Equity is recognised in the consolidated financial statements by categories, in accordance with applicable laws and constitutional documents of the consolidated entities.
The share capital of the LOTOS Group is the share capital of the Parent and is recognised at its par value, in the amount specified in the Company’s Articles of Association and in the relevant entry in the National Court Register.
Cash flow hedging reserve
The Group has elected the option to continue to apply the existing requirements of IAS 39 as of January 1st 2019 and not to apply the new hedge accounting requirements of IFRS 9 until the International Accounting Standards Board has completed work on accounting for macro hedging.
The Parent applies cash flow hedge accounting for USD-denominated borrowings designated as a hedging instrument for future highly probable USD- denominated revenue from sales of commodities and petroleum products exposed to the risk of USD/PLN exchange rate movements.
The objective of cash flow hedge accounting is to guarantee a specific Polish złoty value of revenue generated in USD. The hedged items comprise a number of highly probable and planned USD-denominated refined product sale transactions, in particular the first portion of revenue (up to the amount of the designated principal repayment) in USD generated in a given calendar month, or if the amount of revenue in a given month is lower than the amount of the designated principal payment – the first portion of revenue generated in three successive months. If a subsequent portion of revenue is designated in a given calendar month, the hedged item is the first portion of revenue generated after the previously designated portion of revenue in USD in a given calendar month, or if the amount of revenue in a given month is lower than the amount of the designated principal repayment – a subsequent portion of revenue generated in three successive months. A hedged item is linked to relevant hedging instruments based on an individual document designating the hedging relationship.
The designated hedging instruments cover an obligation to repay a USD-denominated credit facility, whose settlement dates fall on business days of specified calendar months, in accordance with the principal repayment schedule.
Changes in the fair value of financial instruments designated as cash flow hedges are charged directly to other comprehensive income to the extent they represent an effective hedge, while the ineffective portion is charged to other finance income or costs in the reporting period.
At the time when a hedge is undertaken, the Group formally designates and documents the hedging relationship, as well as its risk management objective and strategy for undertaking the hedge. The relevant documentation identifies: (i) the hedging instrument, (ii) the hedged item or transaction, (iii) the nature of the hedged risk, and (iv) specifies how the Company will assess the hedging instrument’s effectiveness in offsetting changes in the fair value of the hedged item or cash flows attributable to the hedged risk. The hedge is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk. The hedge is assessed on an ongoing basis to determine whether it remains highly effective during all the reporting periods for which it was undertaken.