Lenovo 2014 Annual Report Download - page 141

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2013/14 Annual Report Lenovo Group Limited
2 Significant accounting policies (continued)
(j) Impairment of financial assets (continued)
(i) Assets carried at amortized cost (continued)
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant
financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter
bankruptcy or other financial reorganization, and where observable data indicate that there is a measurable decrease
in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
For loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows (excluding future credit losses that have not been
incurred) discounted at the financial asset’s original effective interest rate. The asset’s carrying amount is reduced and
the amount of the loss is recognized in the income statement. If a loan or held-to-maturity investment has a variable
interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined
under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair
value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognized (such as improvement in the debtor’s credit rating), the
reversal of the previously recognized impairment loss is recognized in the income statement.
(ii) Assets classified as available-for-sale
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group
of financial assets is impaired.
For debt securities, the Group uses the criteria referred to in (i) above. If, in a subsequent period, the fair value of a
debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss
was recognized in the income statement, the impairment loss is reversed through the income statement.
For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also
evidence that the assets are impaired. If any such evidence exists, the cumulative losses, measured as the difference
between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously
recognized in the income statement, is removed from equity and recognized in the income statement. Impairment
losses recognized in the income statement on equity instruments are not reversed through the income statement.
(k) Derivative financial instruments and hedging activities
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-
measured at their fair values. The method of recognizing the resulting gain or loss depends on whether the derivative
is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain
derivatives as either: (i) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge) or
(ii) hedges of highly probable forecast transactions (cash flow hedges).
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items,
as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the
hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is
less than 12 months. Trading derivatives are classified as a current asset or liability.
(i) Fair value hedge
Changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the
income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to
the hedged risk.
(ii) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow
hedges is recognized as other comprehensive income/expense. The gain or loss relating to the ineffective portion is
recognized immediately in the income statement.