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23. FINANCIAL INSTRUMENTS AND RISKS MANAGEMENT
 12 Months Ended
Dec. 31, 2020
Financial Instruments And Risks Management  
FINANCIAL INSTRUMENTS AND RISKS MANAGEMENT
23. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
23.1. Overview

In the ordinary course of business, the Company is exposed to credit, liquidity and market risks, which are actively managed in compliance with the Financial Risk Management Policy (“Risk Policy”) and internal guidelines and strategic documents subject to such policy. The Risk Policy was approved by the Board of Directors on December 17, 2020, is valid for one year and is available at the Company’s website.

 

The Company’s risk management strategy, guided by the Risk Policy, has as main objectives:

 

  » To protect operating and financial results of Company, as well its shareholders’ equity from adverse changes in the market prices, specially commodities, foreign exchange and interests;
  » To protect the Company against counterparty risks in existing financial operations as well as to establish guidelines for sustaining the necessary liquidity to fulfil its financial commitments;
  » To protect the cash of Company against price volatilities, adverse conditions in the markets in which the Company acts and adverse conditions in its production chain.

The Risk Policy defines the governance of the bodies responsible for the execution, tracking and approval of the risk management strategies, as well as the limits and instruments that can be used.

 

23.2. Credit risk management

The Company is exposed to the credit risk related to the financial assets held: trade and non-trade accounts receivable, marketable securities, derivative instruments and cash and equivalents. The Company’s credit risk exposure can be assessed in notes 4, 5, 6 and 23.

 

23.2.1. Credit risk in accounts receivable

 

The credit risk associated with trade accounts receivable is actively managed through specific systems and is supported by internal policies for credit analysis. The significant level of diversification and geographical dispersion of the customer portfolio significantly reduces the risk. However, the Company chooses to complement the risk management by contracting insurance policies for specific markets. The impairment of these financial assets is carried out based on expected credit losses.

 

23.2.2. Counterparty credit risk

 

The credit risk associated with marketable securities, cash and cash equivalents and derivative instruments in general is directed to counterparties with Investment Grade ratings. The maintenance of assets with counterparty risk is constantly assessed according to credit ratings and the Company’s portfolio concentration, aligned with the applicable impairment requisites.

 

On December 31, 2020, the Company held financial investments over R$100,000 at the following financial institutions: Banco Bradesco, Banco BIC, Banco BNP Paribas, Banco do Brasil, Banco BTG Pactual, Banco Itaú, Banco Safra, Banco Santander, Citibank, HSBC, J.P. Morgan Chase Bank, T.Garanti Bankasi A.Ş. and Vakiflar Bankasi.

 

The Company also held derivative contracts with the following financial institutions: Banco Bradesco, Banco Itaú, Banco Santander, Banco Votorantim, Bank of America Merrill Lynch, Banco BNP Paribas, Citibank, Deutsche Bank, ING Bank, J.P. Morgan Chase Bank, Morgan Stanley, Rabobank and XP.

 

23.3. Capital management and liquidity risk

The Company is exposed to liquidity risk as far as it needs cash or other financial assets to settle its obligations in the respective terms. The Company’s cash and liquidity strategy takes into consideration historical volatility scenarios of results as well as simulations of sectorial and systemic crisis. It is grounded on allowing resilience in scenarios of capital restriction.

 

The ideal capital structure definition at BRF is essentially associated with (i) strong cash position as a tolerance factor for liquidity shocks, which includes minimum cash analysis; (ii) net indebtedness; and (iii) maximization of the capital opportunity cost.

 

As a guideline, the gross debt must be concentrated at long-term. On December 31, 2020, the long-term consolidated gross debt represented 93.66% (82.50% as of December 31, 2019) of the total gross indebtedness, which has an average term higher than nine years.

 

The Company monitors the gross debt and net debt as set forth below:

               
  12.31.20   12.31.19
   Current     Non-current     Total     Total 
Foreign currency loans and borrowings (575,147)    (15,163,987)    (15,739,134)   (11,006,524)
Local currency loans and borrowings (484,837)    (6,180,455)    (6,665,292)   (7,613,755)
Derivative financial liabilities  (384,969)   (727)   (385,696)    (153,612)
Gross debt  (1,444,953)    (21,345,169)    (22,790,122)   (18,773,891)
               
Marketable securities and cash and cash equivalents  7,890,783    344,577    8,235,360    4,963,319
Derivative financial assets  377,756   234    377,990   245,315
Restricted cash  1    24,357    24,358   296,294
Net debt          (14,152,414)   (13,268,963)

 

The table below summarizes the significant commitments and contractual obligations that may impact the Company’s liquidity:

