| | Derivative financial instruments |
The Company uses derivative financial instruments in order to mitigate against risks related to foreign currency, interest rates and commodity prices. Derivative financial instruments that, although contracted for hedging purposes, do
not
meet all hedge accounting criteria are recognized at fair value in the income statement.
Derivative financial instruments are recognized initially at fair value. Fair value is the amount an asset could be realized and a liability settled, between knowledgeable parties, in an arm’s length transaction. The fair value of derivative financial instruments
may
be obtained from quoted market prices or from pricing models that take into account current market rates, and also credit risk quality of the counterpart.
Subsequent to initial recognition, derivative financial instruments are re-measured to their fair value at the balance sheet date. Changes in fair value of derivative financial instruments are recognized in the income statement, except when they are designated as hedge instruments, when any effective portion of gain or loss is recognized directly in other comprehensive income.
Cash flow, net investment or fair value hedge accounting is applied to all hedges that qualify for hedge accounting under IAS
39,
including the required hedge documentation and hedge effectiveness tests.
Cash flow hedge accounting
When a derivative financial instrument hedges the variability in cash flows of a recognized asset or liability, the foreign currency risk and the fluctuation of commodity prices associated with a highly probable forecasted transaction, the effective portion of any resulting gain or loss on the derivative financial instrument is recognized directly in other comprehensive income (cash flow hedging reserve). The ineffective portion of any resulting gain or loss is recognized in the income statement.
When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss (at that point) remains in other comprehensive income and is reclassified in accordance with the above policy when the hedged transaction occurs. If the hedged transaction is
no
longer probable, the cumulative gain or loss recognized in other comprehensive income is recycled into the income statement immediately.
Fair value hedge accounting
When a derivative financial instrument hedges the variability in fair value of a recognized asset or liability or a firm commitment, any resulting gain or loss on the hedging instrument is recognized in the income statement. The hedged item is also stated at fair value in respect of the risk being hedged, with any gain or loss being recognized in the income statement. The Company does
not
apply the fair value hedge accounting when the hedge item expires, was sold or exercised.
Net investment hedge accounting
When a derivative financial instrument hedges the net investment in foreign operations, the effective part of any resulting gain or loss on the derivative financial instrument is recognized directly in other comprehensive income (translation reserve) , while any gains or losses relating to the ineffective portion are recognized in the income statement
On disposal of a foreign operation, the cumulative gains or losses recognized directly in other comprehensive income is transferred to the income statement.
Derivative financial instruments at fair value through profit or loss
Certain derivative financial instruments do
not
qualify for hedge accounting purposes. Changes in fair value of such derivatives financial instruments are immediately recognized in income statement.
