Interest restriction: group-EBITDA: derivative contracts
In calculating the amounts of net group-interest expense and group-EBITDA any amounts of fair value movements arising on derivative contracts that have a hedging function are to be removed. Instead the amounts from those derivative contracts should be recognised in line with the hedged item. This is achieved through the application of the Disregard Regulations to the group’s financial statements.
XY plc operates a fleet of buses on which it incurs substantial fuel costs. It therefore enters into a series of fuel swaps to effectively fix the price it pays for the fuel. The fuel swaps are not designated as a hedge in the group accounts.
Consolidated financial statements: operating costs
|Actual cost of fuel||£70m|
|Net settlement of fuel swaps in the period||£(5)m|
|Fair value movement on fuel swap||£8m|
The application of the Disregard Regulation to the group financial statements would be as follows:
- Regulation 8 would apply as there is a commodity contract that is hedging risks arising in respect of the costs of purchasing fuel (the hedged item) and the fair value profits and losses in respect of the hedged item are not recognised in the group accounts.
- As a result, all of the profits and losses on the swap are disregarded for the period. Instead, the amounts are brought into account when the hedged item affects the profit or loss. This is likely to follow the net settlement of the swaps in the period.
- The group will therefore have an overall fuel costs of £65m for the period included in the calculation of group-EBITDA. This is calculated by excluding the ‘clean’ fair value movement in the swap of £8m for the period.