(Ecopetrol S.A., 7.Jun.2016) – Ecopetrol S.A. announced that its Board of Directors, in a session held on June 6, 2016, approved the implementation of “Hedge of a net investment in a foreign operation” accounting as established under the International Accounting Standard IAS 39 (paragraph 102) and Decrees 2420 and 2496 of 2015 regarding International Financial Reporting Standards (IFRS). The decision seeks to reduce the volatility within the nonoperational results of the company due to the effects of fluctuations in foreign exchange rates.
The net investment hedge will apply to a portion of the foreign currency investments that the Company owns and whose functional currency is the U.S. dollar, with the hedging instrument being the portion of our dollar denominated debt that generated a net liability position by the end of May.
As from the adoption of net investment hedge accounting, the effect of fluctuations in the foreign exchange rate on the hedged instrument will be recognized as Other Comprehensive Income (OCI) in Equity, where currently the foreign exchange effect on subsidiaries which have the U.S. dollar as their functional currency is recorded when accounted under the equity method. This policy is subject to a test of effectiveness and the ineffective portion will be recognized in profit or loss.
The amounts recognized in OCI will be taken into profit and loss only if and at such time the investments designated for purposes of the net investment hedge are sold. In the meantime such fluctuations will remain in Equity, even after debt payments are made.
The net investment hedge will be applied prospectively from June 7, 2016. This accounting change will be treated alike for both Colombian IFRS and IFRS as issued by the IASB.
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