Nokia 2007 Annual Report Download - page 159

1. Accounting principles (Continued)
Hedge accounting
Cash flow hedges: Hedging of anticipated foreign currency denominated sales and purchases
The Group applies hedge accounting for ”Qualifying hedges”. Qualifying hedges are those properly
documented cash flow hedges of the foreign exchange rate risk of future anticipated foreign currency
denominated sales and purchases that meet the requirements set out in IAS 39 (R). The cash flow
being hedged must be ”highly probable” and must present an exposure to variations in cash flows
that could ultimately affect profit or loss. The hedge must be highly effective both prospectively and
retrospectively.
The Group claims hedge accounting in respect of certain forward foreign exchange contracts and
options, or option strategies, which have zero net premium or a net premium paid, and where the
critical terms of the bought and sold options within a collar or zero premium structure are the same
and where the nominal amount of the sold option component is no greater than that of the bought
option.
For qualifying foreign exchange forwards the change in fair value that reflects the change in spot
exchange rates is deferred in shareholders’ equity to the extent that the hedge is effective. For
qualifying foreign exchange options, or option strategies, the change in intrinsic value is deferred in
shareholders’ equity to the extent that the hedge is effective. In all cases the ineffective portion is
recognized immediately in the profit and loss account as financial income and expenses. Hedging
costs, either expressed as the change in fair value that reflects the change in forward exchange rates
less the change in spot exchange rates for forward foreign exchange contracts, or changes in the time
value for options, or options strategies, are recognized within other operating income or expenses.
Accumulated fair value changes from qualifying hedges are released from shareholders’ equity into
the profit and loss account as adjustments to sales and cost of sales, in the period when the hedged
cash flow affects the profit and loss account. If the hedged cash flow is no longer expected to take
place, all deferred gains or losses are released immediately into the profit and loss account as
adjustments to sales and cost of sales. If the hedged cash flow ceases to be highly probable, but is
still expected to take place, accumulated gains and losses remain in equity until the hedged cash flow
affects the profit and loss account.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting
under IAS 39 (R) are recognized immediately in the profit and loss account. The fair value changes of
derivative instruments that directly relate to normal business operations are recognized within other
operating income and expenses. The fair value changes from all other derivative instruments are
recognized in financial income and expenses.
Cash flow hedges: Hedging of highly probable business acquisition
The Group hedges the foreign currency risk in highly probable business acquisition transactions,
which creates cash flow variation in the transaction settlement flow and could potentially impact
Group’s profit and loss through goodwill assessment from the Group’s perspective. In order to apply
for hedge accounting, the planned business acquisition must be highly probable and the hedges must
be effective prospectively and retrospectively.
The Group claims hedge accounting in respect of forward foreign exchange contracts, foreign currency
denominated loans, and options, or option strategies, which have zero net premium or a net
premium paid, and where the terms of the bought and sold options within a collar or zero premium
structure are the same.
For qualifying foreign exchange forwards, the change in fair value that reflects the change in spot
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Notes to the Consolidated Financial Statements (Continued)