Cemex 2009 Annual Report Download - page 42

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40
Impairment tests are significantly sensitive, among other factors, to the estimation of future prices of CEMEX’s products, the development of operating
expenses, local and international economic trends in the construction industry, the long-term growth expectations in the different markets, as well as the
discount rates and the growth rates in perpetuity applied. CEMEX uses specific after-tax discount rates for each reporting unit, which are applied to after-
tax cash flows. The amounts of estimated undiscounted future cash flows are significantly sensitive to the growth rate in perpetuity applied. Likewise, the
amounts of discounted estimated future cash flows are significantly sensitive to the weighted average cost of capital (discount rate) applied. The higher the
growth rate in perpetuity applied, the higher the amount obtained of undiscounted future cash flows by reporting unit. Conversely, the higher the discount
rate applied, the lower the amount obtained of discounted estimated future cash flows by reporting unit.
K) Derivative financial instruments (notes 13B, C and D)
In compliance with the guidelines established by its Risk Management Committee, CEMEX uses derivative financial instruments (“derivative instruments”),
in order to change the risk profile associated with changes in interest rates, the exchange rates of debt, or both; as an alternative source of financing, in
connection with CEMEX’s stock option programs, and as hedges of: (i) highly probable forecasted transactions and (ii) CEMEX’s net investments in foreign
subsidiaries.
CEMEX recognizes derivative financial instruments as assets or liabilities in the balance sheet at their estimated fair values, and the changes in such fair
values are recognized in the income statement within “Results from financial instruments” for the period in which they occur, except for hedges of cash
flows and the net investment in foreign subsidiaries. Some derivative instruments have been designated as hedges. The accounting rules applied to specific
derivative instruments are as follows:
a) Changes in the fair value of interest rate swaps to exchange floating rates for fixed rates, designated and that are effective as hedges of the variability
in the cash flows associated with the interest expense of a portion of the debt, are recognized in stockholders’ equity. These effects are reclassified to
earnings as the interest expense of the related debt is accrued.
b) Changes in the fair value of foreign currency forwards, designated as hedges of a portion of CEMEX’s net investment in foreign subsidiaries, whose
functional currency is different from the peso, are recognized in stockholders’ equity, as part of the foreign currency translation result (notes 3D and
17B). The reversal of the cumulative effect in stockholders’ equity to earnings would take place upon disposal of the foreign investment. When the
hedging condition for these instruments is suspended, the subsequent valuation effects are recognized prospectively in the income statement.
c) Changes in the fair value of forward contracts in the Company’s own shares are recognized in the income statement as incurred, including those
contracts designated as hedges of executive stock option programs.
d) Changes in the fair value of foreign currency options and forward contracts, negotiated to hedge an underlying firm commitment, are first recognized
in stockholders’ equity and are subsequently reclassified to earnings starting when the firm commitment takes place and is recognized in the balance
sheet, over the period in which the effects from the hedged item are recognized in the income statement.
e) The valuation effects of interest rate swaps and cross currency swaps (“CCS”) are recognized and presented separately from the related short-term and
long-term debt in the balance sheet; consequently, debt associated with the CCS is presented in the currencies originally negotiated. Accrued interest
generated by interest rate swaps and CCS is recognized as financial expense in the relevant period, adjusting the effective interest rate of the related
debt.
In addition, CEMEX reviews its different contracts to identify the existence of embedded derivatives. Identified embedded derivatives are analyzed to
determine if they need to be separated from the host contract, and recognized in the balance sheet as assets or liabilities, applying the same valuation
rules used with other derivative instruments.
Derivative instruments are negotiated with institutions with significant financial capacity; therefore, CEMEX believes the risk of non-performance of the
obligations agreed to by such counterparties to be minimal. The estimated fair value represents the amount at which a financial asset could be bought
or sold, or a financial liability could be extinguished, between willing parties in an arm’s length transaction. Occasionally, there is a reference market
that provides the estimated fair value; in the absence of such market, such value is determined by the net present value of projected cash flows or
through mathematical valuation models. The estimated fair values of derivative instruments determined by CEMEX and used for valuation, recognition
and disclosure purposes in the financial statements and their notes, are supported as well by the confirmations of these values received from the financial
counterparties, which act as valuation agents in these transactions.
L) Provisions
CEMEX recognizes provisions when it has a legal or constructive obligation resulting from past events, whose resolution would imply cash outflows or the
delivery of other resources owned by the Company.
Restructuring (note 14)
CEMEX recognizes a provision for restructuring costs only when the restructuring plans have been properly finalized and authorized by CEMEX’s management,
and have been communicated to the third parties involved and/or affected by the restructuring prior to the balance sheet date. These provisions may
include costs not associated with CEMEX’s ongoing activities.
Asset retirement obligations (note 14)
CEMEX recognizes a liability for unavoidable obligations, legal or constructive, to restore operating sites upon retirement of long-lived assets at the end
of their useful lives. These liabilities represent the net present value of estimated future cash flows to be incurred in the restoration process, and they
are initially recognized against the related assets’ book value. The increase to the assets’ book value is depreciated during its remaining useful life. The
increase in the liability related to the passage of time is charged to the income statement. Adjustments to the liability for changes in the estimated cash
flows or the estimated disbursement period are recognized against fixed assets, and depreciation is modified prospectively.
Asset retirement obligations are related mainly to future costs of demolition, cleaning and reforestation, so that the sites for the extraction of raw
materials, the maritime terminals and other production sites are left in acceptable condition at the end of their operation.