Expert answer:Responds to Two students
Expert answer:In responding to your peers, compare and contrast how different companies have reported on their derivatives. What parallels can be drawn? What factors affect how derivatives are used by different companies?Words with 100-150 thanks
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Student one:
Nike, Inc is an American multinational organization that is occupied with the design,
improvement, producing, and overall showcasing and offers of footwear, attire, gear,
adornments, and administrations. It is the world’s biggest provider of athletic shoes
and clothing and a noteworthy maker of games gear, with income in an
overabundance of US$24.1 billion in its financial year 2012 (consummation May 31,
2012).
Nike is presented to the risk of changes in the reasonable estimation of certain settled
rate obligation owing to changes in interest rate. derivative utilized by Nike to fence
this risk are receive-fixed, pay-variable interest rate swaps. All interest rate swap
understandings are assigned as reasonable esteem rate of the related long-term
obligation and meet the alternate technique necessities under FAS 133. As needs are,
changes in the reasonable estimations of the interest rate swap agreements are
precisely counterbalanced by changes in the reasonable estimation of the hidden
long-term debt. No inadequacy has been recorded to net salary identified with loan
cost swaps assigned as reasonable esteem supports for the three-month time frame
finished August 31, 2009. The purpose of the derivative securities that Nike is using is
for hedging.
All adjustments in reasonable estimation of the derivative assigned as net investment
edge, aside from the insufficient part, are accounted for in the aggregate interpretation
change segment of other thorough salaries alongside the remote cash interpretation
modifications on those investments. The Company assesses hedge adequacy in view
of changes in forwarding rates. The Company recorded no ineffectualness from its net
venture hedge for the three-month time frame finished August 31, 2009.
Investor unfamiliar with financial statements face is the fact the variation of the
change with the fact that Nike is a multinationalism company. Even though the
information is clear enough to understand that the company goal of the derivative, In
planning and assessing the divulgence controls and systems, administration perceives
that any controls and techniques, regardless of how very much outlined and worked,
can give just sensible affirmation of accomplishing the coveted control targets, and
administration is required to apply its judgment in assessing the money-saving
advantage relationship of conceivable controls and methods.
Student Two:
Derivative Securities in Financial Reporting
Avianca Holdings S.A. is a Latin American airline holding created by the merger of
Avianca from Colombia and TACA Airlines from El Salvador in 2010. The company is
registered in the Colombian stock exchange where it has most of its operations, and as well it has
an ADR registered in US (AVH); therefore, Avianca Holdings S.A. must present its financial
statements to the SEC every year under the form 20-F. The company follows IFRS for reporting
their financial statements, thereby it reconciliates them to GAAP for SEC requirements.
Due to its operations, Avianca is exposed to different currencies and to variations in fuel
prices. Among foreign exchange currencies, Avianca bears risk on fluctuations of Colombia peso
(COP), Argentinian peso (ARG) and Bolivars (VEF) against US Dollars. Gains or losses in
foreign exchange currencies and changes of fuel price are presented in two lines in the income
statement after interest expense and income. Specifically, the item Derivative instruments in the
income statement condenses gains or losses of hedges in fuel and exchange currencies, whereas
the Foreign exchange line only relates gains or losses to unhedged currency exposition.
There is a third source of risk, interest rate fluctuations related to lease obligations the
company contracted for the airplanes. To cover these three sources of risk, the company is using
forward currency contracts, interest rate contracts, and commodity forwards as it is stated in the
notes of the financial statements:
Derivative financial instruments
We use derivative financial instruments such as forward currency contracts, interest rate contracts and
forward commodity contracts to hedge our foreign currency risks, interest rate risks and commodity price risks,
respectively. Such derivative financial instruments are initially recognized at fair value on the date on which a
derivative contract is entered into. Subsequent to initial recognition, derivatives are carried at fair value as financial
assets when the fair value is positive and as financial liabilities when the fair value is negative.
