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The following table shows the changes during the year in the net fair value of embedded derivatives within Level 3 of the fair value hierarchy.
The amount recognized in the income statement for the year relating to Level 3 embedded derivatives still held at December 31, 2009, was a $347 million gain
(2008: $985 million loss relating to embedded derivatives still held at December 31, 2008).
The fair value gain (loss) on embedded derivatives is shown below.
Cash flow hedges
At December 31, 2009, the group held currency forwards and futures contracts and cylinders that were being used to hedge the foreign currency risk of highly
probable forecast transactions, as well as cross-currency interest rate swaps to fix the US dollar interest rate and US dollar redemption value, with matching
critical terms on the currency leg of the swap with the underlying non-US dollar debt issuance. Note 24 outlines the management of risk aspects for currency
and interest rate risk. For cash flow hedges the group only claims hedge accounting for the intrinsic value on the currency with any fair value attributable to
time value taken immediately to the income statement. There were no highly probable transactions for which hedge accounting has been claimed that have not
occurred and no significant element of hedge ineffectiveness requiring recognition in the income statement. For cash flow hedges the pretax amount removed
from equity during the period and included in the income statement is a loss of $366 million (2008: loss of $45 million and 2007: gain of $74 million). Of this,
a loss of $332 million is included in production and manufacturing expenses (2008: $1 million loss and 2007: $143 million gain) and a loss of $34 million is
included in finance costs (2008: $44 million loss and 2007: $69 million loss). The amount removed from equity during the period and included in the carrying
amount of nonfinancial assets was a loss of $136 million (2008: $38 million gain and 2007: $40 million gain).
The amounts retained in equity at December 31, 2009, are expected to mature and affect the income statement by a $146 million gain in 2010, a loss of $26
million in 2011, and a loss of $65 million in 2012 and beyond.
Fair value hedges
At December 31, 2009, the group held interest rate and cross-currency interest rate swap contracts as fair value hedges of the interest rate risk on fixed rate debt
issued by the group. The effectiveness of each hedge relationship is quantitatively assessed and demonstrated to continue to be highly effective. The loss on the
hedging derivative instruments taken to the income statement in 2009 was $98 million (2008: $2 million gain and 2007: $334 million gain) offset by a gain on
the fair value of the finance debt of $117 million (2008: $20 million loss and 2007: $327 million loss).
The interest rate and cross-currency interest rate swaps have an average maturity of four to five years, (2008: three to four years) and are used to convert
sterling, euro, Swiss Franc, Australian dollar, Japanese yen and Hong Kong dollar denominated borrowings into US dollar floating rate debt. Note 24 outlines
the group’s approach to interest rate risk management.
Hedges of net investments in foreign operations
The group held currency swap contacts as a hedge of a long-term investment in a UK subsidiary that expired in 2009. At December 31, 2008, the hedge had a
fair value of $2 million and the loss on the hedge recognized in equity in 2008 was $38 million (2007: $67 million loss). US dollars had been sold forward for
sterling purchased and matched the underlying liability with no significant ineffectiveness reflected in the income statement.
1. What are the principal objectives of IFRS 7?
MULTIPLE-CHOICE QUESTIONS