Virgin Media 2012 Annual Report Download - page 166

F-95
Strategies and Objectives for Holding Derivative Instruments
Our operations are materially impacted by changes in interest rates and foreign currency exchange rates. In an effort
to manage these risks, we periodically enter into various derivative instruments including interest rate swaps, cross-
currency interest rate swaps and foreign exchange forward rate contracts. We recognize all derivative instruments as
either assets or liabilities at fair value on our consolidated balance sheets.
We have entered into cross-currency interest rate swaps and foreign currency forward rate contracts to manage interest
rate and foreign exchange rate currency exposures with respect to our U.S. dollar and euro denominated debt
obligations. We have entered into interest rate swaps to manage interest rate exposures resulting from variable rates
of interest we pay on our pounds sterling denominated debt obligations, and we have entered into interest rate swaps
and cross-currency interest rate swaps to hedge the fair values of certain of our U.S. dollar and U.K. pounds sterling
debt obligations. We have also entered into U.S. dollar forward rate contracts to manage our foreign exchange rate
currency exposures related to certain committed and forecasted purchases.
Whenever it is practical to do so, we designate a derivative contract as either a cash flow or fair value hedge for
accounting purposes. These relationships are referred to as “Accounting Hedges” below. When a derivative contract
is not designated as an Accounting Hedge, the derivative is treated as an economic hedge with mark-to-market
movements and realized gains or losses recognized through gains (losses) on derivative instruments in net income in
the consolidated statements of comprehensive income. These derivatives are referred to as “Economic Hedges” below.
We do not enter into derivatives for speculative or trading purposes.
During the years ended December 31, 2012 and 2011, we recognized losses of £21.9 million and £11.1 million on
derivative instruments, respectively, relating to derivative instruments that were not designated or qualifying as a
hedging instrument.
We believe that those relationships designated as Accounting Hedges will be highly effective throughout their term in
offsetting changes in cash flow or fair value attributable to the hedged risk. If we determine it is probable that forecasted
transactions to which a hedge contract relates will not occur, we discontinue hedge accounting prospectively and
immediately reclassify any amounts accumulated in other comprehensive income to net income. We perform, at least
quarterly, both a prospective and retrospective assessment of the effectiveness of our hedge contracts, including
assessing the possibility of counterparty default. If we determine that a hedging relationship is no longer expected to
be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value
of the derivative in gains (losses) on derivative instruments in net income in the consolidated statements of
comprehensive income. As a result of our effectiveness assessment at December 31, 2012, we believe our derivative
contracts that are designated and qualify for hedge accounting will continue to be highly effective in offsetting changes
in cash flow or fair value attributable to the hedged risk.
Our derivative contracts are valued using internal models based on observable inputs, counterparty valuations, or
market transactions in either the listed or over-the-counter markets, adjusted for non-performance risk. Non-
performance is based on quoted credit default swaps for counterparties to the contracts and swaps. These derivative
instruments are classified within level 2 in the fair value hierarchy, because we consider all of the significant inputs are
observable. Derivative instruments which are subject to master netting arrangements are not offset and we have not
provided, nor do we require, cash collateral with any counterparty.
Table of Contents
VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED AND SUBSIDIARIES
VIRGIN MEDIA INVESTMENTS LIMITED AND SUBSIDIARIES
COMBINED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7—Derivative Financial Instruments and Hedging Activities