Cemex 2012 Annual Report Download - page 50

Notes to the
consolidated
financial
statements
50
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Capital leases
Capital leases, in which CEMEX has substantially all risks and rewards associated with the ownership of an asset, are recognized
as financing liabilities against a corresponding fixed asset for the lesser of the market value of the leased asset and the net present
value of future minimum payments, using the contract’s implicit interest rate to the extent available, or the incremental borrowing
cost. Among other elements, the main factors that determine a capital lease are: a) if ownership title of the asset is transferred to
CEMEX at the expiration of the contract; b) if CEMEX has a bargain purchase option to acquire the asset at the end of the lease
term; c) if the lease term covers the majority of the useful life of the asset; and/or d) if the net present value of minimum payments
represents substantially all the fair value of the related asset at the beginning of the lease.
Financial instruments with components of both liability and equity
Based on IAS 32, Financial instruments: presentation (“IAS 32”) and IAS 39, when a financial instrument contains components
of both liability and equity, such as a note that at maturity is convertible into a fixed number of CEMEX’s shares and the
currency in which the instrument is denominated is the same as the functional currency of the issuer, each component is
recognized separately in the balance sheet according to the specific characteristics of each transaction. In the case of instruments
mandatorily convertible into shares of the issuer, the liability component represents the net present value of interest payments
on the principal amount using a market interest rate, without assuming any early conversion, and is recognized within “Other
financial obligations,” whereas the equity component represents the difference between the principal amount and the liability
component, and is recognized within “Other equity reserves” net of commissions. In the case of instruments that are optionally
convertible into a fixed number of shares, the liability component represents the difference between the principal amount and the
fair value of the conversion option premium, which reflects the equity component (note 2P). When the transaction is denominated
in a currency different than the functional currency of the issuer, the conversion option is accounted for as a derivative financial
instrument at fair value in the statements of operations.
Derivative financial instruments
In compliance with the guidelines established by its Risk Management Committee and the restrictions set forth by its debt
agreements, CEMEX uses derivative financial instruments (“derivative instruments”) mainly in order to change the risk profile
associated with changes in interest rates, the exchange rates of debt, or both; as an alternative source of financing, and as hedges
of: (i) highly probable forecasted transactions; (ii) purchases of certain commodities; and (iii) CEMEX’s net investments in foreign
subsidiaries.
CEMEX recognizes all derivative instruments as assets or liabilities in the balance sheet at their estimated fair values, and the
changes in such fair values are recognized in the statements of operations within “Other financial expense, net” for the period
in which they occur, except for changes in fair value of derivative instruments associated with cash flow hedges, in which case,
such changes in fair value are recognized in stockholders’ equity, and are reclassified to earnings as the interest expense of the
related debt is accrued, in the case of interest rate swaps, or when the underlying products are consumed in the case of contracts
on the price of raw materials and commodities. Likewise, in hedges of the net investment in foreign subsidiaries, changes in fair
value are recognized in stockholders’ equity as part of the foreign currency translation result (note 2D), which reversal to earnings
would take place upon disposal of the foreign investment. For the years ended December 31, 2012 and 2011, CEMEX has not
designated any fair value hedges.
Accrued interest generated by interest rate derivative instruments, when applicable, is recognized as financial expense in the
relevant period, adjusting the effective interest rate of the related debt.
CEMEX reviews its different contracts to identify the existence of embedded derivatives. Identified embedded derivatives are
analyzed to determine if they need to be separated from the host contract and recognized in the balance sheet as assets or
liabilities, applying the same valuation rules used for other derivative instruments.
Derivative instruments are negotiated with institutions with significant financial capacity; therefore, CEMEX believes the risk of
non-performance of the obligations agreed to by such counterparties to be minimal. According to IFRS 13, the estimated fair
value represents the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, considering the counterparties’ risk, that is, an exit price. Occasionally,
there is a reference market that provides the estimated fair value; in the absence of such market, such value is determined by the
net present value of projected cash flows or through mathematical valuation models.