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35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
hedges of the foreign exchange rate risk of future forecast
foreign currency denominated sales and purchases that meet
the following requirements: the cash fl ow being hedged must
be “highly probable” and must present an exposure to vari-
ations in cash fl ows that could ultimately aff ect profi t or loss,
and the hedge must be highly eff ective both prospectively and
retrospectively.
For qualifying foreign exchange forwards, the change in
fair value that refl ects the change in spot exchange rates is
deferred in fair value and other reserves to the extent that the
hedge is eff ective. For qualifying foreign exchange options, or
option strategies, the change in intrinsic value is deferred in
fair value and other reserves to the extent that the hedge is
eff ective. In all cases, the ineff ective portion is recognized im-
mediately in profi t and loss. Hedging costs, expressed either
as the change in fair value that refl ects the change in forward
exchange rates less the change in spot exchange rates for for-
ward foreign exchange contracts, or change in the time value
for options, or options strategies, are recognized in other
operating income or expenses.
Accumulated changes in fair value from qualifying hedges
are released from fair value and other reserves to profi t
and loss as adjustments to sales and cost of sales when the
hedged cash fl ow aff ects profi t and loss. Forecast foreign
currency sales and purchases aff ect profi t and loss at various
dates up to approximately year from the balance sheet date.
If the hedged cash fl ow is no longer expected to occur, all
deferred gains or losses are released immediately to profi t and
loss. If the hedged cash fl ow ceases to be highly probable, but
is still expected to occur, accumulated gains and losses remain
in equity until the hedged cash fl ow aff ects profi t and loss.
CASH FLOW HEDGES: HEDGING OF FOREIGN CURRENCY RISK
OF HIGHLY PROBABLE BUSINESS ACQUISITIONS AND OTHER
TRANSACTIONS
From time to time the Group hedges the cash fl ow variability
due to foreign currency risk inherent in highly probable busi-
ness acquisitions and other future transactions that result in
the recognition of non-fi nancial assets. When those non-fi nan-
cial assets are recognized in the consolidated statements of
fi nancial position, the gains and losses previously deferred are
transferred from fair value and other reserves and included in
the initial acquisition cost of the asset. The deferred amounts
are ultimately recognized in profi t and loss as a result of good-
will assessments in case of business acquisitions and through
depreciation in case of other assets. In order to apply for
hedge accounting, the forecast transactions must be highly
probable and the hedges must be highly eff ective prospec-
tively and retrospectively.
CASH FLOW HEDGES: HEDGING OF CASH FLOW VARIABILITY
ON VARIABLE RATE LIABILITIES
The Group applies cash fl ow hedge accounting for hedging cash
fl ow variability on certain variable rate liabilities. The eff ective
portion of the gain or loss relating to interest rate swaps hedg-
ing variable rate borrowings is deferred in fair value and other
reserves. The gain or loss related to the ineff ective portion is
recognized immediately in profi t and loss. For hedging instru-
ments closed before the maturity date of the related liability,
hedge accounting will immediately discontinue from that date
onwards, with all the cumulative gains and losses on the hedg-
ing instruments recycled gradually to profi t and loss when the
hedged variable interest cash fl ows aff ect profi t and loss.
FAIR VALUE HEDGES
The Group applies fair value hedge accounting with the objec-
tive to reduce the exposure to fl uctuations 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 attrib-
utable to the hedged risk, are recorded in profi t and loss in
fi nancial 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 while the hedge was
eff ective are amortized to profi t and loss in fi nancial income
and expenses based on the eff ective interest method.
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
The Group also applies hedge accounting for its foreign cur-
rency hedging on net investments. Qualifying hedges are
those properly documented hedges of the foreign exchange
rate risk of foreign currency denominated net investments
that are eff ective both prospectively and retrospectively.
For qualifying foreign exchange forwards, the change in
fair value that refl ects the change in spot exchange rates
is deferred in translation diff erences within consolidated
shareholder’s equity. The change in fair value that refl ects
the change in forward exchange rates less the change in spot
exchange rates is recognized in fi nancial income and expenses.
For qualifying foreign exchange options, the change in intrinsic
value is deferred in translation diff erences within consolidated
shareholder’s equity. Changes in the time value are at all times
recognized directly in profi t and loss as fi nancial 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 translation diff erences within
consolidated shareholder’s equity. In all cases, the ineff ective
portion is recognized immediately in profi t and loss.
Accumulated changes in fair value from qualifying hedges
are released from translation diff erences on the disposal of
all or part of a foreign Group company by sale, liquidation,
repayment of share capital or abandonment. The cumulative
amount or proportionate share of the changes in the fair value
from qualifying hedges deferred in translation diff erences is
recognized as income or as expense when the gain or loss on
disposal is recognized.