Note 10—Hedge Accounting

Cash Flow Hedging Strategy

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the entire change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income, a component of shareholders’ equity in the Company’s consolidated balance sheets.

The Company has entered into an interest rate swap agreement to manage interest rate risk exposure. An interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to a fixed rate basis for the next five years on 50% of the currently outstanding amount to Rabobank, thus reducing the impact of interest rate changes on future interest expense. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.

The Company determines the hedge effectiveness of its interest rate swaps at inception using regression analysis. On an ongoing basis the Company reviews hedge effectiveness through assessing the hedge relationship by comparing the current terms of the swap and the associated debt to ensure they continue to coincide through the continued ability of the Counterparty to the swap to honor its obligations under the swap contract. If the qualitative assessment indicates that the hedge relationship is ineffective, the Company performs a regression analysis. As of the date of this report, the Company concluded the hedge was highly effective.

As of March 31, 2020, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $33.2 million.

The fair value of the Company’s derivative instrument is set out below:


($ in thousands)
Instrument	Balance sheet location	Fair Value
Interest rate swap	Derivative liability	$	3,227
	Other Comprehensive Income		(3,227)

The effect of derivative instruments on the consolidated statements of operations for the periods ended March 31, 2020 and 2019 is set out below:


($ in thousands)
Cash flow hedging relationships	Amount of Gain / (Loss) recognized in OCI on derivative	Location of Gain (Loss) reclassified from Accumulated OCI into income
Interest rate contracts	—	Interest expense

The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The following table outlines the movements in the other comprehensive income account as of March 31, 2020 and December 31, 2019:


($ in thousands)		March 31, 2020		March 31, 2019
Beginning accumulated derivative instrument gain or loss	$	(1,644)	$	(865)
Net change associated with current period hedging transactions		(1,583)		(215)
Net amount of reclassification into earnings		—		—
Difference between a change in fair value of excluded components		—		—
Closing accumulated derivative instrument gain or loss	$	(3,227)	$	(1,080)