Nokia 2011 Annual Report Download - page 227

Derivatives not designated in hedge accounting relationships carried at fair value through profit and
loss
Fair values of forward rate agreements, interest rate options, futures contracts and exchange traded
options are calculated based on quoted market rates at each balance sheet date. Discounted cash flow
analyses are used to value interest rate and currency swaps. Changes in the fair value of these
contracts are recognized in the income statement.
Fair values of cash settled equity derivatives are calculated based on quoted market rates at each
balance sheet date. Changes in fair value are recognized in the income statement.
Forward foreign exchange contracts are valued at the market forward exchange rates. Changes in fair
value are measured by comparing these rates with the original contract forward rate. Currency options
are valued at each balance sheet date by using the Garman & Kohlhagen option valuation model.
Changes in the fair value on these instruments are recognized in the income statement.
For the derivatives not designated under hedge accounting but hedging identifiable exposures such as
anticipated foreign currency denominated sales and purchases, the gains and losses are recognized
within other operating income or expenses. The gains and losses on all other hedges not designated
under hedge accounting are recognized under financial income and expenses.
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.
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