Nokia 2011 Annual Report Download - page 229

Fair value hedges
The Group applies fair value hedge accounting with the objective to reduce the exposure to
fluctuations in the fair value of interest-bearing liabilities due to changes in interest rates and foreign
exchange rates. Changes in the fair value of derivatives designated and qualifying as fair value
hedges, together with any changes in the fair value of the hedged liabilities attributable to the hedged
risk, are recorded in the income statement within financial income and expenses.
If a hedge no longer meets the criteria for hedge accounting, hedge accounting ceases and any fair
value adjustments made to the carrying amount of the hedged item during the periods the hedge was
effective are amortized to profit or loss based on the effective interest method.
Hedges of net investments in foreign operations
The Group also applies hedge accounting for its foreign currency hedging on net investments.
Qualifying hedges are those properly documented hedges of the foreign exchange rate risk of foreign
currency denominated net investments that meet the requirements set out in IAS 39. The hedge must
be effective both prospectively and retrospectively.
The Group claims hedge accounting with respect to 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
exchange rates is deferred in shareholders’ equity. The change in fair value that reflects the change in
forward exchange rates less the change in spot exchange rates is recognized in the income statement
within financial income and expenses. For qualifying foreign exchange options, the change in intrinsic
value is deferred in shareholders’ equity. Changes in the time value are at all times recognized directly
in the income statement as financial income and expenses. If a foreign currency denominated loan is
used as a hedge, all foreign exchange gains and losses arising from the transaction are recognized in
shareholders’ equity. In all cases, the ineffective portion is recognized immediately in the income
statement as financial income and expenses.
Accumulated changes in fair value from qualifying hedges are released from shareholders’ equity into
the income statement only if the legal entity in the given country is sold, liquidated, repays its share
capital or is abandoned.
Income taxes
The tax expense comprises current tax and deferred tax. Current taxes are based on the results of the
Group companies and are calculated according to local tax rules. Taxes are recognized in the income
statement, except to the extent that it relates to items recognized in the other comprehensive income
or directly in equity, in which case, the tax is recognized in other comprehensive income or equity,
respectively.
Deferred tax assets and liabilities are determined, for all temporary differences arising between tax
bases of assets and liabilities and their carrying amounts in the consolidated financial statements using
liability method. Deferred tax assets are recognized to the extent that it is probable that future taxable
profit will be available against which the unused tax losses or deductible temporary differences can be
utilized. Each reporting period they are assessed for realizability and when circumstances indicate it is
no longer probable that deferred tax assets will be utilized, they are adjusted as necessary. Deferred
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