   
  12.31.20
  Book
value		   Contractual cash flow   2021   2022   2023   2024   2025   2026 onwards
Non derivative financial liabilities                              
Loans and borrowings  22,404,426    34,310,033    1,731,718    3,405,806    3,491,994    2,668,153    1,418,320    21,594,042
Trade accounts payable  9,009,987    9,098,376    9,084,595    5,499    5,433    2,849   -   -
Supply chain finance  1,452,637    1,474,227    1,474,227   -   -   -   -   -
Lease liabilities  2,536,681    3,277,861   409,409   542,947   448,295   377,710   283,917    1,215,583
Derivative financial liabilities                              
Financial instruments designated as cash flow hedge                              
Currency derivatives 81,650   81,650   81,650   -   -   -   -   -
Commodities derivatives 269,361   269,361   268,634   727   -   -   -   -
Financial instruments not designated as cash flow hedge                              
Interestrate derivatives 14,649   14,649   14,649   -   -   -   -   -
Currency derivatives 20,036   20,036   20,036   -   -   -   -   -

 

The Company does not expect that the cash outflows to fulfill the obligations presented above will be significantly influenced by factors unrelated to its best interests, or substantially modified outside the normal course of business.

 

23.4. Market risk management
23.4.1. Interest rate risk

The interest rate risk may cause economic losses to the Company resulting from volatility in interest rates that affect its assets and liabilities.

 

The Company’s Risk Policy does not restrict exposure to different interest rates, neither establishes limits for fixed or floating rates. However, the Company continually monitors the market interest rates in order to evaluate any need to enter into hedging transactions to protect from the fluctuation of such rates and manage the mismatch between its financial investments and debts.

 

The indebtedness is essentially linked to the fixed coupon (R$, USD, EUR e TRY), Interbank Deposit Certificate (“CDI”), Broad Consumer Price Index (“IPCA”) and London Interbank Offered Rate (“LIBOR”). In situations of adverse market changes that result in an increase in these rates, the cost of floating-rate debt rises and on the other hand, the cost of fixed-rate debt decreases in relative terms.

 

Regarding the marketable securities, the Company holds, mainly, instruments indexed by the CDI for investments in Brazil and fixed coupon in USD for investments in the foreign market.

 

The Company’s exposure to interest rates can be assessed in notes 4, 5 and 14.

 

The derivative financial instruments used to hedge the exposure to interest rates as of December 31, 2020 are presented in the table below:

                           
12.31.20
Derivative instruments not designated   Maturity       Asset   Liability   Notional   Fair value (R$)
Interest rate swap    2nd Qtr. 2021        USD + 2.80% p.a.    CDI + 2.27% p.a.    49,900  USD    (14,649)
                          (14,649)

 

23.4.2. Foreign exchange risk

 

This risk is the one that may cause unexpected losses to the Company resulting from volatility of the FX rates, reducing its assets and revenues or increasing its liabilities and costs. The Company’s exposure is managed in three dimensions: statement of financial position exposure, operating income exposure and investments exposure.

 

  i. Statement of financial position exposure

The Risk Policy regarding statement of financial position exposure has the objective to balance assets and liabilities denominated in foreign currencies, hedging the Company’s statement of financial position by using natural hedges, over-the-counter derivatives and exchange traded futures.

 

Assets and liabilities denominated in foreign currency for which the exchange variations are recognized in the Financial Results are as follows, summarized in Brazilian Reais:

         
    12.31.20   12.31.19 (1)
Cash and cash equivalents    2,855,979    2,591,746
Trade accounts receivable    5,765,753    4,892,708
Trade accounts payable   (859,790)   (601,007)
Loans and borrowings    (14,947,793)    (8,854,826)
Other assets and liabilities, net    225,694   (162,341)
Exposure of assets and liabilities in foreign currencies    (6,960,157)    (2,133,720)
Derivative financial instruments (hedge)    6,849,947    1,734,517
Exposure in result, net   (110,210)   (399,203)

 

  (1) In the consolidated financial statements for the year of 2019, the Company presented the exposure arising from monetary assets and liabilities in foreign entities, for which Real is the functional currency, in a single line item “Investments”. For better management of the foreign exchange exposure, in 2020 the Company begun to break down such exposure, by classifying each asset or liability by its nature. Therefore, the comparative period has been restated for comparability.

 

The net P&L exposure is mainly composed of the following currencies:

 

         
Net P&L Exposure   12.31.20   12.31.19
Argentinian Peso (ARS)   (5,310)   (13,236)
Euros (EUR)    104,539    23,624
Pound Sterling (GBP)    9,394    6,949
Yen (JPY)    29,976   (17,285)
Rubles (RUB)   (1,261)    2,780
Turkish Liras (TRY)    178,906   (418,576)
U.S. Dollars (USD)   (426,454)    16,541
Total   (110,210)   (399,203)

 

The Company has exposure to other different currencies, although they have been grouped in the currencies above due to its high correlation or for not being individually significant.

 

The derivative financial instruments hired to hedge the foreign currency statement of financial position exposure on December 31, 2020 are not designated as hedge accounting and are set forth below:

 

12.31.20
Derivative instruments not designated   Asset   Liability   Maturity   Notional   Exercise rate   Fair value (R$)
Non-deliverable forward    EUR     BRL    1st Qtr. 2021    EUR  265,000   6.2671   32,015
Non-deliverable forward    USD     BRL    1st Qtr. 2021    USD  340,000   5.1077   27,023
Non-deliverable forward    USD     BRL    2nd Qtr. 2021    USD   50,000   5.2800    (4,525)
Futures - B3    BRL     USD    1st Qtr. 2021    USD  553,000   5.1797    (9,086)
Non-deliverable forward    EUR     JPY    1st Qtr. 2021    EUR   19,789   126.3299    704
Non-deliverable forward    USD     EUR    1st Qtr. 2021    EUR   75,000   1.2274    (1,888)
Non-deliverable forward    EUR     RUB    1st Qtr. 2021    EUR   20,836   91.1883   2,655
Collar    TRY     USD    1st Qtr. 2021    USD   50,000   7.8800   8,544
Total                         55,442

 

  ii. Operating income exposure

 

The Risk Policy regarding operating income exposure has the objective to hedge revenues and costs denominated in foreign currencies. The Company is supported by internal models to measure and monitor these risks, and uses financial instruments for hedging, designating the relations as cash flow hedges.

 

The derivative and non-derivative financial instruments designated as cash flow hedges for foreing exchange operating income exposure on December 31, 2020 are set forth below:

 

12.31.20
Cash flow hedge - Derivative instruments   Hedged object   Asset   Liability   Maturity   Notional   Designation rate   Fair value
Non-deliverable forward    USD Exports     BRL     USD    1st Qtr. 2021    USD  241,000   5.4084   53,721
Non-deliverable forward    USD Exports     BRL     USD    2nd Qtr. 2021    USD  25,000   5.6329   10,964
Non-deliverable forward    USD Exports     BRL     USD    3rd Qtr. 2021    USD  5,000   5.8018   2,940
Collar    USD Exports     BRL     USD    1st Qtr. 2021    USD  132,000   4.9158    (33,764)
Collar    USD Exports     BRL     USD    2nd Qtr. 2021    USD  45,000   5.3785   10,110
Collar    USD Exports     BRL     USD    3rd Qtr. 2021    USD  45,000   5.5933   18,967
Collar    USD Exports     BRL     USD    4th Qtr. 2021    USD  10,000   5.7500   5,457
                              68,395
                               
                               
12.31.20
Cash flow hedge - Non-derivative instruments   Hedged object       Liability   Maturity   Notional   Designation rate   Fair value (1)
Bond BRF SA BRFSBZ 5 7/8 (2)    USD Exports         USD    2nd Qtr. 2022    USD  70,928   2.0213    (409,518)
Bond BRF SA BRFSBZ 3.95    USD Exports         USD    2nd Qtr. 2023    USD  150,000   2.0387    (473,700)
                               
                               (883,218)

 

(1) Corresponds to the effective portion of the hedge result accumulated in Other Comprehensive Income.

(2) For this instrument, the initial designation was of USD150,000, however there were repurchases with corresponding revocation of the designation in the amounts of USD31,338 at the rate of 3.2408, USD9,350 at the rate of 4.1827, USD27,190 at the rate of 5.1889 e USD11,194 at the rate of 5.5714. The accumulated exchange rate variation of the revoked portions is fixed and reserved in Other Comprehensive Income until the recognition of the hedge object in the second quarter of 2022.
  iii. Investments exposure

 

The Company holds investments abroad in functional currencies different than the Brazilian Real, which generate currency exposure that affects directly the Company’s Equity, in Other Comprehensive Income.

 

The non-derivative financial instruments designated as net investment hedge instruments on December 31, 2020 are set forth below:

 

                           
12.31.20
Net investment hedge -
Non-derivative instruments		   Object (Investment)   Liability   Maturity   Notional   Rate   Fair value (1)
Bond - BRF SA BRFSBZ 4.35   Federal Foods LLC    USD    3rd Qtr. 2026    USD  75,673   3.7649   (108,991)
Bond - BRF SA BRFSBZ 4.35   BRF Al Yasra Food    USD    3rd Qtr. 2026    USD  108,757   3.7649   (142,280)
Bond - BRF SA BRFSBZ 4.35   Al Khan Foodstuff LLC    USD    3rd Qtr. 2026    USD  65,570   3.7649   (93,403)
                          (344,674)
  (1) Corresponds to the effective portion of the hedge result accumulated in Other Comprehensive Income.
23.4.3. Commodities price risk

 

In the ordinary course of business, the Company purchases commodities, mainly corn, soybean, soybean meal and soybean oil, individual components of the production costs.

 

Corn and soy prices are subject to volatility resulting from weather conditions, harvest productivity, transport and warehouse costs, government agricultural policies, FX rates and international market prices, among other factors.

 

The Risk Policy establishes coverage limits to the flow of purchases of corn and soy with the purpose of reducing the impact due to a price increase of these raw materials. The hedge may be reached using derivatives or by inventory management.

 

The financial instruments designated as cash flow hedges and fair value hedges for the commodities price exposure on December 31, 2020 are set forth below:

 

                           
12.31.20
Cash flow hedge - Derivative instruments   Hedged object   Index   Maturity   Quantity   Exercise rate (USD/Ton)   Fair value
Non-deliverable forward - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    1st Qtr. 2021   5,000  ton    430.69    1,062
Non-deliverable forward - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    2nd Qtr. 2021   80,995  ton    372.18   38,447
Non-deliverable forward - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    3rd Qtr. 2021   128,995  ton    381.44   28,387
Non-deliverable forward - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    4th Qtr. 2021   9,999  ton    390.12   590
Collar - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    1st Qtr. 2021   4,990  ton    465.17   939
Collar - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    2nd Qtr. 2021   9,072  ton    462.42    1,970
Collar - buy    Soybean meal purchase - floating price     Soybean meal - CBOT    4th Qtr. 2021   4,990  ton    402.67   431
Non-deliverable forward - buy    Soybean oil purchase - floating price     Soybean oil - CBOT    2nd Qtr. 2021   19,098  ton    762.42   13,524
Non-deliverable forward - buy    Soybean oil purchase - floating price     Soybean oil - CBOT    3rd Qtr. 2021   18,098  ton    731.37   12,892
Non-deliverable forward - buy    Soybean oil purchase - floating price     Soybean oil - CBOT    4th Qtr. 2021   1,000  ton    825.63   123
Collar - buy    Soybean oil purchase - floating price     Soybean oil - CBOT    3rd Qtr. 2021   2,994  ton    861.57    1,396
Collar - buy    Soybean oil purchase - floating price     Soybean oil - CBOT    4th Qtr. 2021   2,994  ton    858.26    1,376
                          101,137
                           
12.31.20
Fair value hedge - Derivative instruments   Hedged object   Index   Maturity   Quantity   Exercise rate (1)   Fair value
Non-deliverable forward - sell    Soybean purchase - fixed price     Soybean - CBOT    1st Qtr. 2021   26,322  ton    411.58   (9,063)
Non-deliverable forward - sell    Soybean purchase - fixed price     Soybean - CBOT    2nd Qtr. 2021   29,998  ton    399.35   (11,788)
Non-deliverable forward - sell    Soybean purchase - fixed price     Soybean - CBOT    3rd Qtr. 2021   19,999  ton    383.18   (7,955)
Non-deliverable forward - sell    Corn purchase - fixed price     Corn - CBOT    1st Qtr. 2021   16,573  ton    140.98   (3,946)
Non-deliverable forward - sell    Corn purchase - fixed price     Corn - CBOT    2nd Qtr. 2021   743,321  ton    147.47   (148,541)
Non-deliverable forward - sell    Corn purchase - fixed price     Corn - CBOT    3rd Qtr. 2021   239,954  ton    142.95   (39,015)
Non-deliverable forward - sell    Corn purchase - fixed price     Corn - CBOT    4th Qtr. 2021   175,433  ton    146.65   (21,643)
Non-deliverable forward - sell    Corn purchase - fixed price     Corn - CBOT    1st Qtr. 2022   9,998  ton    153.33    (727)
Corn future - sell    Corn purchase - fixed price     Corn - B3    2nd Qtr. 2021   36,801  ton     1,040.42    (479)
Corn future - sell    Corn purchase - fixed price     Corn - B3    3rd Qtr. 2021   95,364  ton    972.98   (1,102)
Corn future - sell    Corn purchase - fixed price     Corn - B3    4th Qtr. 2021   6,480  ton    847.38    (94)
Collar - sell    Corn purchase - fixed price     Corn - B3    3rd Qtr. 2021   9,990  ton     1,104.39    (841)
                          (245,194)

 

(1) Base price of each commodity in USD/ton, except for Corn – B3 denominated in R$/ton.

                               
12.31.20
Fair value hedge -
Derivative instruments		   Protection object   Assets   Liabilities   Maturity   Notional   Exercise rate   Fair value
Non-deliverable forward    Cost in USD     BRL     USD       1st Qtr. 2021     USD  13,170   5.4056    2,939
Non-deliverable forward    Cost in USD     BRL     USD       2nd Qtr. 2021     USD  121,597   5.2471    5,340
Non-deliverable forward    Cost in USD     BRL     USD     3rd Qtr. 2021     USD  41,966   5.5286    12,692
Non-deliverable forward    Cost in USD     BRL     USD       4th Qtr. 2021     USD  25,727   5.4991    5,958
Non-deliverable forward    Cost in USD     BRL     USD       1st Qtr. 2022     USD  1,533   5.4651   234
                               27,163

 

23.5. Effects of hedge instruments on financial information

 

The effects of financial instruments for hedging exchange rate, commodities price and interest rates in the income for the year, in Other Comprehensive Income and in the financial position are set forth below:

 

                     
Income for the year                    
12.31.20   Note   Exposure   Hedge accounting   Foreign Exchange   Commodities   Interest Rate   Total
                             
Net Sales                40,841,803   -   -    40,841,803
Derivatives result        Operating Results     Cash flow    (1,372,103)   -   -    (1,372,103)
Net Revenue   25            39,469,700   -   -    39,469,700
                             
Cost of Sales               -   (29,816,160)   -   (29,816,160)
Derivatives result        Operating Results     Cash flow / Fair value    -   (182,662)   -   (182,662)
Cost of Sales               -   (29,998,822)   -   (29,998,822)
                             
Interests on loans and borrowings               -   -    (1,545,825)    (1,545,825)
Interest Rate Derivatives result        Interest expenses     Cash flow    -   -   (32,909)   (32,909)
Foreign Exchange variation on assets and liabilities               (1,179,236)   -   -    (1,179,236)
Foreign Exchange Derivatives result        Financial Position     Not designated    981,847   -   -   981,847
Effects on Financial Result   27           (197,389)   -    (1,578,734)    (1,776,123)
                             
                     
Other Comprehensive Income                    
12.31.20       Exposure   Hedge accounting   Foreign Exchange   Commodities   Interest Rate   Total
                             
Derivative Instruments - current        Operating Results     Cash flow    (28,893)   211,751   -   182,858
Non-derivative Instruments – non-current        Operating Results     Cash flow    (306,340)   -   -   (306,340)
Non-derivative Instruments - non-current        Foreign investments     Net investment    (277,856)   -   -   (277,856)
Other Comprehensive Income (1)               (613,089)   211,751   -   (401,338)

 

  (1) All effects are presented gross of taxes.
                     
Statement of financial position                    
12.31.20   Note   Exposure   Hedge accounting   Foreign Exchange   Commodities   Interest Rate   Total
                             
Designated derivatives        Operating Results     Cash flow / Fair value    95,558   (144,057)   -   (48,499)
Not designated derivatives        Financial Position     Not designated    55,442   -   (14,649)    40,793
Asset / (Liability) net               151,000   (144,057)   (14,649)   (7,706)
                             
Derivative Instruments - current (2)        Operating Results     Cash flow    47,942   171,306   -   219,248
Non-derivative instruments – non-current        Operating Results     Cash flow    (883,218)   -   -   (883,218)
Non-derivative Instruments - non-current        Foreign investments     Net investment    (344,674)   -   -   (344,674)
Other Comprehensive Income (1)               (1,179,950)   171,306   -    (1,008,644)
                             
Derivatives result        Operating Results     Cash flow / Fair value    -   442,398   -   442,398
Inventories   7           -   442,398   -   442,398

 

(1) All effects are presented gross of taxes.
(2) Includes R$6,251 related to the time value of the foreign exchange option contracts, and R$6,178 related to the time value of the commodity options contracts.
                     
Income for the year                    
12.31.19   Note   Exposure   Hedge accounting   Foreign Exchange   Commodities   Interest Rate   Total
                             
Net Sales                33,465,194   -   -    33,465,194
Derivatives result        Operating Results     Cash flow    (18,214)   -   -   (18,214)
Net Revenue   25            33,446,980   -   -    33,446,980
                             
Cost of Sales               -   (25,339,804)   -   (25,339,804)
Derivatives result        Operating Results     Cash flow / Fair value    -   (30,238)   -   (30,238)
Cost of Sales               -   (25,370,042)   -   (25,370,042)
                             
Interests on loans and borrowings               -   -    (1,516,677)    (1,516,677)
Interest Rate Derivatives result        Interest expenses     Cash flow    -   -    5,173    5,173
Foreign Exchange variation on assets and liabilities               100,480   -   -   100,480
Foreign Exchange Derivatives result        Financial Position     Not designated    (178,523)   -   -   (178,523)
Effects on Financial Result   27           (78,043)   -    (1,511,504)    (1,589,547)
                             
                     
Other Comprehensive Income                    
12.31.19       Exposure   Hedge accounting   Foreign Exchange   Commodities   Interest Rate   Total
                             
Derivative Instruments - current        Operating Results     Cash flow    46,110   (14,056)   -    32,054
Non-derivative Instruments – non-current        Operating Results     Cash flow    23,328   -   -    23,328
Non-derivative Instruments - non-current        Foreign investments     Net investment    (66,818)   -   -   (66,818)
Other Comprehensive Income (1)                2,620   (14,056)   -   (11,436)
                     
Statement of financial position                    
12.31.19   Note   Exposure   Hedge accounting   Foreign Exchange   Commodities   Interest Rate   Total
                             
Designated derivatives        Operating Results     Cash flow / Fair value    93,312   (23,638)   -    69,674
Not designated derivatives        Financial Position     Not designated    22,026   -   -    22,026
Asset / (Liability) net               115,338   (23,638)   -    91,700
                             
Derivative Instruments - current        Operating Results     Cash flow    76,835   (40,445)   -    36,390
Non-derivative Instruments - non-current        Operating Results     Cash flow    (576,877)   -   -   (576,877)
Non-derivative Instruments - non-current        Foreign investments     Net investment    (66,818)   -   -   (66,818)
Other Comprehensive Income (1)               (566,860)   (40,445)   -   (607,305)
                             
Derivatives result        Operating Results     Cash flow / Fair value    -    47,374   -    47,374
Inventories   7           -    47,374   -    47,374

 

  (1) All effects are presented gross of taxes.

 

In the Statement of Cash Flows, the effect of the derivative financial instruments designated as hedge accounting is presented in the line item in which the hedged object is recorded. For the instruments not designated, the effects are presented in the Derivative Financial Instruments line item.

 

Summarized financial position of derivative financial instruments:

     
  12.31.20   12.31.19
Asset      
Designated as hedge accounting      
Currency derivatives 177,208   166,729
Commodities derivatives 125,304    25,191
Not designated as hedge accounting      
Currency derivatives  75,478    53,395
  377,990   245,315
       
Current assets 377,756   195,324
Non-current assets 234    49,991
       
Liabilities      
Designated as hedge accounting      
Currency derivatives (81,650)   (73,417)
Commodities derivatives (269,361)   (48,829)
Not designated as hedge accounting      
Currency derivatives (20,036)   (31,369)
Interest rate derivatives (14,649)   -
  (385,696)   (153,615)
       
Current liabilities (384,969)   (153,612)
Non-current liabilities  (727)   (3)

 

23.6. Sensitivity analysis

 

The Management understands that the most relevant risks that may affect the Company’s results are the volatility of commodities prices and foreign exchange rates. Currently the fluctuation of the interest rates does not affect significantly the Company’s results since Management has chosen to keep at fixed rates a considerable portion of its debts.

 

The amounts below represent the possible impacts (incremental results) of the hedging instruments and their respective hedged positions, considering situations of increase and decrease in the selected risk factors.

 

The information used in the preparation of the analysis is based on the position as of December 31, 2020, which has been described in the items above. The future results may diverge significantly of the estimated values if the reality presents different than the assumptions used. Positive values indicate gains and negative values indicate losses.

 

                             
    Scenario
Exchange rate - Balance   Base   - 50%   - 25%   - 10%   + 10%   + 25%   + 50%
USD   5.1967   2.5984   3.8975   4.6770   5.7164   6.4959   7.7951
                             
Monetary Assets and Liabilities        2,891,741    1,445,871   578,348    (578,348)   (1,445,871)   (2,891,741)
Derivative Instruments - Not designated       (2,678,513)   (1,339,257)    (535,703)   535,703    1,339,257    2,678,513
Net effect       213,228   106,614   42,645   (42,645)    (106,614)    (213,228)
                             
EUR   6.3935   3.1968   4.7951   5.7542   7.0329   7.9919   9.5903
                             
Monetary Assets and Liabilities       684,591   342,295   136,918    (136,918)    (342,295)    (684,591)
Derivative Instruments - Not designated        (736,988)    (368,494)    (147,398)   147,398   368,494   736,988
Net effect       (52,397)   (26,199)   (10,480)   10,480   26,199   52,397
                             
JPY   0.0503   0.0252   0.0377   0.0453   0.0553   0.0629   0.0755
                             
Monetary Assets and Liabilities       (77,886)   (38,943)   (15,577)   15,577   38,943   77,886
Derivative Instruments - Not designated       62,925   31,463   12,585   (12,585)   (31,463)   (62,925)
Net effect       (14,961)   (7,480)   (2,992)   2,992   7,480   14,961
                             
RUB   0.0698   0.0349   0.0524   0.0628   0.0768   0.0873   0.1047
                             
Monetary Assets and Liabilities       (65,717)   (32,858)   (13,143)   13,143   32,858   65,717
Derivative Instruments - Not designated       66,348   33,174   13,270   (13,270)   (33,174)   (66,348)
Net effect       631   316   127    (127)    (316)    (631)
                             
TRY   0.7061   0.3531   0.5296   0.6355   0.7767   0.8826   1.0592
                             
Monetary Assets and Liabilities       51,616   25,808   10,323   (10,323)   (25,808)   (51,616)
Derivative Instruments - Not designated        (141,926)   (70,963)   (28,385)   28,385   70,963   141,926
Net effect       (90,310)   (45,155)   (18,062)   18,062   45,155   90,310
                             
    Scenario
Exchange rate - Operating results   Base   - 50%   - 25%   - 10%   + 10%   + 25%   + 50%
USD   5.1967   2.5984   3.8975   4.6770   5.7164   6.4959   7.7951
                             
Revenue in USD       (1,881,018)    (940,509)    (376,204)   376,204   940,509    1,881,018
NDF       704,153   352,076   140,831    (140,831)    (352,076)    (704,153)
Collar       581,264   279,855   114,019   (94,283)    (260,303)    (561,712)
Loans - Designated       574,048   287,025   114,810    (114,810)    (287,025)    (574,048)
Net effect       (21,553)   (21,553)   (6,544)   26,280   41,105   41,105
                             
    Scenario
Exchange rate - Operating results   Base   - 50%   - 25%   - 10%   + 10%   + 25%   + 50%
USD   5.1967   2.5984   3.8975   4.6770   5.7164   6.4959   7.7951
                             
