Cookie information

24. Derivative finacial instruments

The Group assesses the fair value and performs analysis of derivative financial instruments on a regular basis for the purposes of consolidated financial statements or when so requested by the management. Changes in fair value of derivative financial instruments determined using Levels 2 and 3 inputs:

Derivative financial instruments mature in less than 6 months to 5 years. The majority of derivatives mature in 1 to 2 years.

Instruments subject to special hedge accounting rules

Hedging transactions listed below are assessed as effective for the purposes of IAS 39 “Financial Instruments: Recognition and Measurement“.

(а) Cross-currency interest rate swaps with a fixed interest rate

In April and May 2013, the Group entered into two cross-currency interest rate swap agreements with a fixed interest rate with a Russian bank to hedge some of its Euro-denominated revenues from potential unfavourable RUB/EUR exchange rate fluctuations. In 2013 the loss arising from the change in fair value of this derivative financial instrument of USD 17.5 million was recorded in the consolidated statement of comprehensive income together with the corresponding deferred tax of USD 3.5 million, the amount of USD 2.7 million was recycled to consolidated statement of profit or loss.

Similar transactions entered into in 2010 were closed in the first half of 2013 due to the agreements term expiration. The decrease in hedge reserve as a result of closure of these transactions was USD 15.2 million. The results of closure of these transactions were reported in the consolidated statement of profit or loss for the year ended 31 December 2013, namely a gain of USD 30.8 million and a loss of USD 7.9 million as well as the change in the deferred tax of USD 3.1 million.

Level 2 market inputs in the fair value hierarchy were used to assess the fair value of the instrument. The fair value was determined based on discounted contractual cash flows using one-month MosPrime discount rate for cash flows in roubles and EURIBOR – for Euro-denominated cash flows. Cash flows under this agreement are expected through to the end of the first quarter of 2016 when the gain or loss will be recognised under this transaction.

The agreements are entered into with a Russian bank with a long-term credit rating BBB- (Fitch rating agency), therefore the effect of credit risk on the value of this derivative financial instrument is insignificant.

(b)Interest rate swap with a fixed interest rate

In June 2011, the Group entered into an agreement with a Russian bank to hedge a risk related to increase of LIBOR which is mainly used for estimation of the payments under finance lease agreements. In accordance with the terms of the agreement the Group fixes interest payments related to 21 ongoing financial lease agreements. The fair value of the hedge amounted to a gain of USD 1.7 million, which together with a corresponding deferred tax of USD 0.3 million have been recognised in the consolidated statement of comprehensive income for the year ended 31 December 2013. In 2013, the loss under this transaction was USD 2.4 million.

Level 2 market inputs in the fair value hierarchy were used to assess the fair value of the instrument. The fair value was determined based on discounted contractual cash flows using one-month MosPrime discount rate and forward currency rates determined on the basis of similar transactions in the active market. Management believes that sufficient cash flows will be available during the periods when a gain or a loss will be recognised on this transaction, through to June 2014.

The agreement is entered into with a Russian bank with a long-term credit rating BBB+ (Fitch rating agency), therefore the effect of credit risk on the value of this derivative financial instrument is insignificant.

Instruments that are not subject to special hedge accounting rules

The derivative financial instruments listed below are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivative financial instruments are included in profit or loss for the reporting period.

(а) Fuel options

In September and October 2012 as well as in September 2013, the Group entered into agreements with a number of Russian banks to hedge a portion of its aircraft fuel costs. The change in fair value of this derivative financial instrument amounted to a gain of USD 2.5 million for 2013, which is reported in the consolidated statement of profit or loss (2012: a loss of USD 41.3 million).

A similar transaction entered into in December 2010 was closed in the first half of 2013 due to the contractual term expiration. The gain of USD 0.03 million on the closure of this transaction was recorded within the finance income for 2013.

The agreements are entered into with a number of Russian banks with long-term credit ratings at least BBB- (Fitch rating agency), therefore, the effect of credit risk on the value of these derivative financial instruments is insignificant.

Level 3 market inputs were used to assess the fair value of the instrument and the Monte-Carlo method was applied. The following inputs were used to assess the fair value of the options:

• spot price for Brent crude oil observable in the information systems at the valuation date;
• forecast price for Brent crude oil determined based on the data provided by analysts for the term of the option;
• volatility calculated based on historical closing prices for Brent oil; and
• one-month MosPrime rate.

(b) Currency options

In November and December 2012 as well as in August, September and December 2013, the Group entered into agreements with a number of Russian banks to hedge the currency risk. The loss from the change in fair value of this derivative financial instrument in 2013 recorded in the consolidated statement of profit or loss amounted to USD 32.0 million (2012: a gain in amount of USD 8.3 million).

The agreements are entered into with a number of Russian banks with long-term credit ratings at least BBB- (Fitch rating agency), therefore, the effect of credit risk on the value of this derivative financial instrument is insignificant.

Level 3market inputs were used to assess the fair value of the instrument and the Monte-Carlo method was applied. The following inputs were used to assess the fair value of the options:

• the underlying asset’s spot rate observable in the information systems at the valuation date;
• forward rate determined based on the data provided by analysts for the term of the option;
• volatility calculated based on historical closing prices for the underlying asset; and
• three-month US Dollar LIBOR rate.

For the year ended 31 December 2013, the gain on the currency and fuel options was USD 26.1 million, the loss was USD 27.2 million (2012: USD 13.3 million and USD 9.1 million, respectively). These amounts were recorded within finance income and finance costs, respectively.

Notes in Consolidated Statements:

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity