3 Feb 2015 07:00
New treatment of foreign currency risk in the IFRS consolidated financial statements of Rosneft Oil Company
§ Effective October 1, 2014, Rosneft adopted hedge accounting in accordance with IAS 39 in order to enhance the recognition relevance and the measurement accuracy of the foreign currency effects in the consolidated financial statements of the Company
§ Foreign currency risk will affect consolidated profit and loss only when the risk actually materializes
For the purposes of preparation of IFRS consolidated financial statements, the Company applies IAS 21, The Effects of Changes in Foreign Exchange Rates, and translates loans and borrowings denominated in foreign currencies to Russian Ruble using exchange rates as of the period-end. Before October 1, 2014, all foreign exchange differences arising on loans and borrowings denominated in foreign currencies were recognized directly in the statement of profit and loss in IFRS financial statements.
Due to the increased foreign exchange volatility of the Russian Ruble, one-off translation of the whole loan portfolio as of the period-end with immediate recognition of the resulting exchange differences within profit and loss for the period can distort the effect of the actual currency risk pertaining to the current period.
Oil sales revenue is predominantly denominated in US dollars. At the same time Rosneft attracts financing in the form of long-term US dollar' loans and borrowings for investment purposes. This creates a natural hedge relationship, as the risks related to translation of export revenue to the Company's functional currency are partially offset by the risks of translation of loans and borrowings in mid- and long-term perspective, in line with the Company's risk management strategy.
In order to enhance the recognition relevance and the measurement accuracy of the foreign currency effects in the consolidated financial statements as well as to ensure true and fair presentation of the financial results and the existing natural hedging relationships, effective on October 1, 2014, the Company adopted hedge accounting in line with IAS 39, Financial instruments: recognition and measurement.
In accordance with IAS 39 a portion of highly probable future export revenue denominated in US dollars corresponds with US dollar denominated loans and borrowings in respect of foreign currency risk expected by the Company. Foreign exchange gains and losses resulting from the translation of loans and borrowings denominated in foreign currencies to Russian Ruble are temporarily recognized within other comprehensive income being part of equity with no effect on profit or loss for the period. Once the hedged operation occurs and revenue is recognized, the related exchange differences temporarily held within equity are released to profit or loss for the period, within revenue and EBITDA.
Thus the foreign exchange effects on loans and borrowings are more evenly reflected in future period revenues. As a result the Company recognizes actual currency risk to which it is exposed to.
The accounting treatment of foreign currency risk fully complies with IFRS and is duly approved by Board of Directors' Audit Committee of the Company with involvement of the independent auditor Ernst&Young LLC.
Rosneft Information Division
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fax: +7 (495) 411-54-21
February 3, 2015
These materials contain statements about future events and expectations that are forward-looking in nature. Any statement in these materials that is not a statement of historical fact is a forward-looking statement that involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements expressed or implied by such forward-looking statements to differ. We assume no obligation to update the forward-looking statements contained herein to reflect actual results, changes in assumptions or changes in factors affecting these statements.