Marks and Spencer 2016 Annual Report Download - page 95

93
ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
OUR BUSINESSOUR PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
1 ACCOUNTING POLICIES CONTINUED
Financial instruments continued
D. Bank borrowings: Interest-bearing bank loans and overdrafts are
initially recorded at fair value, which equals the proceeds received,
net of direct issue costs. They are subsequently held at amortised
cost. Finance charges, including premiums payable on settlement
or redemption and direct issue costs, are accounted for using an
e ective 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 initially measured at fair value
net of direct issue costs and are subsequently held at amortised
cost unless the loan is designated in a hedge relationship, in which
case hedge accounting treatment will apply.
F. Trade payables: Trade payables are recorded initially at fair value
and subsequently measured at amortised cost. Generally this
results in their recognition at their nominal value.
G. Equity instruments: Equity instruments issued by the Company
are recorded at the consideration received, net of direct issue costs.
Derivative fi nancial instruments and hedging activities
The Group primarily uses interest rate swaps, cross currency swaps
and forward foreign currency contracts to manage its exposures
to fl uctuations in interest rates 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 end of
the reporting period. 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 certain hedging derivatives as either:
> A hedge of a highly probable forecast transaction or change in
the cash fl ows of a recognised asset or liability (a cash fl ow hedge);
> 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).
At the inception of a hedging relationship the hedging instrument
and the hedged item are documented, along with the risk
management objectives and strategy for undertaking various
hedge transactions, and prospective e ectiveness testing is
performed. During the life of the hedging relationship, prospective
and retrospective e ectiveness testing is performed to ensure
the instrument remains an e ective hedge of the transaction.
Changes in the fair value of derivative fi nancial instruments that
do not qualify for hedge accounting are recognised in the income
statement as they arise.
A. Cash fl ow hedges: Changes in the fair value of derivative
fi nancial instruments that are designated and e ective as hedges of
future cash fl ows are recognised in other comprehensive income in
the hedging reserve and any ine ective portion is recognised
immediately in the income statement. If the fi rm commitment or
forecast transaction that is the subject of a cash fl ow hedge results
in the recognition of a non-fi nancial asset or 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
comprehensive income 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 comprehensive income are recognised
in the income statement in the same period in which the hedged
items a ect net profi t or loss.
B. Fair value hedges: Changes in the fair value of a derivative
instrument designated in a fair value hedge, or for non-derivatives
the foreign currency component of carrying value, are recognised in
the income statement. The hedged item is adjusted for changes in
fair value attributable to the risk being hedged with the
corresponding entry in the income statement.
C. Net investment hedges: Changes in the fair value of derivative or
non-derivative fi nancial instruments that are designated and
e ective as hedges of net investments are recognised in other
comprehensive income in the hedging reserve and any ine ective
portion is recognised immediately in the income statement.
Changes in the fair value of derivative fi nancial instruments that
do not qualify for hedge accounting are recognised in the income
statement as they arise.
D. Dis co nti nua nce o f h edge accountin g : Hedge accounting is
discontinued when the hedging instrument expires or is sold,
terminated, or exercised, the hedge relationship no longer
qualifi es for hedge accounting, the forecast transaction is no
longer expected to occur or the Group de-designates the
hedge relationship.
When a cash fl ow hedge is discontinued, any cumulative gain or loss
on the hedging instrument recognised in comprehensive income is
retained in equity until the forecast transaction occurs. Subsequent
changes in the fair value of the hedging instruments when the
forecast transaction is no longer highly probable but is still
expected to occur, are recognised in the income statement.
If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognised in comprehensive income is
transferred to the income statement for the period.
When a fair value hedge is discontinued, the fair value adjustment to
the carrying amount of the hedged item arising from the hedged
risk is amortised to the income statement from that date.
When a net investment hedge is discontinued, the subsequent
changes in fair value of a derivative (or foreign exchange gains/
losses on recognised fi nancial liabilities) are recognised in the
income statement. The gain or loss on the hedging instrument
recognised in other comprehensive income is reclassifi ed to the
income statement only on disposal of the net investment.
The Group does not use derivatives to hedge income statement
translation exposures.
Embedded derivatives
Derivatives embedded in other fi nancial instruments or other host
contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of the host contracts
and the host contracts are not carried at fair value, with unrealised
gains or losses reported in the income statement. Embedded
derivatives are carried in the statement of fi nancial position at fair
value from the inception of the host contract.
Changes in fair value are recognised within the income statement
during the period in which they arise.