Virgin Media 2009 Annual Report Download - page 176

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 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 accrue 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 and purchase of fixed
assets incurred in the normal course of business.
Our objective in managing our 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 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 in accordance with the Derivatives and Hedging Topic of
the FASB ASC we are required to document in advance the relationship between the item being
hedged and the hedging instrument. We are also required to demonstrate that the hedge will be highly
effective on an ongoing basis. This effectiveness testing is performed and documented at each period
end to ensure that the hedge remains highly effective.
We recognize all 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 accumulated other comprehensive income or loss. Amounts recorded in
accumulated other comprehensive income or loss are reclassified to the statement of operations in the
same period as the corresponding impact on earnings from the underlying hedged transaction. Changes
in fair value of any instrument not designated as an accounting hedge or considered to be ineffective as
an accounting hedge are reported in earnings immediately.
Where an accounting 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 an instrument designated as an
accounting hedge 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.
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