APC 2010 Annual Report Download - page 167

CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.20 - Share-based payments
The Group grants different types of share-based payments to senior
executives and certain employees. These include:
•Schneider Electric SA stock options;
•stock grants;
•stock appreciation rights, based on the Schneider Electric SA
stock price.
Only plans set up after November7, 2002 that did not vest prior to
January1, 2005 are affected by the application of IFRS2 – Share-
based payments
Pursuant to this standard, these plans are measured on the date
of grant and an employee benefi ts expense is recognised on a
straight-line basis over the vesting period, in general three or four
years depending on the country in which it is granted.
The Group uses the Cox, Ross, Rubinstein binomial model to
measure these plans.
For stock grants and stock options, this expense is offset in the own
share reserve. In the case of stock appreciation rights, a liability is
recorded corresponding to the amount of the benefi t granted, re-
measured at each balance sheet date.
As part of its commitment to employee share ownership, Schneider
Electric gave its employees the opportunity to purchase shares at a
discount (note21.5).
1.21 - Provisions for contingencies and pension
accruals
A provision is recorded when the Group has an obligation to a third
party prior to the balance sheet date, and where the loss or liability is
likely and can be reliably measured. If the loss or liability is not likely
and cannot be reliably estimated, but remains possible, the Group
discloses it as a contingent liability. Provisions are calculated on a
case-by-case or statistical basis and discounted when due in over a
year. The discount rate used for long-term provisions was 2.75% at
December31, 2010 versus 3.6% at December31, 2009.
Provisions are primarily set aside to cover:
•economic risks.
These provisions cover tax risks arising from tax audits performed by
local tax authorities and fi nancial risks arising primarily on guarantees
given to third parties in relation to certain assets and liabilities;
•customer risks.
These provisions are primarily established to covers risks arising
from products sold to third parties. This risk mainly consists of claims
based on alleged product defects and product liability;
•product risks.
These provisions comprise:
•statistical provisions for warranties: the Group funds provisions
on a statistical basis for the residual cost of Schneider Electric
product warranties not covered by insurance.
•provisions to cover disputes concerning defective products and
recalls of clearly identifi ed products;
•environmental risks.
These provisions are primarily funded to cover cleanup costs;
•restructuring costs, when the Group has prepared a detailed
plan for the restructuring and has either announced or started to
implement the plan before the end of the year.
1.22 - Financial liabilities
Financial liabilities primarily comprise bonds and short and long-term
bank borrowings. These liabilities are initially recorded at fair value,
taking into account any direct transaction costs. Subsequently, they
are measured at amortised cost based on their effective interest rate.
1.23 - Financial instruments and derivatives
Risk hedging management is centralised. The Group’s policy is to
use derivative fi nancial instruments exclusively to manage and hedge
changes in exchange rates, interest rates or prices of certain raw
materials. The Group never uses derivative fi nancial instruments
for speculative purposes. The Group accordingly uses instruments
such as swaps, options and futures, depending on the nature of the
exposure to be hedged.
Foreign currency hedges
The Group periodically buys foreign currency derivatives to hedge the
currency risk associated with foreign currency transactions. Some
of these instruments hedge operating receivables and payables
carried in the balance sheets of Group companies. The Group
does not apply hedge accounting to these instruments because
gains and losses on this hedging is immediately recognised. At
year-end, the hedging derivatives are marked to market and foreign
exchange gains or losses are recognised in “Net fi nancial income/
(loss)”, offsetting the gains or losses resulting from the translation
at end-of-year rates of foreign currency payables and receivables,
in accordance with IAS21 – The Effects of Changes in Foreign
Exchange Rates.
The Group also hedges future cash flows, including recurring
future transactions, intra-group foreign currency loans or planned
acquisitions or disposals of investments. In accordance with IAS39,
these are treated as cash fl ow hedges. These hedging instruments
are recognised in the balance sheet and are measured at fair
value at the end of the year. The portion of the gain or loss on the
2010 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC 165