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4.1 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Organization of financial risks and derivatives management
DANONE
REGISTRATION DOCUMENT 2015
127
first-tier companies. In addition, the Internal Control and Internal
Audit Departments review the organization and procedures applied.
Lastly, a monthly treasury and financing report is sent to the Group
Finance Department, enabling it to monitor the decisions taken to
implement the previously approved management strategies.
The Group is also exposed to price volatility and to a potential shortage
of the commodities that it purchases, mainly to produce its finished
products. To manage this exposure, the Group has implemented a
commodity purchasing policy (Market RiskManagement). This policy
as well as the impact of a price change in the two main commodity
categories on the Group's annual cost of purchases are presented
in Note 5.7 of the Notes to the consolidated financial statements.
Note 12.2. 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 the financial debt
or current and non-current asset lines;
•
foreign exchange derivatives related to operations are recognized
in the heading Derivatives – assets within Other receivables or in
the heading Derivatives – liabilities within Other current 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.
When derivatives are designated as hedges of net investments in
foreign operations, changes in the fair value of the derivatives are
recognized in equity under Cumulative translation adjustments.
When derivatives are designated as future cash flow hedges, changes
in the value of the effective portion of the derivative are recognized
in equity under Accumulated other comprehensive income. This
effective portion is recycled to profit or loss, in the same heading,
when the hedged item itself is recognized in profit or loss. However,
changes in the value of the ineffective portions of derivatives are
recognized directly in profit or loss, in the heading Other financial
income (expense). 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 the nature of the hedge.
Note 12.3. Derivatives used to hedge operational currency risk
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
reduced. 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, 2015, the Group's
residual exposure after hedging of exchange risks on its highly pro-
bable commercial operating transactions is significantly reduced
for 2016, the main currencies partially hedged being the Russian
ruble, the Brazilian real and the Turkish lira.
Portfolio of foreign exchange derivative instruments related to operations
Notional and fair value amounts
As of December 31
2014
2015
(in € millions)
Notional
Fair value
Of which,
recognized
in equity
(a)
Notional
Fair value
Of which,
recognized
in equity
(a)
Forward contracts
(1,366)
5
20
(1,154)
33
47
Currency options
(167)
(3)
−
(222)
2
4
Total
(1,532)
2
20
(1,376)
35
51
(a) Amount recorded in equity in respect of instruments designated as cash flow hedges.