Vtech 2005 Annual Report Download - page 41

Notes to the Financial Statements
39
VTech Holdings Ltd Annual Report 2005
Principal Accounting Policies (continued)
S Financial Instruments The Group’s activities expose it
to financial risks of changes in foreign currency exchange rates
and interest rates. The Group uses foreign exchange forward
contracts and interest rate swap contracts to hedge certain
exposures.
The use of financial derivatives is governed by the Group’s
policies approved by the Board of Directors, which provide
written principles on the use of financial derivatives.
Derivative financial instruments are initially recognised in the
balance sheet at cost and subsequently are remeasured at their
fair value. The method of recognising the resulting gain or loss is
dependent on the nature of the item being hedged. On the date
a derivative contract is entered into, the Group designates
certain derivatives as either a hedge of the fair value of a
recognised asset or liability (fair value hedge), a hedge of a
forecasted transaction or of a firm commitment (cash flow
hedge), or a hedge of a net investment in a foreign entity.
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges and that are highly effective, are
recorded in the consolidated income statement, along with any
changes in the fair value of the hedged asset or liability that is
attributable to the hedged risk.
Changes in the fair value of derivatives that are designated and
qualify as cash flow hedges and that are highly effective, are
recognised in the hedging reserve. Where the forecasted
transaction or firm commitment results in the recognition of an
asset or of a liability, the gains and losses previously deferred in
hedging reserve are transferred from hedging reserve and
included in the initial measurement of the cost of the asset or
liability. Otherwise, amounts deferred in hedging reserve are
transferred to the consolidated income statement and classified
as revenue or expense in the same periods during which the
hedged firm commitment or forecasted transaction affects the
consolidated income statement.
If certain derivative transactions, while providing effective
economic hedges under the Group’s policies, do not qualify for
hedge accounting under the specific rules in IAS 39, “Financial
Instruments: Recognition and Measurement”, changes in the fair
value of these derivative instruments are recognised
immediately in the consolidated income statement.
When a hedging instrument expires or is sold, or when a hedge
no longer meets the criteria for hedge accounting under IAS 39,
any cumulative gain or loss existing in the hedging reserve at
that time remains in the hedging reserve and is recognised,
when the committed or forecasted transaction ultimately is
recognised in the consolidated income statement. However, if a
committed or forecasted transaction is no longer expected to
occur, the cumulative gain or loss that was reported in the
hedging reserve is immediately transferred to the consolidated
income statement.
The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items,
as well as risk management objective and strategy for
undertaking various hedge transactions.
T Borrowings Borrowings are recognised as the proceeds
are received, net of transaction costs incurred.
U Dividends Dividends proposed or declared after the
balance sheet date are not recognised as a liability at the
balance sheet date.
V Segment Reporting A segment is a distinguishable
component of the Group that is engaged either in providing
products or services (business segment), or in providing
products or services within a particular economic environment
(geographical segment), which is subject to risks and rewards
that are different from those of other segments.