Capital Structure, Investments, and Financing Activities

Accounting and measurement policies

Derivative financial instruments

The IFRS 9 provisions are applied for hedge accounting. The Group concludes hedging instruments with a cash flow hedging relationship for the following risks from the hedged items:

• Foreign exchange risks from highly probable planned transactions in non-functional currency as well as firm purchase commitments in non-functional currency

• Interest rate risks from highly probable planned external financing transactions

• Share price risks arising from the granting of share-based compensation programs

Cash flow hedge accounting for forecast transactions in non-functional currency means the hedged item is recognized at a fixed exchange rate on a net basis instead of being recognized at the spot exchange rate at the transaction date. Interest payment hedge accounting means that the amount from the hedging instrument previously recognized in the reserve for cash flow hedges is recognized as a reclassification adjustment in the same periods in which the hedged cash flows are recognized through profit or loss. The resulting interest expense is calculated using the hedge interest rate. As part of cash flow hedge accounting associated with the granting of share-based compensation programs, the amount from the hedging instrument recognized in the reserve for cash flow hedges is reclassified to the Consolidated Income Statement on a pro rata basis over the vesting period of the underlying transaction. On a net basis, a liability arises for the hedged portion, the amount of which is determined by the hedging rate.

Foreign exchange risks are hedged using options, among other instruments; only their intrinsic value is designated. Changes in the fair value of the time value component of options with a hedging relationship are recognized in other comprehensive income and in the cost of cash flow hedge reserve within equity. The subsequent accounting treatment of these amounts depends on the type of hedged transaction.

Forward contracts (forwards) are used to hedge foreign exchange risks, interest rate risks and share price risks. Where forwards are used as transaction-related hedges (foreign exchange risks), only the spot element is designated. Changes in the fair value of the forward element are recognized in other comprehensive income and in the cost of cash flow hedge reserve within equity. When forwards are used for time-period-related hedges (interest rate risks, share price risks), both the spot and forward elements are designated and reported together in other comprehensive income and in the reserve for cash flow hedges. The subsequent accounting treatment of these amounts depends on the type of hedged transaction.

The Group uses the dollar offset method as well as regression analyses to measure hedge effectiveness. Hedging ineffectiveness may occur due to structural differences in the characteristics of the hedged items and the hedging instruments, or if the hedged items are discontinued. This ineffectiveness is recognized through profit or loss in the Consolidated Income Statement.

Derivatives that do not or no longer meet the documentation or effectiveness requirements for the hedging relationship, whose hedged item no longer exists or to which the hedging relationship rules do not apply, are classified as financial assets or liabilities at fair value through profit or loss, depending on their balance.

The Group concludes hedging instruments without a hedging relationship for the following risks:

• Foreign exchange risks from intragroup financing in non-functional currency as well as receivables from and liabilities to third parties in non-functional currency

• Electricity price risks from virtual power purchase agreements

As the virtual power purchase agreements are designed as contracts for difference, they fulfill the definition of a derivative financial instrument and are measured at fair value through profit or loss in accordance with IFRS 9. Because no physical electricity is purchased, the own-use exemption that allows certain derivative financial instruments to be treated as executory contracts does not apply. Forwards are used to hedge the electricity price risks arising from the virtual power purchase agreements, which are also measured at fair value through profit or loss.

With the exception of the accounting treatment of amounts included directly from the reserve in the initial cost or in the other carrying amount of a non-financial asset or liability, derivative financial instruments are recognized in the Consolidated Balance Sheet, the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income as follows: