Vtech 2002 Annual Report Download - page 42

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VTech Holdings Ltd40
Principal Accounting Policies
U FINANCIAL INSTRUMENTS
The Group’s activities expose it to financial risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign
exchange forward contracts and interest rate swaps contracts to hedge certain exposures.
The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on
the use of financial derivatives.
Derivative financial instruments are initially recognized in the balance sheet at cost and subsequently are remeasured at their fair value. The
method of recognizing the resulting gain or loss is dependent on the nature of the item being hedged. On the date a derivative contract is
entered into, the Group designates certain derivatives as either a hedge of the fair value of a recognized asset or liability (fair value hedge), a
hedge of a forecasted transaction or of a firm commitment (cash flow hedge), or a hedge of a net investment in a foreign entity.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recorded in the
consolidated income statement, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged
risk.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly effective, are recognized in
hedging reserve. Where the forecasted transaction or firm commitment results in the recognition of an asset or of a liability, the gains and
losses previously deferred in hedging reserve are transferred from hedging reserve and included in the initial measurement of the cost of
the asset or liability. Otherwise, amounts deferred in hedging reserve are transferred to the consolidated income statement and classified as
revenue or expense in the same periods during which the hedged firm commitment or forecasted transaction affects the consolidated
income statement.
If certain derivative transactions, while providing effective economic hedges under the Group’s policies, do not qualify for hedge accounting
under the specific rules in IAS 39, changes in the fair value of these derivative instruments are recognized immediately in the consolidated
income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under IAS 39, any
cumulative gain or loss existing in hedging reserve at that time remains in hedging reserve and is recognized, when the committed or
forecasted transaction ultimately is recognized in the consolidated income statement. However, if a committed or forecasted transaction is
no longer expected to occur, the cumulative gain or loss that was reported in hedging reserve is immediately transferred to the
consolidated income statement.
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as risk
management objective and strategy for undertaking various hedge transactions.
This is a change in accounting policy as in previous years the unrealized gains and losses on forward contracts to hedge specific future
currency transactions were matched against the losses and gains on the specific transactions.
V DIVIDENDS
Dividends proposed or declared after the balance sheet date are not recognized as a liability at the balance sheet date.
W BORROWINGS
Borrowings are recognized at the proceeds received, net of transaction costs incurred.