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HEDGE ACCOUNTING
 12 Months Ended
Dec. 31, 2019
Disclosure of detailed information about hedges [abstract]  
Disclosure of hedge accounting [text block]

NOTE 10 – HEDGE ACCOUNTING

In accordance with its risk management policies, Grupo Aval uses hedge accounting to manage foreign exchange risk relating to investments in foreign operations and in forecasted transactions of its subsidiary Promigas, as follows:

Hedges of net investment in foreign operations

Banco de Bogotá, Banco de Occidente and Promigas are exposed to foreign exchange risk relating to its investments in foreign subsidiaries, which functional currencies are the US dollar.

The purpose of hedge accounting is to mitigate and offset any adverse changes resulting from the fluctuation in exchange rate of the Colombian Peso and the functional currency of such investments. The impacts of those movements are reflected in the cumulative translation adjustment in other comprehensive income of the consolidated financial statements.

To cover this risk, Grupo Aval hedges its exposure through foreign currency financial liabilities expressed in U.S. dollars and forward contracts for the sale of U.S. dollars.

Changes in the fluctuation of the Colombian peso against the U.S. dollar have been as follows:

 

 

 

 

 

 

Date

    

Value of USD 1

    

Variation in pesos

December 31, 2017

 

2,984.00

 

(16.71)

December 31, 2018

 

3,249.75

 

265.75

December 31, 2019

 

3,277.14

 

27.39

 

According to the information described above, the following table shows movements of OCI gross of taxes, related to hedges of net investment in foreign operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Exchange 

    

Exchange 

    

 

 

 

 

Translation 

 

difference of 

 

difference 

 

 

 

 

 

adjustment of 

 

financial 

 

in forward 

 

Net OCI 

Detail of investment

    

the investments

    

liabilities

    

contracts

    

account

Leasing Bogotá Panamá

 

Ps.

101,556

 

Ps.

(56,618)

 

Ps.

(46,383)

 

Ps.

(1,445)

Other subsidiaries and branches Banco de Bogotá

 

 

3,638

 

 

 —

 

 

(3,935)

 

 

(297)

Occidental Bank Barbados

 

 

1,142

 

 

(1,142)

 

 

 —

 

 

 —

Banco de Occidente Panamá

 

 

1,799

 

 

(1,799)

 

 

 —

 

 

 —

Sociedad Portuaria El Cayao S.A. E.S.P.

 

 

(740)

 

 

740

 

 

 —

 

 

 —

Gases del Pacífico S.A.C.

 

 

(92)

 

 

(1,096)

 

 

 —

 

 

(1,189)

Gas Natural de Lima y Callao S.A.C.  – Calidda

 

 

(11,973)

 

 

11,973

 

 

 —

 

 

 —

Total

 

Ps.

95,329

 

Ps.

(47,942)

 

Ps.

(50,318)

 

Ps.

(2,931)

 

According to information described above, the following table contains details of hedging operations carried out to cover foreign denominated equity investments. The analysis shows current amount of OCI gross of taxes:

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thousands of USD

 

 

Ps. millions

 

 

 

 

 

Amount of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedge by

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

 

 

financial

 

Amount of

 

translation

 

Exchange

 

Exchange

 

 

 

 

 

 

 

liabilities in

 

hedge by

 

adjustment

 

difference of

 

difference in

 

 

 

 

 

Investment

 

foreign

 

forward

 

of the 

 

financial

 

forward

 

Net OCI

Detail of investment

    

amount

    

currency

    

contracts

    

investments (1)

    

liabilities (1)

    

contracts

    

account

Leasing Bogotá Panamá

 

4,475,304

 

(2,067,100)

 

(2,391,651)

 

Ps.

4,230,937

 

Ps.

(1,651,823)

 

Ps.

(2,716,214)

 

Ps.

(137,100)

Other subsidiaries and branches Banco de Bogotá (2)

 

139,662

 

 —

 

(137,752)

 

 

129,616

 

 

 —

 

 

(127,333)

 

 

2,283

Occidental Bank Barbados

 

31,027

 

(31,027)

 

 —

 

 

25,748

 

 

(25,748)

 

 

 —

 

 

 —

Banco de Occidente Panamá

 

38,924

 

(38,924)

 

 —

 

 

37,376

 

 

(37,376)

 

 

 —

 

 

 —

Sociedad Portuaria El Cayao S.A. E.S.P.  (3)

 

26,214

 

(26,214)

 

 —

 

 

9,332

 

 

(9,332)

 

 

 —

 

 

 —

Gases del Pacífico S.A.C. (3)

 

 2,500

 

(2,500)

 

 —

 

 

2,302

 

 

(3,490)

 

 

 —

 

 

(1,189)

Gas Natural de Lima y Callao S.A.C.  – Calidda (3)

 

131,606

 

(131,606)

 

 —

 

 

(3,977)

 

 

3,977

 

 

 —

 

 

 —

Total

 

4,845,237

 

(2,297,371)

 

(2,529,403)

 

Ps.

4,431,333

 

Ps.

(1,723,792)

 

Ps.

(2,843,547)

 

Ps.

(136,006)

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thousands of USD

 

 

Ps. millions

 

 

 

 

 

Amount of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedge by

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

 

 

financial

 

Amount of

 

translation

 

Exchange

 

Exchange

 

 

 

 

 

 

 

liabilities in

 

hedge by

 

adjustment

 

difference of

 

difference in

 

 

 

 

 

Investment

 

foreign

 

forward

 

of the 

 

financial

 

forward

 

Net OCI

Detail of investment

    

amount

    

currency

    

contracts

    

investments (1)

    

liabilities (1)

    

contracts

    

account

Leasing Bogotá Panamá

 

3,964,051

 

(2,067,100)

 

(1,896,348)

 

Ps.

4,129,381

 

Ps.

(1,595,205)

 

Ps.

(2,669,831)

 

Ps.

(135,655)

Other subsidiaries and branches Banco de Bogotá (2)

 

126,380

 

 —

 

(121,116)

 

 

125,978

 

 

 —

 

 

(123,398)

 

 

2,580

Occidental Bank Barbados

 

23,971

 

(23,971)

 

 —

 

 

24,606

 

 

(24,606)

 

 

 —

 

 

 —

Banco de Occidente Panamá

 

23,439

 

(23,439)

 

 —

 

 

35,577

 

 

(35,577)

 

 

 —

 

 

 —

Sociedad Portuaria El Cayao S.A. E.S.P.  (3)

 

31,214

 

(31,214)

 

 —

 

 

10,072

 

 

(10,072)

 

 

 —

 

 

 —

Gases del Pacífico S.A.C. (3)

 

4,000

 

(4,000)

 

 —

 

 

2,394

 

 

(2,394)

 

 

 —

 

 

 —

Gas Natural de Lima y Callao S.A.C.  – Calidda (3)

 

31,649

 

(19,336)

 

 —

 

 

7,996

 

 

(7,996)

 

 

 —

 

 

 —

Total

 

4,204,704

 

(2,169,060)

 

(2,017,464)

 

Ps.

4,336,004

 

Ps.

(1,675,850)

 

Ps.

(2,793,229)

 

Ps.

(133,075)

(1)

Includes exchange difference hedged

(2)

Includes Banco de Bogotá Panamá, Banco Bogotá Finance, Ficentro and contributions of foreign branches in Miami, New York and Nassau.

(3)

Includes only a portion of this investments hedged

Hedging with Forward Contracts

Forward contracts to sell U.S. dollars have been contracted to hedge part of the net foreign investment that Banco de Bogotá has in Leasing Bogotá Panamá and other foreign subsidiaries. The forward contracts were executed with counterparties from the financial sector and the hedge was documented as a "dynamic hedging strategy", where new forward contracts are signed simultaneously as the previous ones expire. According to IAS 39, changes in the fair value of derivatives exclusively due to exchange rate changes in the peso against the U.S. dollar are registered under “Other Comprehensive Income” in equity. The ineffective part of the hedge is recognized in the statement of income for the period.

Hedging with Debt in Foreign Currency in U.S. dollars

Debt financial instruments that are not derivatives can be designated as hedging instruments for changes in foreign currency exchange rates. According to this rule, Banco de Bogotá and Banco de Occidente designed debt denominated in U.S. dollar as hedging instruments of their foreign subsidiaries as follows:

·

Bonds issued by Banco de Bogotá in the international market were designated as hedging instruments of its investment in Leasing Bogotá Panamá amounting US$2,067 million in 2019 and 2018.

·

Other financial liabilities in the amount of $230 million as December 31, 2019 (US$102 million as of December 31, 2018) were used to hedge part of the net foreign investment that Banco de Occidente and Promigas have in foreign subsidiaries as part of a hedging strategy, by which new obligations are continuously designated as hedging instruments to replace the previous ones as they expire over time.

