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Accounting policies
385
24. Derivatives and hedging
Derivative financial instruments are initially recognised, and subsequently
measured, at fair value. The Group’s approach to determining the fair
value of financial instruments is set out in the section of Critical
accounting policies and key sources of estimation uncertainty entitled
Fair value - financial instruments; further details are given in Note 11.
A derivative embedded in a contract is accounted for as a stand-alone
derivative if its economic characteristics are not closely related to the
economic characteristics of the host contract; unless the entire contract is
measured at fair value with changes in fair value recognised in profit or
loss.
Gains and losses arising from changes in the fair value of derivatives that
are not the hedging instrument in a qualifying hedge are recognised as
they arise in profit or loss. Gains and losses are recorded in Income from
trading activities except for gains and losses on those derivatives that are
managed together with financial instruments designated at fair value;
these gains and losses are included in Other operating income.
The Group enters into three types of hedge relationship: hedges of
changes in the fair value of a recognised asset or liability or firm
commitment (fair value hedges); hedges of the variability in cash flows
from a recognised asset or liability or a highly probable forecast
transaction (cash flow hedges); and hedges of the net investment in a
foreign operation.
Hedge relationships are formally designated and documented at
inception. The documentation identifies the hedged item and the hedging
instrument and details the risk that is being hedged and the way in which
effectiveness will be assessed at inception and during the period of the
hedge. If the hedge is not highly effective in offsetting changes in fair
values or cash flows attributable to the hedged risk, consistent with the
documented risk management strategy, hedge accounting is
discontinued. Hedge accounting is also discontinued if the Group revokes
the designation of a hedge relationship.
Fair value hedge - in a fair value hedge, the gain or loss on the hedging
instrument is recognised in profit or loss. The gain or loss on the hedged
item attributable to the hedged risk is recognised in profit or loss and,
where the hedged item is measured at amortised cost, adjusts the
carrying amount of the hedged item. Hedge accounting is discontinued if
the hedge no longer meets the criteria for hedge accounting; or if the
hedging instrument expires or is sold, terminated or exercised; or if hedge
designation is revoked. If the hedged item is one for which the effective
interest rate method is used, any cumulative adjustment is amortised to
profit or loss over the life of the hedged item using a recalculated
effective interest rate.
Cash flow hedge - in a cash flow hedge, the effective portion of the gain
or loss on the hedging instrument is recognised in other comprehensive
income and the ineffective portion in profit or loss. When the forecast
transaction results in the recognition of a financial asset or financial
liability, the cumulative gain or loss is reclassified from equity to profit or
loss in the same periods in which the hedged forecast cash flows affect
profit or loss. Otherwise the cumulative gain or loss is removed from
equity and recognised in profit or loss at the same time as the hedged
transaction. Hedge accounting is discontinued if the hedge no longer
meets the criteria for hedge accounting; if the hedging instrument expires
or is sold, terminated or exercised; if the forecast transaction is no longer
expected to occur; or if hedge designation is revoked. On the
discontinuance of hedge accounting (except where a forecast transaction
is no longer expected to occur), the cumulative unrealised gain or loss is
reclassified from equity to profit or loss when the hedged cash flows
occur or, if the forecast transaction results in the recognition of a financial
asset or financial liability, when the hedged forecast cash flows affect
profit or loss. Where a forecast transaction is no longer expected to
occur, the cumulative unrealised gain or loss is reclassified from equity to
profit or loss immediately.
Hedge of net investment in a foreign operation - in the hedge of a net
investment in a foreign operation, the portion of foreign exchange
differences arising on the hedging instrument determined to be an
effective hedge is recognised in other comprehensive income. Any
ineffective portion is recognised in profit or loss. Non-derivative financial
liabilities as well as derivatives may be the hedging instrument in a net
investment hedge. On disposal or partial disposal of a foreign operation,
the amount accumulated in equity is reclassified from equity to profit or
loss.
25. Associates and joint ventures
Associates and joint ventures are entities that the Group does not control
but either shares control (joint ventures) or has significant control over its
operating and financial policies (associates). Investments in associates
and interests in joint ventures are recognised using the equity method.
They are stated initially at cost, including attributable goodwill, and
subsequently adjusted for post-acquisition changes in the Group’s share
of net assets.