Cost of Sales        (530,044)    (265,022)    (106,009)   106,009   265,022   530,044
NDF       530,044   265,022   106,009    (106,009)    (265,022)    (530,044)
Net effect        -     -     -     -     -     - 
                             
                             
                             
    Scenario
Operating results - Commodities   Base (1)   - 50%   - 25%   - 10%   + 10%   + 25%   + 50%
Soy Grain - CBOT   475   238   356   428   523   594   713
                             
Cost of Sales       (18,132)   (9,066)   (3,626)   3,626   9,066   18,132
NDF       18,132   9,066   3,626   (3,626)   (9,066)   (18,132)
Net effect        -     -     -     -     -     - 
                             
Soybean Meal - CBOT   430   215   322   387   473   537   645
                             
Cost of Sales       52,458   26,229   10,492   (10,492)   (26,229)   (52,458)
Collar       (3,267)   (1,126)    (97)   753   2,038   4,180
NDF       (48,363)   (24,181)   (9,673)   9,673   24,181   48,363
Net effect       828   922   722    (66)    (10)   85
                             
Soybean Oil - CBOT   770   385   578   693   847   963   1,156
                             
Cost of Sales       17,020   8,510   3,404   (3,404)   (8,510)   (17,020)
Collar       (1,775)    (488)    -    450   1,222   2,509
NDF       (14,714)   (7,357)   (2,943)   2,943   7,357   14,714
Net effect       531   665   461    (11)   69   203
                             
Corn - CBOT   184   92   138   165   202   230   276
                             
Cost of Sales        (108,892)   (54,446)   (21,778)   21,778   54,446   108,892
NDF       108,892   54,446   21,778   (21,778)   (54,446)    (108,892)
Net effect        -     -     -     -     -     - 
                             
Corn - B3   1,199   600   899   1,079   1,319   1,499   1,799
                             
Cost of Sales       (5,990)   (2,995)   (1,198)   1,198   2,995   5,990
Collar       5,143   2,148    -    (1,198)   (2,995)   (5,990)
Net effect        (847)    (847)   (1,198)    -     -     - 

 

  (1) Base price of each commodity in USD/ton, except for Corn – B3 denominated in R$/ton.

 

23.7. Financial instruments by category
   
  12.31.20
  Amortized cost   Fair value through other comprehensive income   Fair value through profit and loss   Total
    Equity instruments   Debt instruments    
Assets                  
Cash and bank  2,439,072   -   -   -    2,439,072
Cash equivalents -   -   -    5,137,553    5,137,553
Marketable securities 287,504    42,029   -    329,202   658,735
Restricted cash  24,358   -   -   -    24,358
Trade accounts receivable  3,789,616   -   -    310,265    4,099,881
Other receivables  86,404   -   -   -    86,404
Derivatives not designated -   -   -    75,478    75,478
Derivatives designated as hedge accounting (1) -   -   -    302,512   302,512
                   
Liabilities                  
Trade accounts payable  (9,009,987)   -   -   -    (9,009,987)
Supply chain finance  (1,452,637)   -   -   -    (1,452,637)
Loans and borrowings (2) (22,404,426)   -   -   -   (22,404,426)
Derivatives not designated -   -   -   (34,685)   (34,685)
Derivatives designated as hedge accounting (1) -   -   -   (351,011)   (351,011)
Written option– business combination -   -   -   (185,401)   (185,401)
  (26,240,096)    42,029   -    5,583,913   (20,614,154)

 

(1) All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.
(2) All loans and borrowings are measured at amortized cost. Those designated as hedge accounting have their gains and losses also affecting shareholders’ equity.
   
  12.31.19
  Amortized cost   Fair value through other comprehensive income   Fair value through profit and loss   Total
    Equity instruments   Debt instruments    
Assets                  
Cash and bank  2,289,787   -   -   -    2,289,787
Cash equivalents -   -   -    1,947,998    1,947,998
Marketable securities 265,783    26,678    19,285    413,788   725,534
Restricted cash 296,294   -   -   -   296,294
Trade accounts receivable  2,811,902   -   -    225,941    3,037,843
Other receivables 123,877   -   -   -   123,877
Derivatives not designated -   -   -    53,395    53,395
Derivatives designated as hedge accounting -   -   -    191,920   191,920
                   
Liabilities                  
Trade accounts payable  (5,796,766)   -   -   -    (5,796,766)
Supply chain finance (842,037)   -   -   -   (842,037)
Loans and borrowings (18,620,279)   -   -   -   (18,620,279)
Derivatives not designated -   -   -   (31,369)   (31,369)
Derivatives designated as hedge accounting -   -   -   (122,246)   (122,246)
Written option– business combination -   -   -   (706,920)   (706,920)
  (19,471,439)    26,678    19,285    1,972,507   (17,452,969)

 

23.8. Fair value of financial instruments

 

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

Depending on the inputs used for measurement, the financial instruments at fair value may be classified into 3 hierarchy levels:

 

  » Level 1 – Uses quoted prices (unadjusted) for identical instruments in active markets. In this category are classified investments in stocks, savings accounts, overnights, term deposits, Financial Treasury Bills (“LFT”) and investment funds;
  » Level 2 – Uses prices quoted in active markets for similar instruments, prices quoted for identical or similar instruments in non-active markets and evaluation models for which inputs are observable. In this level are classified the investments in Bank Deposit Certificates (“CDB”) and derivatives, which are measured by well-known pricing models: discounted cash flows and Black-Scholes. The observable inputs are interest rates and curves, volatility factors and foreign exchange rates;
  » Level 3 – Instruments for which significant inputs are non-observable. The Company has a financial liability arising from a put option written in the context of a business combination.