·

Between December 21, 2015 and November 2, 2016, financial liabilities designated as hedging instruments described above included an intra-group liability amounting to US$ 500 million that Banco de Bogotá had as a hedging instrument of its investment in Leasing Bogotá Panamá. This operation was eliminated in the consolidation process of Grupo Aval and was excluded from the foreign investment hedge accounting. Starting on May 1st and up to November 2nd, 2016 Grupo Aval designated financial assets in foreign debt securities amounting to US$ 500 million as cash flow hedge, the foreign exchange differences of this intra-group liability were not eliminated in the consolidation process and recorded in Other Comprehensive Income in the amount of  73,708. This amount could be realized in the future as income when the investment in Leasing Bogotá Panamá is sold. On November 2nd, 2016 Banco de Bogotá cancelled the intragroup liability amounting to US$ 500 million which was replaced in the foreign investment hedge accounting with other obligations in foreign currency with third parties.

Hedging of Future Transactions

In the ordinary course of its operations Promigas S.A. and its subsidiaries receive income in U.S. Dollars derived from the transportation of gas. Promigas and its subsidiaries hedge the exchange risk arising in future transactions of highly probable gas transportation income, entering into forward contracts for the sale of U.S. dollars with financial entities different from the ones consolidated into Grupo Aval. During the years ended December 31, 2019, 2018 and 2017, an exchange difference recognized under “Other Comprehensive Income” as a result of cash flow hedge accounting of income (loss) from these highly probable transactions, was reclassified to profit or loss in the amounts of Ps. 20,066,  Ps. (276) and Ps. (26,846) respectively.

The following is the summary of Promigas and its subsidiaries open cash flow hedges:

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

 

Income in Thousands of USD dollars forecasted

 

92,611

 

120,265

 

Notional amount contracts forward Thousands of USD

 

92,611

 

120,265

 

% hedged

 

100

%  

100

%

Fair value in Colombian pesos

 

(874)

 

(13,414)

 

# of contracts

 

158

 

1,470

 

 

The movement of the accumulated OCI account related to cash flow hedges in Colombian pesos during the years ended on December 31, 2019, 2018 and 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

    

December 31, 2017

Balance at the beginning of the year

 

Ps.

(14,343)

 

Ps.

5,447

 

Ps.

7,419

Changes in the fair value of the hedge forward contracts

 

 

(6,597)

 

 

(19,513)

 

 

24,874

Reclassified to profit or loss

 

 

20,066

 

 

(276)

 

 

(26,846)

Balance at the end of the year

 

Ps.

(874)

 

Ps.

(14,343)

 

Ps.

5,447

 

Testing of Hedge Effectiveness

Grupo Aval considers hedging as highly effective if at the beginning and in subsequent periods, the hedging instrument highly offsets changes in fair value or in cash flows attributable to the risk hedged during the period for which the hedging has been designated. The hedging is considered as such if the effectiveness of the hedging is in a range between 80% and 125%. Such effectiveness is assessed by Grupo Aval’s entities at least quarterly and at the end of each accounting period.

Grupo Aval has documented the hedging effectiveness of its foreign currency denominated investments based on the portion of the net investment hedged at the beginning of the hedging relationship. Since the net balance of these investments fluctuates during the year, Grupo Aval evaluates the hedging relationship on a daily basis as well as the result of the testing of hedge effectiveness.

Hedge Effectiveness with Forward Contracts

Grupo Aval applies the method of the forward rate used in forward contracts to evaluate the hedge effectiveness; for such purpose, Grupo Aval measures the hedge ineffectiveness comparing the value of current forward contracts, which serve as hedge, with the change in the value of a hypothetical derivative with the same maturity.

Hedge Effectiveness with Debt Instruments in Foreign Currency

For debt instruments in foreign currency designated as a hedging instruments, the gain or loss arising from the conversion of the debt to Colombian Pesos is based on the current exchange rate between the U.S. dollar and the Colombian Peso, which is the functional currency of Grupo Aval. If the notional amount of the hedging instrument exactly matches with the portion of the hedged investment in foreign operations, no ineffectiveness is registered in the statement of income.

Derivative Financial Instruments for hedging purposes comprise the following:

 

According to information described above, the following table contains the fair value of derivative financial instruments used for hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

December 31, 2018

Item

    

Assets

    

Liabilities

    

Assets

    

Liabilities

Forward contracts

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency to buy

 

Ps.

14

 

Ps.

74,529

 

Ps.

28,367

 

Ps.

1,128

Foreign currency to sale

 

 

166,584

 

 

16,197

 

 

1,771

 

 

194,411

Subtotal

 

Ps.

166,598

 

Ps.

90,726

 

Ps.

30,138

 

Ps.

195,539

Swap

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 —

 

 

3,572

 

 

 —

 

 

 —

Subtotal

 

Ps.

 —

 

Ps.

3,572

 

Ps.

 —

 

Ps.

 —

Total hedge derivatives

 

Ps.

166,598

 

Ps.

94,298

 

Ps.

30,138

 

Ps.

195,539