Marks and Spencer 2007 Annual Report Download - page 60

11 AACCCCOOUUNNTTIINNGG PPOOLLIICCIIEESS continued
Investments in subsidiaries are held at cost less impairment.
Dividends received from the pre-acquisition profits of
subsidiaries are deducted from the cost of investment.
C Classification of financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that
evidences a residual interest in the assets of the Group
after deducting all of its liabilities.
D Bank borrowings
Interest-bearing bank loans and overdrafts are recorded
at the proceeds received, net of direct issue costs. Finance
charges, including premiums payable on settlement or
redemption and direct issue costs, are accounted for on
an effective interest rate method and are added to the
carrying amount of the instrument to the extent that they are
not settled in the period in which they arise.
E Loan notes
Long-term loans are held at amortised cost unless the loan
is hedged by a derivative financial instrument in which case
hedge accounting treatment will apply.
F Trade payables
Trade payables are stated at their nominal value.
G Equity instruments
Equity instruments issued by the Company are recorded at
the proceeds received, net of direct issue costs.
D
Deerriivvaattiivvee ffiinnaanncciiaall iinnssttrruummeennttss aanndd hheeddggiinngg aaccttiivviittiieess
The Group primarily uses interest rate swaps and forward
foreign currency contracts to manage its exposures to fluctuating
interest and foreign exchange rates. These instruments are initially
recognised at fair value on the trade date and are subsequently
remeasured at their fair value at the balance sheet date. The
method of recognising the resulting gain or loss is dependent
on whether the derivative is designated as a hedging instrument
and the nature of the item being hedged. The Group designates
derivatives as either:
• a hedge of a highly probable forecast transaction or change
in the cash flows of a recognised asset or liability (a cash
flow hedge); or
• a hedge of the exposure to change in the fair value of a
recognised asset or liability (a fair value hedge); or
• a hedge of the exposure on the translation of net
investments in foreign entities (a net investment hedge).
Underlying the definition of fair value is the presumption that the
Group is a going concern without any intention of materially
curtailing the scale of its operations.
For those of the Group’s derivative instruments stated at fair
value, the fair value will be determined by the Group applying
discounted cash flow analysis using quoted market rates as an
input into the valuation model.
In determining the fair value of a derivative, the appropriate
quoted market price for an asset held is the bid price, and for
a liability issued is the offer price.
At inception of a hedging relationship, the hedging instrument
and the hedged item are documented and prospective
effectiveness testing is performed. During the life of the hedging
relationship, effectiveness testing is continued to ensure the
instrument remains an effective hedge of the transaction.
In order to qualify for hedge accounting, the following conditions
must be met:
• formal designation and documentation at inception of the
hedging relationship, detailing the risk management objective
and strategy for undertaking the hedge;
• the hedge is expected to be highly effective in achieving
offsetting changes in fair value or cash flows attributable
to the hedged risk;
• for a cash flow hedge, a forecast transaction that is the
subject of the hedge must be highly probable;
• the effectiveness of the hedge can be reliably measured; and
• the hedge is assessed on an ongoing basis and determined
actually to have been highly effective throughout its life.
A Cash flow hedges
Changes in the fair value of derivative financial instruments
that are designated and effective as hedges of future cash
flows are recognised directly in equity and any ineffective
portion is recognised immediately in the income statement.
If the firm commitment or forecasted transaction that is the
subject of a cash flow hedge results in the recognition of an
asset or a liability, then, at the time the asset or liability is
recognised, the associated gains or losses on the derivative
that had previously been recognised in equity are included
in the initial measurement of the asset or liability. For hedges
that do not result in the recognition of an asset or a liability,
amounts deferred in equity are recognised in the income
statement in the same period in which the hedged items
affect net profit or loss.
B Fair value hedges
For an effective hedge of an exposure to changes in the fair
value, the hedged item is adjusted for changes in fair value
attributable to the risk being hedged with the corresponding
entry in profit or loss. Gains or losses from remeasuring
the derivative, or for non-derivatives the foreign currency
component of its carrying amount, are recognised in profit
or loss.
C Net investment hedges
Changes in the fair value of derivative financial instruments
that are designated and effective as hedges of the net
investments are recognised directly in equity and any
ineffective portion is recognised immediately in the
income statement.
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in the
income statement as they arise.
Notes to the financial statements continued
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