Norske Skog has in the past entered into Euro denominated energy contracts in Norway, reducing the group’s exposure to the Norwegian krone. Financially, a contract combining energy prices and currency exposures is considered a hybrid instrument, containing a host contract and an embedded derivative. A hybrid instrument can be accounted for based on the host contract, or be split and accounted for by their separate elements. Norske Skog previously accounted for such contracts by their separate elements. In Q1 2015 Norske Skog changed the accounting principle to account for the host contract only. The change in accounting principle was agreed with the current auditor EY.
However, on 1 April 2016 the company was informed by EY that the Norwegian Financial Supervisory Authority has made a preliminary assessment that such energy contracts should be accounted for by their separate elements.
Based on the Financial Supervisory Authority’s preliminary assessment Norske Skog may need to change the accounting principle governing the Norwegian energy contracts. Norske Skog is currently assessing the full accounting effects of returning to the former accounting principles, and the current estimate is that it could have a negative impact in the range of NOK 200-350 million in the year-end 2015 consolidated on net income and equity. Such a change would result in the equity to be negative per year-end 2015. A change in accounting principle will not have any cash effect.
If the accounting policy is changed, the changes in the value of the embedded derivative in the energy contracts will be accounted for in other gains and losses through the income statement. For further information on the historical treatment, see note 2 (a) financial assets at fair value through profit or loss in the consolidated financial statements for 2014.
If the accounting policy for the energy contracts is changed, the negative effect on the equity per year-end 2015 resulting from the change is expected to be more than offset by the combined effects of the equity improvement measures previously announced on 31 March 2016 and by the contemplated 2017 Exchange Offer if consummated.