Financial Instruments: Principles as per Solvay Annual Report

1. Derivative financial instruments

1.1. Content + 1.2. Recognition

See the notes to the consolidated financial statement related to Derivative financial instruments and Greenhouse gas emission allowances and Certified Emission Reductions.

1.3 Additional information

Valuation of contracts

• All open transactions should be “mark to market” (MTM). It means that they should be revalued according to market conditions.
  The MTM process may be more or less complex depending on the type of hedging instrument. CICC provides the monthly MTM figures to companies involved in hedging transactions.
• The value of a contract can be split into two elements:
  • Intrinsic value which is deemed to be effective
  • Time value which is deemed to be ineffective

Hedging principles

• Receivables and payables denominated in a currency other than the local currency of the company (i.e. sales in USD made by a company in EUR) are generally assigned to CICC. When this is the case, CICC guarantees an exchange rate based on the European Central Bank fixing rate of the day of assignment.
• In agreement with the Group hedging policy and on the basis of an analysis of forecasted cash flows prepared every year, hedges will be made either via forward purchases/sales or via options. According to IAS 39, such hedges may qualify for hedge accounting (“Hedge” e.g. cash flow hedges) or may not qualify for hedge accounting (“Trade” = default category). The qualification will impact reporting:
  • MTM variations of “trade” transaction will directly impact the income statement whereas the same variations on “hedge” transaction will impact both the income statement (ineffective portion of the gain or loss on the hedging instrument) and the equity (effective portion of the gain or loss on the hedging instrument).
  • If a “hedge” qualification is achieved, the hedge impact should affect the underlying transaction (usually sales).