The table below presents the overall classification of financial instruments measured at fair value by measurement hierarchy. For the year ended on December 31, 2020, there were no changes among the 3 levels of hierarchy.

 

                         
  12.31.20   12.31.19
  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total
Financial Assets                              
Fair value through other comprehensive income                              
Credit linked notes -   -   -   -   19,285    -    -   19,285
Stocks  42,029   -   -    42,029   26,678    -    -   26,678
Fair value through profit and loss                              
Savings account and overnight  1,220,232   -   -    1,220,232   689,874    -    -   689,874
Term deposits 250,189   -   -   250,189   374,859    -    -   374,859
Bank deposit certificates -    3,662,448   -    3,662,448    -   879,758    -   879,758
Financial treasury bills 312,515   -   -   312,515   396,994    -    -   396,994
Investment funds  21,371   -   -    21,371   20,301    -    -   20,301
Trade accounts receivable -   310,265   -   310,265    -   225,941    -   225,941
Derivatives -   377,990   -   377,990    -   245,315    -   245,315
Financial Liabilities                              
Fair value through profit and loss                              
Derivatives -   (385,696)   -   (385,696)    -    (153,615)    -    (153,615)
Written option– business combination -   -   (185,401)   (185,401)    -    -    (706,920)    (706,920)
   1,846,336    3,965,007   (185,401)    5,625,942    1,527,991    1,197,399    (706,920)    2,018,470

 

Except for the items set forth below, the fair value of all other financial instruments is approximate to their book value. The fair value of the bonds set forth below is based in prices observed in active markets, level 1 of the fair value hierarchy, while the debentures are based in level 2 and are measured by discounted cash flows.

                         
            12.31.20   12.31.19
    Currency   Maturity   Book
value		   Fair
value		   Book
value		   Fair
value
BRF S.A.                        
BRF SA BRFSBZ 5 7/8   USD   2022   (367,714)   (389,611)   (435,934)   (460,606)
BRF SA BRFSBZ 4 3/4   USD   2024    (1,538,086)    (1,659,891)    (2,086,169)    (2,191,726)
BRF SA BRFSBZ 3.95   USD   2023    (1,207,468)    (1,275,598)    (1,370,446)    (1,427,754)
BRF SA BRFSBZ 2 3/4   EUR   2022    (1,081,404)    (1,105,478)    (1,492,653)    (1,559,476)
BRF SA BRFSBZ 4 7/8   USD   2030    (3,951,539)    (4,333,054)    (3,022,773)    (3,160,573)
BRF SA BRFSBZ 5 3/4   USD   2050    (4,106,115)    (4,705,851)   -   -
Debenture - 1st Issue   BRL   2026   (771,138)   (778,016)   (755,760)   (832,213)
Debenture - 2nd Issue   BRL   2030    (2,250,867)    (2,225,796)   -   -
BRF GmbH                        
BRF SA BRFSBZ 4.35   USD   2026    (2,577,667)    (2,779,574)    (1,999,509)    (2,101,175)
            (17,851,998)   (19,252,869)   (11,163,244)   (11,733,523)

 

23.8.1. Level 3 measurement

 

The Company holds a financial liability arising from a put option written in the context of a business combination. This option gives the non-controlling shareholder the right to sell its equity stake in the subsidiary for an amount equivalent, in Turkish Liras, to a multiple of the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of the economic group of this subsidiary in the last 12 months prior to the exercise. The exercise period is comprised of the six-month period beginning on May 25, 2021. This liability is measured at the present value of redemption amount using internal assumptions regarding the results of that economic group.

 

The effects of the subsequent measurement resulted in a gain in financial results of R$579,946 in the year ended on December 31, 2020 (loss of R$189,816 in the year ended on December 31, 2019), as per note 27.

 

The Company assessed the unobservable inputs used in the determination of the fair value of this instrument and observed that the premise which causes relevant impact is the expected EBITDA of the economic group object of the option. The other unobservable inputs, e.g. net debt, when submitted to the analysis have not shown relevant impacts on the fair value of the option. Below, 4 scenarios with the correspondent fair value of option are presented:

 

                     
    Scenario
      - 50%   - 25% Base   + 25%   + 50%
Written option (business combination)     (88,528)   (136,965) (185,401)   (233,837)   (282,274)