Management Report 2020

- Management Report 2020 Non-derivative financial liabilities | The Group recognizes debt securities issued and subordinated liabilities initially at the date they arise. All other financial lia- bilities are initially recognized on the trade date on which the Group becomes a party to the contractual provisions of the instrument. The Group discharges a fi- nancial liability when its contractual obligations have been discharged, cancelled or expired. The Group classifies non-derivative financial liabilities in the category of other fi- nancial liabilities. Such financial liabilities are recognized initially at fair value plus any attributable transaction costs. After initial recognition, these financial liabili- ties are measured at amortized cost using the effective interest method. The Group has the following non-derivative financial liabilities: financing and loans, suppliers, loan agreements and related party leases, third-party leases, se- curities payable and other accounts payable. Derivative financial instruments, including hedge accounting | The Company uses derivative financial instruments such as currency forward contracts, commodities forward contracts and interest rate swaps to hedge against the risk of changes in foreign exchange rates, the risk of changes in commodities prices and the risk of changes in interest rates. Embedded derivatives are separated from their master contracts and recorded individually if the economic characteristics and risks of the master contract and the embedded derivative are not intrinsically related; or an individual instrument with the same conditions as the embedded derivative meets the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. At the time of the initial hedge assignment, the Group formally documents the relationship between the hedge instruments and the hedged items, including the risk management objectives and strategy in conducting the hedging transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group assesses whether the forecasted or contracted hedging items remain in the same amount and term of the hedging instrument. In addition, continuous monitoring is performed to check whether the hedge SLC Agrícola instruments are expected to be "highly effective" in offsetting changes in the fair value or cash flows of the respective hedged items during the year for which the hedge is designated. Derivatives are initially recognized at fair value; attributable transaction costs are recognized in profit or loss as incurred. After initial recognition, derivatives are measured at fair value, and changes in fair value are recorded as described below. Hedges of cash flows | When a derivative is designated as a hedging instrument in a hedge of variability in cash flows attributable to a specific risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of the changes in the derivative's fair value is recognized in other comprehensive income and presented in the equity valuation reserve. Any ineffective portion of the changes in the fair value of the derivative is recognized immediately in profit or loss. When the hedged item is a non-financial asset, the amount recognized in other comprehensive income is transferred to the asset's book value when the asset is realized. The value recognized in other comprehensive income is reclassified to net income in the same year as the hedged cash flows affect net income on the same line in the income statement as the hedged item. If there are no longer expectations that the forecast transaction will occur, then the balance in other comprehensive income is recognized immediately in the income statement. In other cases the value recognized in other comprehensive income is transferred to net income in the same fiscal year as the hedged item affects the result. If the hedging instrument no longer meets the criteria for hedge accounting, ex- pires, i.e. sold, closed, exercised, or has its designation revoked, then hedge ac- counting is discontinued prospectively. The retained earnings, previously recog- nized in other comprehensive income and presented in the equity valuation re- serve, remain there until the forecast transaction affects profit or loss. For the years ended December 31, 2019 and 2018, the Group had operations clas- sified as cash flow hedge. 89

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