26.5 Hedge accounting

Changes in the fair value measurement of derivative financial instruments designated as CCIRS and IRS cash flow hedges are recognised in the revaluation reserve for the portion that constitutes an effective hedge, while the ineffective portion of the hedge is recognised in profit or loss.

The amounts of the cumulative change in the measurement of the fair value of a hedging instrument previously recognised in the revaluation reserve are transferred to profit or loss in the period or periods during which the hedged item affects profit or loss. Alternatively, where a hedge of a forecast transaction results in the recognition of a non-financial asset or non-financial liability, the Group excludes such an amount from equity and includes it in the initial cost or another book value of a non-financial asset or non-financial liability.

In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions hedging the exchange rate. In these transactions, banks-counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN. In the consolidated financial statements, a relevant part of CCIRS transactions is treated as a hedge of bonds issued by PGE Sweden AB (publ).

PGE S.A. hedges the risk of changes in cash flows resulting from foreign exchange rates in connection with forward contracts for the purchase of carbon emission allowances whose price is expressed in EUR.

PGE S.A. also applies hedge accounting to IRS transactions hedging the interest rate in connection with its financial liabilities under loan agreements such as the Loan Agreement with a consortium of banks entered into on September 7, 2015 and the Loan Agreement with Bank Gospodarstwa Krajowego entered into on December 17, 2014. Under these IRS transactions, banks-counterparties pay PGE S.A. interest based on a variable rate in PLN and PGE S.A. pays interest based on a fixed rate in PLN.

To recognise these IRS transactions, the PGE Capital Group uses hedge accounting.

The source of ineffectiveness for hedge accounting is solely the CCIRS transaction hedging the interest rate on bonds issued by PGE Sweden AB.

Information on hedging instruments – maturity structure as at December 31, 2020. Payments received by the Group are presented with a “minus” sign and payments made by the Group are presented with a “plus” sign.

The Group assesses that the ineffective part of the hedge resulting from the EUR exchange rate and the change in WIBOR and recognised in profit or loss will not have a material impact on future financial statements of the PGE Capital Group.

The impact of hedge accounting on the revaluation reserve is presented in note 20.3 to these financial statements.