Nokia 2014 Annual Report Download - page 138

136 NOKIA IN 2014
For qualifying foreign exchange forwards, the change in fair value that
reects the change in spot exchange rates and, for qualifying foreign
exchange options or option strategies, the change in intrinsic value are
deferred in fair value and other reserves in the consolidated statement
of shareholders’ equity to the extent that the hedge is eective. The
ineective portion is recognized immediately in the consolidated
income statement. Hedging costs, either expressed as the change in
fair value that reects the change in forward exchange rates less the
change in spot exchange rates for forward foreign exchange contracts,
or as changes in the time value for options or options strategies,
are recognized in other income or expenses in the consolidated
income statement.
Accumulated changes in fair value from qualifying hedges are released
from fair value and other reserves into the consolidated income
statement as adjustments to sales and cost of sales when the hedged
cash ow aects the consolidated income statement. Forecast
foreign currency sales and purchases aect the consolidated income
statement at various dates up to approximately one year from the
consolidated statement of nancial position date. If the forecasted
transaction is no longer expected to take place, all deferred gains
or losses are released immediately into the consolidated income
statement. If the hedged item ceases to be highly probable but
is still expected to take place, accumulated gains and losses remain in
fair value and other reserves until the hedged cash ow aects the
consolidated income statement.
Cash ow hedges: hedging of foreign currency risk of highly
probable business acquisitions and other transactions
From time to time, the Group hedges cash ow variability caused by
foreign currency risk inherent in highly probable business acquisitions
and other future transactions that result in the recognition of
non-nancial assets. When those non-nancial assets are recognized
in the consolidated statement of nancial position, the gains and
losses previously deferred in fair value and other reserves are
transferred to the initial acquisition cost of the asset. The deferred
amounts are ultimately recognized in the consolidated income
statement as a result of goodwill assessments for business
acquisitions and through depreciation or amortization for other
assets. The application of hedge accounting is conditional on the
forecast transaction being highly probable and the hedge being highly
eective, prospectively and retrospectively.
Cash ow hedges: hedging of cash ow variability on variable rate
liabilities
The Group applies cash ow hedge accounting for hedging cash ow
variability on certain variable rate liabilities. The eective portion of
the gain or loss relating to interest rate swaps hedging variable rate
borrowings is deferred in fair value and other reserves. The gain or loss
related to the ineective portion is recognized immediately in the
consolidated income statement. If hedging instruments are settled
before the maturity date of the related liability, hedge accounting is
discontinued and all cumulative gains and losses recycled gradually to
the consolidated income statement when the hedged variable interest
cash ows aect the consolidated income statement.
Fair value hedges
The Group applies fair value hedge accounting to reduce exposure to
fair value uctuations 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 hedged liabilities attributable to
the hedged risk, are recognized in nancial income and expenses. If
the hedged item 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 eective are
recognized in nancial income and expenses based on the eective
interest method.
Hedges of net investments in foreign operations
The Group applies hedge accounting for its foreign currency hedging
on net investments. Qualifying hedges are those properly
documented hedges of foreign exchange rate risk of foreign currency
denominated net investments that are eective both prospectively
and retrospectively.
The change in fair value that reects the change in spot exchange
rates for qualifying foreign exchange forwards, and the change in
intrinsic value for qualifying foreign exchange options, are deferred
in translation dierences in the consolidated statement of
shareholder’s equity. The change in fair value that reects the change
in forward exchange rates less the change in spot exchange rates for
forwards, and changes in time value for options are recognized in
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 dierences. The
ineective portion is recognized immediately in the consolidated
income statement.
Accumulated changes in fair value from qualifying hedges are released
from translation di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
changes in the fair value of qualifying hedges deferred in translation
dierences is recognized as income or expense when the gain or loss
on disposal is recognized.
Provisions
Provisions are recognized when the Group has a present legal or
constructive obligation as a result of past events, it is probable that an
outow of resources will be required to settle the obligation and a
reliable estimate of the amount can be made. When the Group expects
a provision to be reimbursed, the reimbursement is recognized as an
asset only when the reimbursement is virtually certain. The Group
assesses the adequacy of its existing provisions and adjusts the
amounts as necessary based on actual experience and changes in
facts and circumstances at each statement of nancial position date.
Restructuring provisions
The Group provides for the estimated cost to restructure when a
detailed formal plan of restructuring has been completed, approved by
management, and been announced. Restructuring costs consist
primarily of personnel restructuring charges. The other main
components are costs associated with the closure of manufacturing
sites and exiting real estate locations, and divestment-related charges.
Warranty provisions
The Group provides for the estimated liability to repair or replace
products under warranty at the time revenue is recognized. The
provision is an estimate based on historical experience of the level
of repairs and replacements.
Project loss provisions
The Group provides for onerous contracts based on the lower of the
expected cost of fullling the contract and the expected cost of
terminating the contract.
Notes to consolidated nancial statements continued