110
Table of Contents
Commodity contracts that are entered into and continue to be held for the purpose of the receipt or
delivery of a non-financial item in accordance with our expected purchase, sale or usage requirements are held at
cost.
Any gains or losses arising from changes in the fair value of derivatives are taken directly into the
consolidation statement of comprehensive income, except for the effective portion of derivatives assigned as cash
flow hedges, which is recognized in other comprehensive income.
Cash flow hedges which meet the strict criteria for hedge accounting are accounted for as follows:
The effective portion of the gain or loss on the hedging instrument is recognized directly as other
comprehensive income in the equity, while any ineffective portion of cash flow hedge related to operating and
financing activities is recognized immediately in the consolidated statement of comprehensive income.
Amounts recognized as other comprehensive income are transferred to the consolidated statement of
comprehensive income when the hedged transaction affects earnings, such as when the hedged financial income or
financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial
asset or non-financial liability, the amounts recognized as other comprehensive income are transferred to the initial
carrying amount of the non-financial asset or liability.
If the forecasted transaction or firm commitment is no longer expected to occur, the cumulative gain or
loss previously recognized in equity is transferred to the consolidated statement of comprehensive income. If the
hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation
as a hedge is revoked, any cumulative gain or loss previously recognized in other comprehensive income remains in
other comprehensive income until the forecast transaction or firm commitment affects profit or loss.
We use forward currency contracts and cross currency as hedges of our exposure to foreign currency
risk in forecasted transactions and firm commitments, as well as forward commodity contracts for its exposure to
volatility in commodity prices.
Source: Avianca Holdings S.A. Form 20-F, SEC
This note recognizes the use of different forward contracts and the accounting rules used
to report them at fair value or cost whereas the contracts are for financial assets (currencies or
interest rates) or commodities (fuel). The word “forward” is used indistinctly by the company to
refer to derivate; specifically, the company is using options to hedge part of the exposition in fuel
price changes as it is stated in the following note of the financial statements:
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
Given the nature of our business, we are exposed mainly to changes to the price of fuel, interest rates
and foreign exchange.
Fuel
Our results of operations are affected by changes in the price of jet fuel. To mitigate the price risk, we
use jet fuel options and futures agreements. Market risk is estimated as a hypothetical 1.0% increase in the
December 31, 2016 cost per gallon of fuel. Based on our 2016 fuel consumption and, assuming the same for 2017,
such an increase would result in an increase to our fuel expense of approximately $7.9 million in 2017, not taking
into account our derivative contracts. At December 31, 2016, we had hedged approximately 12.6% of our projected
2017 fuel requirements.
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Table of Contents
The following table sets forth our fuel swaps and options at market value as of December 31, 2015 and
December 31, 2016.
Maturing before 1 Year
At December 31, At December 31,
2015
2016
Maturing after 1 Year
At December 31, At December 31,
2015
2016
Total
At December 31, At December 31,
2015
2016
(in $ thousands)
Options
Swaps
882.61
0
18,874.6
0
0
0
6,665.04
0
882.61
0
25,539.64
0
Our fuel hedging strategy remained the same in 2015 and 2016 and any difference in the number of
options and swaps is due to strategic internal decisions.
Source: Avianca Holdings S.A. Form 20-F, SEC
From this note is clear the company concerns with increases in fuel prices for 2017.
Avianca built a lot more hedge for 2017 than it had for 2016 from $882,610 to $25,539,640, that
represents an increase of about 30 times.
To conclude, the company is using different derivatives to hedge exposure to currency
exchange rates, interest rates, and fuel prices; for the nature of the business, Avianca
permanently holds hedges on fuel prices under a strategic policy which is changed
opportunistically by management depending on market conditions. This information is stated in
the financial statements but requires a detailed analysis by informed investors to understand the
risks associated and the ways to bear with them.
References
Avianca Holdings S.A. Form 20-F, SEC. Retrieved from
https://www.sec.gov/Archives/edgar/data/1575969/000119312517150623/d340023d20f.htm
…
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