Virgin Media 2006 Annual Report Download - page 96

VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Derivative Financial Instruments
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. As certain
portions of our indebtedness accrues interest at variable rates, we are exposed to volatility in future cash flows and earnings associated
with variable interest rate payments. Also, substantially all of our revenue and operating costs are earned and paid in pounds sterling
and, to a lesser extent, U.S. dollars and euros, but we pay interest and principal obligations on some of our indebtedness in U.S. dollars
and euros. As a result, we have exposure to volatility in future cash flows and earnings associated with changes in foreign currency
exchange rates on payments of principal and interest on a portion of our indebtedness. We are also exposed to volatility in future cash
flows and earnings associated with foreign currency payments in relation to operating costs incurred in the normal course of business.
Our objective in managing exposure to fluctuations in interest rates and foreign currency exchange rates is to decrease the
volatility of our earnings and cash flows caused by changes in underlying rates. To achieve this objective, we have entered into
derivative financial instruments. We have established policies and procedures to govern the strategic management of these exposures
through a variety of derivative financial instruments, including interest rate swaps, cross−currency interest rate swaps and foreign
currency forward rate contracts. By policy, we do not enter into derivative financial instruments with a level of complexity or with a
risk that is greater than the exposure to be managed.
In order to qualify for hedge accounting we are required to document in advance the relationship between the item being hedged
and the hedging instrument. We are also required to document the relationship between the hedged item and the hedging instrument
and demonstrate that the hedge will be highly effective on an ongoing basis. This effectiveness testing is performed at each period end
to ensure that the hedge remains highly effective.
In accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), we
recognize derivative financial instruments as either assets or liabilities measured at fair value. Gains and losses resulting from changes
in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
To the extent that the derivative instrument is designated and considered to be effective as a cash flow hedge of an exposure to future
changes in interest rates or foreign currency exchange rates, the change in fair value of the instrument is deferred in other
comprehensive income. Amounts recorded in other comprehensive income are reclassified to the statement of operations to match the
corresponding cash flows on the underlying hedged transaction. Changes in fair value of any instrument not designated as a hedge or
considered to be ineffective as a hedge are reported in earnings immediately.
Where a hedge no longer meets the effectiveness criteria, any gains or losses deferred in equity are only transferred to the
statement of operations when the committed or forecasted transaction is recognized in the statement of operations. However, where we
have applied cash flow hedge accounting for a forecasted or committed transaction that is no longer expected to occur, then the
cumulative gain or loss that has been recorded in equity is recognized immediately as gains or losses on derivative instruments in the
statement of operations. When a hedging instrument expires or is sold, any cumulative gain or loss existing in equity at that time
remains in equity and is recognized when the forecast transaction is ultimately recognized in the statement of operations.
F−16
Source: VIRGIN MEDIA INVESTM, 10−K, March 01, 2007