk causes an adjustment of the carrying amount of the hedged item, which is also recognized through profit or loss. In this manner, the gains and losses resulting from the changes in fair value of the hedging instrument and the hedged item offset each other if the hedge is 100% effective.
Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to profit or loss from that date.