Nokia 2010 Annual Report Download - page 205

1. Accounting principles (Continued)
Embedded derivatives are identified and monitored by the Group and fair valued at each balance
sheet date. In assessing the fair value of embedded derivatives, the Group employs a variety of
methods including option pricing models and discounted cash flow analysis using assumptions that
are based on market conditions existing at each balance sheet date. Changes in fair value are
recognized in the income statement.
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. 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 income statement as financial income and expenses. Hedging costs,
expressed either 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 changes in fair value from qualifying hedges are released from shareholders’ equity into
the income statement as adjustments to sales and cost of sales, in the period when the hedged cash
flow affects the income statement. If the hedged cash flow is no longer expected to take place, all
deferred gains or losses are released immediately into the income statement 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 income
statement.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting
under IAS 39 are recognized immediately in the income statement. The changes in fair value of
derivative instruments that directly relate to normal business operations are recognized within other
operating income and expenses. The changes in fair value from all other derivative instruments are
recognized in financial income and expenses.
Cash flow hedges: Hedging of foreign currency risk of highly probable business acquisitions and other
transactions
The Group hedges the cash flow variability due to foreign currency risk inherent in highly probable
business acquisitions and other future transactions that result in the recognition of nonfinancial
assets. When those nonfinancial assets are recognized in the statement of financial position, the
gains and losses previously deferred in equity are transferred from equity and included in the initial
acquisition cost of the asset. The deferred amounts are ultimately recognized in the profit and loss as
a result of goodwill assessments in case of business acquisitions and through depreciation in the case
F17
Notes to the Consolidated Financial Statements (Continued)