LensCrafters 2011 Annual Report Download - page 191

| 115 >CONSOLIDATED FINANCIAL STATEMENTS - NOTES
Derivative financial instruments
Derivative financial instruments are accounted for in accordance with IAS 39 – Financial
Instruments: Recognition and Measurement.
At the date the derivative contract is entered into, derivative instruments are accounted for
at their fair value and, if they are not designated as hedging instruments, any changes in
fair value after initial recognition are recognized as components of net income for the year.
If, on the other hand, derivative instruments meet the requirements for being classified as
hedging instruments, any subsequent changes in fair value are recognized according to
the following criteria, as illustrated below.
The Group designates certain derivatives as instruments for hedging specific risks
associated with highly probable transactions (cash flow hedges).
For each derivative financial instrument designated as a hedging instrument, the Group
documents the relationship between the hedging instrument and the hedged item, as well
as the risk management objectives, the hedging strategy and the methodology to measure
the hedging effectiveness. The hedging effectiveness of the instruments is assessed both
at the hedge inception date and on an ongoing basis. A hedging instrument is considered
highly effective when both at the inception date and during the life of the instrument, any
changes in fair value of the derivative instrument offset the changes in fair value or cash
flows attributable to the hedged items.
If the derivative instruments are eligible for hedge accounting, the following accounting
criteria are applicable:
• Fair value hedge – When a derivative financial instrument is designated as a hedge
of the exposure to changes in fair value of a recognized asset or liability (“hedged
item”), both the changes in fair value of the derivative instrument as well as changes in
the hedged item are recorded in the consolidated statement of income. The gain or
loss related to the ineffective portion of the derivative instrument is recognized in the
consolidated statement of income as Other - net.
• Cash flow hedge – When a derivative financial instrument is designated as a hedge
of the exposure to variability in future cash flows of recognized assets or liabilities or
highly probable forecasted transactions (“cash flow hedge”), the effective portion
of any gain or loss on the derivative financial instrument is recognized directly in
equity. The cumulative gain or loss is removed from equity and recognized in the
consolidated statement of income at the same time as the economic effect arising
from the hedged item affects income. The gain or loss related to the ineffective
portion of the derivative instrument is recognized in the consolidated statement of
income as Other – net. When a forecasted transaction is no longer expected to occur,
the cumulative gain or loss that was reported in equity is immediately transferred to
the consolidated statement of income to Other – net. When a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss existing
in equity at that time remains in equity, and is recognized when the economic
effect arising from the hedged item affects income. The Group utilizes derivative
financial instruments, primarily Interest Rate Swap and Currency Swap contracts, as
part of its risk management policy in order to reduce its exposure to interest rate