3. FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
3.7 Hedge accounting
 

The Group designates certain derivatives as hedging instruments in respect of foreign currency risk and interest rate risk in fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the 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 hedging instrument is effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships meet all of the following hedge effectiveness requirements:

  • there is an economic relationship between the hedged item and the hedging instrument;
  • the effect of credit risk does not dominate the value changes that result from that economic relationship; and
  • the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.

If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, the Group adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again.

The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve, limited to the cumulative change in fair value of the hedged item from inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in finance costs.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item.

However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are removed from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. This transfer does not affect other comprehensive income. Furthermore, if the Group expects that some or all of the loss accumulated in the cash flow hedging reserve will not be recovered in the future, that amount is immediately reclassified to profit or loss.

The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria (after rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in cash flow hedge reserve at that time remains in equity and is reclassified to profit or loss when the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in the cash flow hedge reserve is reclassified immediately to profit or loss.

On 7 October 2020, TPC entered into an interest rate swap agreement in respect of its variable rate facility agreement in order to hedge its interest rate risk (refer to note 3.2.3 for more detail). By using derivative financial instruments to hedge exposures to changes in interest rates, TPC also exposes itself to credit risk of the derivative counterparty, which is not offset by the hedged item. TPC minimises counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties.

At inception of each hedge, it was determined that the effects of credit risk are not expected to dominate the value changes arising from the hedging relationship as all relevant metrics to demonstrate the existence of an economic relationship have been satisfied.

    Interest rate swap
    2023
R’000
2023
R’000
Opening balance   20 224 6 915
Change in value of the hedging instrument recognised in other comprehensive income 8 693 10 262
Interest settlements (16 003) 3 047
Closing balance   12 914 20 224
Amounts included in non-current portion of financial assets at fair value through other comprehensive income 8 536
Amounts included in current portion of financial assets at fair value through other comprehensive income 12 914 11 688