Summary of financial assets, financial liabilities and derivatives

5.6 Summary of financial assets, financial liabilities and derivatives

The carrying amounts of Fingrid's financial assets and liabilities by measurement category are as follows:

Fingrid uses derivatives for hedging purposes only, even though the company does not apply hedge accounting. Bilateral derivative transactions require a valid International Swap Dealers Association’s (ISDA) Master Agreement with the counterparty. The derivatives falling under the scope of an ISDA agreement can be netted in conditional circumstances such as default or bankruptcy. The company had derivatives that can be netted as per ISDA at a total fair value of EUR 9,8 million in 2016 (12,3). Fingrid uses collaterals to cover the market value of the loss power price hedge derivatives. The management of electricity price risk is described in chapter 3.7. The hedging of interest rate and foreign exchange risks is described in chapter 5.3.

The company’s derivative transactions consist of interest rate and cross currency swaps hedging the loan portfolio, and purchased cap options to hedge the loan portfolio from a sudden change in short-term interest rates. Forward contracts are used to fix the exchange rate for non-euro-denominated contracts related to business operations.The company uses electricity futures to hedge the price risk of future loss power purchases.

The table below includes all of the Group’s derivatives.

Accounting principles

Derivative instruments

Derivatives are initially recognised at fair value according to the date the derivative contract is entered into, and are subsequently re-measured at fair value. Changes in the fair value of derivatives are recognised in profit and loss. The company uses derivative contracts only for hedging purposes according to the Corporate Finance and Financing principles and the loss energy hedging policy.

Electricity derivatives

The company enters into electricity derivative contracts in order to hedge the price risk of electricity purchases in accordance with the loss energy forecast. Fingrid discontinued hedge accounting for electricity derivatives at the beginning of 2014. As a result, the entire change in the fair value of electricity derivatives was recorded and will continue to be recorded in the income statement. The hedge fund in the balance sheet was dismantled in the income statement during 2015 and 2016 in fixed instalments such that it decreases the result by EUR 11.6 million.

Interest and currency derivatives

The company enters into derivative contracts in order to hedge financial risks (interest rate and foreign exchange exposure) in compliance with the Corporate Finance and Financing Principles approved by the Board of Directors. Fingrid does not apply hedge accounting to these derivatives. A derivative asset or liability is recognised at its original fair value. Derivatives are measured at fair value at the closing date, and the change in fair value is recognised in the income statement under finance income and costs.

The fair values of derivatives at the closing date are based on different calculation methods. Foreign exchange forwards have been meas-ured at the forward prices. Interest rate and currency swaps have been measured at the present value on the basis of the yield curve of each currency. Interest rate options have been valued using generally accepted option pricing models in the market.

Adoption of the IFRS 9 standard, effective 1 January 2018

IFRS 9 Financial instruments replaces IAS 39 and brings changes to how financial assets are recognised and measured, the application of impairment and hedge accounting principles.

- Bonds that are financial assets are measured at amortised cost, but only when the business model target is to hold on to these investments and collect all the cash flows based on the contract, and when the instrument’s contract-based cash flows consist exclusively of capital and interest payments. All other bonds, equity investments and structured investment products that are financial assets are recognised at fair value.

- Changes in the fair value of all financial assets are recognised in the income statement. The exception is changes in the fair value of equity investments, which are not held for trading: they can be recognised either in the income statement or in equity funds (in which case they are not transferred later to the income statement). In addition, some bonds that belong under financial assets may be recognised at fair value through other comprehensive income, depending on the company’s business model.

- The impairment of financial assets must be determined using the expected loss impairment model.

- The new hedge accounting rules bring hedge accounting closer to general risk management practices.

Company management has begun an analysis of the impacts of the IFRS 9 standard. The company’s current opinion is that the standard will not have a significant impact on the financial statement figures, since the company’s financial assets have largely been recognised in line with the IFRS 9 standard. The company does not have a significant credit risk, nor are any essential credit losses expected to be entered in future. In addition, management’s current opinion is that the company will not begin applying hedge accounting when the IFRS 9 standard enters into effect. The new standard also contains broader notes requirements than before, and changes will be made to the method of presentation.