Virgin Media 2010 Annual Report Download - page 109

VIRGIN MEDIA INC. 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 purchases of fixed assets 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 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 the 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 a gain or loss 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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