Notes to the financial statements
Note 21 Derivative financial instruments
The Aker Solutions group uses derivative financial instruments to hedge foreign exchange and interest rate exposures. In addition, there are embedded foreign exchange forward derivatives separated from ordinary commercial contracts. Further information regarding risk management policies in the group is available in note 5 Financial risk management and exposures.
The table below presents the fair value of the derivative financial instruments and a maturity analysis of the derivative’s undiscounted cashflows. Given the Aker Solutions group hedging policy and the assumption that the projects are cash neutral, this table also indicates when the cash flows related to project expenses are expected to impact profit and loss. The majority of project revenues are recognised in accordance with IAS 11 using the percentage of completion method. This may result in different timing of cash flows related to project revenues and revenue recognition.
2010
Amounts in NOK million
Assets at fair value Liabilities at fair value Net fair value Total undiscounted
cash flow1 6 mths or less 6-12 mths 1-2 years 2-5 years2
Forward foreign exchange contracts
Cash flow hedges 57 (92) (35) (77) 3 (27) (30) (23)
Fair value hedges 134 - 134 134 134 - - -
Embedded derivatives included in ordinary commercial contracts (163) 8 (155) (245) (112) (56) (65) (12)
Not hedge accounted 289 (121) 168 243 122 45 62 14
Interest rate swaps
Option contracts 8 (7) 1 1 1 - - -
Cash flow and fair value hedges 61 (31) 30 30 (6) (10) 46 -
Total 386 (243) 143 86 142 (48) 13 (21)
2009
Amounts in NOK million
Assets at fair value
Liabilities at fair
value Net fair value
Total undiscounted
cash flow1 6 mths or less 6-12 mths 1-2 years 2-5 years2
Forward foreign exchange contracts
Cash flow hedges 140 (58) 82 66 53 11 2 -
Fair value hedges 41 (19) 22 27 30 (2) (1) -
Embedded derivatives included in ordinary commercial contracts 11 (4) 7 (105) (28) (36) (26) (15)
Not hedge accounted 173 (230) (57) 38 (69) 70 23 14
Interest rate swaps
Option contracts 1 (2) (1) (1) (1) - - -
Cash flow and fair value hedges 2 (28) (26) (28) (3) (3) (7) (15)
Not hedge accounted 4 (4) - - - - - -
Total 372 (345) 27 (3) (18) 40 (9) (16)
1) Undiscounted cash flows are translated to NOK using the exchange rates on the balance sheet date. 2) No derivative financial instruments mature after 5 years.
Derivative financial instruments are classified as current assets or liabilities. The full fair value of a hedg- ing derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability if the maturity of the hedged item is less than 12 months. If the hedged item is related to projects, such as work in progress or trade receivables, the hedging derivative is always classified as a current asset or liability.
Foreign exchange derivatives
Corporate Treasury hedge the group’s future transactions in foreign currencies with external banks. Approximately 80 percent of the exposure to foreign exchange variations in future cash flows are related to a few large projects. The currency exposure in these projects have been hedged back-to-back in order to meet the requirements for hedge accounting. They are either subject to hedge accounting or separated embedded derivatives. All other hedges are not designated as IAS 39 hedges and will have an effect on profit or loss. Most hedges qualifying for hedge accounting are classified as cash flow hedges (hedges of highly probable future revenues and/or expenses). Some hedges that will clearly qualify as hedges of firm commitments are classified as fair value hedges.
Embedded derivatives are foreign exchange derivatives separated from construction contracts. The main reason for separation is that the agreed payment is in a currency different from any of the major contract parties’ own functional currency. The embedded derivatives represent currency exposures, which is hedged against external banks. Since the embedded derivatives are measured and classified in the same way as their hedging derivatives, they will have an almost equal, opposite effect to profit and loss. In the table above, the derivatives hedging the embedded derivatives are included in Forward foreign exchange contracts - not hedge accounted.
The hedged transactions in foreign currency that are subject to cash flow hedge accounting are highly probable future transactions expected to occur at various dates during the next one to four years, depending on progress in the projects. Gains and losses on forward foreign exchange contracts are recognised in comprehensive income and reported as hedging reserve in equity until it will be recog- nised in the income statement in the period or periods during which the hedged transactions affect the income statement. This is generally within 12 months from the balance sheet date unless the gain or loss is over the life of the asset.
The following table shows the unsettled cash flow hedges’ impact on profit and loss and equity (not adjusted for tax).
2010
Amounts in NOK million hedging instrumentsFair value of all Recognised in profit and loss (the hedging reserve)Deferred in equity
Interest rate swaps1 (22) - (22)
Forward exchange contracts (35) (31) (4)
Total (57) (31) (26)
2009
Amounts in NOK million hedging instrumentsFair value of all Recognised in profit and loss (the hedging reserve)Deferred in equity
Interest rate swaps1 (11) - (11)
Forward exchange contracts 82 40 42
Total 71 40 31
1) The value of the interest swaps is attributable to changes in the interest swap curve for Norwegian kroner during the period from inception of the hedge to the balance sheet date.
The purpose of the hedging instrument is to secure a situation where the hedged item and the hedging instrument together represent a predetermined value independent of fluctuations of exchange rates. Revenue and expense on the underlying construction contracts are recognised in the income statement in accordance with progress. Consequently, NOK negative 31 million of the value of the forward con- tracts have already affected the income statement indirectly as revenues and expenses are recognised based on updated forecasts and progress. The NOK negative 4 million that are currently recorded directly in the hedging reserve, will be reclassified to income statement over approximately the next three years.
Interest rate swaps
As of 31 December 2010, Aker Solutions has one bond of NOK 150 million with a fixed interest rate of 6 percent and one bond of NOK 1 913 million with a fixed interest rate of 8.7 percent. At year end, there were interest rate swaps with floating interest with a notional value of NOK 1 100 hedging the fixed interest bonds. In addition, Aker Solutions has three bonds totalling NOK 1 056 million at floating interest rates and NOK 400 million are swapped to fixed interest. NOK 1 300 million of drawings under committed facilities are swapped to 12 months fixed rate from 15 January 2010. A credit facility of NOK 750 million with floating interest was established in 2009 where NOK 375 million are swapped to fixed interest. Floating interest is mainly tied to NIBOR and LIBOR.
Hedge accounting is applied using the cash flow hedge accounting model which means that gains and losses on interest rate swap from floating to fixed interest rates as of 31 December 2010 are recognised in the hedging reserve in equity and will be continuously released to the income statement until the bank borrowings are repaid. Fair value hedge accounting is applied for hedging of the fixed interest bonds, see note 28 Borrowings.
The fair value amounts of the outstanding interest rate swap contracts as of 31 December 2010 were NOK 30 million (negative NOK 26 million in 2009).