Danone // 2020 Universal Registration Document

DANONE UNIVERSAL REGISTRATION DOCUMENT 2020 104 4.1 Consolidated financial statements and notes to the consolidated financial statements Note 13. Organization of financial risks and derivatives management Note 13.2. Accounting principles Derivatives are recognized in the consolidated balance sheet at their fair value: • derivatives used to manage net debt and hedges of net invest- ments in foreign operations are recognized in Derivatives assets or liabilities; • foreign exchange and rawmaterials derivatives related to opera- tions are recognized in the heading (i) Other accounts receivable in Derivatives – assets or within (ii) Other current liabilities in Derivatives – liabilities. When derivatives are designated as: • fair value hedges of assets or liabilities in the consolidated balance sheet, changes in the fair value of both the derivatives and the hedged items are recognized in profit or loss in the same period. • hedges of net investments in foreign operations, changes in the fair value of the derivatives are recognized in equity under translation adjustments and are recycled as income (expense) when the asset is derecognized. • future cash flow hedges: • changes in the value of the effective portion are recognized in equity under Accumulated other comprehensive income and are recycled to profit or loss, in the same heading, when the hedged item itself is recognized in profit or loss; • time value (swap points, currency option premium and basis spread of cross-currency swaps) is recognized in equity in Other comprehensive income and taken to profit or loss on expiry of the underlying instrument, in accordance with the principles adopted by the Group. As a reminder, derivatives designated as future cash flow hedges are recognized in accordance with the transaction-related principle (hedging of transactions included in the forecasts). Changes in the fair value of the ineffective portions of derivatives that meet the conditions for classification as hedging instruments and changes in the fair value of derivative financial instruments that do not meet the conditions for classification as hedging instruments are recognized directly in profit or loss for the period, in a heading within operating income or financial income depending on their nature. Note 13.3. Derivatives Group policy Operational currency risk management The Group’s policy is to hedge its highly probable commercial transactions so that, as of December 31, its residual exposure in respect of the whole of the following fiscal year is significantly re- duced. However, when the hedging conditions of certain currencies have deteriorated (less availability, high cost, etc.), the Group may be required to limit the hedging of its highly probable commercial transactions in its currencies, by not hedging or only partially hed- ging the exposure. The Group uses forward currency contracts and currency options to reduce its exposure. The execution of the hedging policy for currency risk related to operations consists of providing the necessary hedges to subsi- diaries through a centralized management system, or, in the case of subsidiaries where such hedges are legally prohibited, through a monitoring and control process. The Group mainly applies cash flow hedge accounting. Based on pending transactions as of December 31, 2020, the Group’s residual exposure after hedging of exchange risks on its highly pro- bable commercial operating transactions is significantly reduced for 2021, the currencies partially hedged being mainly the Turkish lira, the Russian ruble and the Brazilian real. Management of currency risk related to financing activities and translation risk on net assets The Group has established a policy for monitoring and hedging the net assets of certain subsidiaries, with regular assessments of risks and opportunities to use hedging instruments. The Group’s policy consists of maintaining the debt and/or surplus cash posi- tions of Danone and its subsidiaries in their respective functional currencies. Furthermore, in compliance with its policy of managing risks centrally, the Group may manage multi-currency borrowings and surplus cash. As part of these policies, the Group therefore uses cross-currency swaps. Cost of net debt management In connection with its net debt management, the Group has imple- mented a policy to monitor and manage interest rate risk in order to limit the volatility of its financial income (expense) through the use of hedging instruments. These derivatives are mainly interest rate swaps and sometimes collars. All these instruments are plain vanilla. The interest rate derivatives are contracted to manage in- terest rate risk and are either eligible for hedge accounting or not in accordance with IFRS 9. Hedging acquisitions and disposals of companies or other equity investments The Group’s policy is, generally, not to hedge amounts payable or receivable in connection with acquisitions or disposals of companies or other equity investments. However, in certain circumstances, the Group may decide to hedge certain transactions. Management of commodities price volatility risk The Group has implemented a commodity purchasing policy (“Market Risk Management”), defining rules for securing the physical supply and for setting the prices of rawmaterials on the financial markets. The Group’s central purchasing team mainly negotiates forward purchase contracts with suppliers which are based on a financial markets index or on a proxy, since instruments that would fully hedge the price volatility of Danone’s main raw materials do not always exist in the financial markets. The impact of a price change in the two main commodity categories on the cost of the Group’s annual purchases is presented in Note 6.7 of the Notes to the consolidated financial statements.