Epson 2015 Annual Report Download - page 61

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60
(D) Offsetting of Financial Assets and Financial Liabilities
Financial assets and financial liabilities are offset and presented as a net amount in the consolidated statement of
financial position only when there is a legally enforceable right to set off the recognised amounts and Epson
intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
(E) Derivatives Accounting
Epson utilizes derivatives, including forward foreign exchange contracts and non-deliverable forwards, to hedge
foreign exchange and interest rate risks. These derivatives are initially measured at fair value when the contract is
entered into, and are subsequently remeasured at fair value.
Changes in fair value of derivatives are recognised as profit or loss in the consolidated statement of comprehensive
income. However, the gains or losses on hedging instruments relating to the effective portion of cash flow hedges
and hedges of net investments in foreign operations are recognised as other comprehensive income in the
consolidated statement of comprehensive income.
(F) Hedge Accounting
At the inception of a hedge, Epson formally designates and documents the hedging relationship to which hedge
accounting is applied and the objectives and strategies of risk management for undertaking the hedge. The
documentation includes identification of hedging instruments, the hedged items or transactions, the nature of the
risks being hedged and how the hedging instrument’ s effectiveness is assessed in offsetting the exposure to changes
in the hedged item’ s fair value or cash flows attributable to the hedged risks. Even though these hedges are
expected to be highly effective in offsetting changes in fair value or cash flows, they are assessed on an ongoing
basis and determined actually to have been highly effective throughout the financial reporting periods for which the
hedges were designated. Hedges that meet the requirements for hedge accounting are classified in the following
categories.
(i) Fair Value Hedge
Changes in fair value of derivatives are recognised as profit or loss in the consolidated statement of
comprehensive income. Regarding changes in fair value of hedged items attributable to the hedged risks, the
carrying amount of the hedged item is adjusted and the change is recognised as profit or loss in the consolidated
statement of comprehensive income.
(ii) Cash Flow Hedge
The effective portion of gains or losses on hedging instruments is recognised as other comprehensive income in
the consolidated statement of comprehensive income, while the ineffective portion is recognised immediately as
profit or loss in the consolidated statement of comprehensive income.
The amounts of hedging instruments recognised in other comprehensive income are reclassified to profit or loss
when the transactions of the hedged items affect profit or loss. In cases where hedged items result in the
recognition of non-financial assets or liabilities, the amounts recognised as other comprehensive income are
accounted for as adjustments to the initial carrying amount of non-financial assets or liabilities.
When forecast transactions or firm commitments are no longer expected to occur, any related cumulative gains or
losses that have been recognised in other components of equity as other comprehensive income are reclassified to
profit or loss. When hedging instruments expire, are sold, terminated or exercised without the replacement or
rollover of other hedging instruments, or when the hedge designation is revoked, amounts that have been
recognised in other components of equity through other comprehensive income continue to be recognised in
other component of equity until the forecast transactions or firm commitments occur.
(iii) Hedge of Net Investment in Foreign Operations
The hedge of net investment in foreign operations is accounted for similarly to a cash flow hedge. The effective
portion of gains or losses on hedging instruments is recognised as other comprehensive income in the
consolidated statement of comprehensive income, while the ineffective portion is recognised as profit or loss in
the consolidated statement of comprehensive income. At the time of the disposal of the foreign operations, any
related cumulative gains or losses that have been recognised in other components of equity as other
comprehensive income are reclassified to profit or loss.
(G) Fair Value of Financial Instruments
Fair value of financial instruments that are traded in active financial markets at the fiscal year end refers to quoted
market prices or dealer quotations.
If there is no active market, fair value of financial instruments is determined using appropriate valuation models.