Annual Report 2010 - SBM Offshore

18. Derivative financial instruments
For a description of the financial risk management
objectives and policies, reference is made to note 28 -
Financial Risk Management.
At 31 December 2010, the Company held several
forward exchange contracts designated as hedges of
expected future transactions for which the Company
2010 2009 2010 2009 2010 2009
in thousands of US$ Assets Liabilities Net
Interest rate swaps cash flow hedge 31,066 22,294 173,456 123,327 (142,390) (101,033)
Forward currency contracts cash flow
hedge 91,174 37,850 21,847 41,463 69,327 (3,613)
Forward currency contracts fair value
hedge 3,548 895 1,172 5,064 2,376 (4,169)
Forward currency contracts net foreign
investment hedge 352 2,266 352 (2,266)
Commodity swap cash flow hedge 429 67 - 429 67
Total 126,569 61,106 196,475 172,120 (69,906) (111,014)
The ineffective portion recognised in the income statement
(see note 5 - Net financing costs) arises from
cash flow hedges and amounts to US$ 29.3 million
(2009: US$ 3.0 million). There was no ineffectiveness
recognised in the income statement related to foreign
investment hedges (2009: none). The maximum exposure
to credit risk at the reporting date is the fair value
of the derivative assets in the balance sheet.
Forward currency contracts
The notional principal amounts of the outstanding forward
currency contracts at 31 December 2010 were
US$ 3.1 billion (2009: US$ 2.3 billion) of which US$ 2.7
billion will mature in the next 12 months.
Gains and losses recognised in the hedging reserve on
forward currency contracts as of 31 December 2010
are recognised in the income statement in the period
or periods during which the hedged transaction affects
the income statement. This is mainly within 12 months
from the balance sheet date unless the gain or loss is
included in the initial amount recognised in the carrying
Financial Review / Financial Statements 2010
has firm commitments or forecasts. Furthermore, the
Company held several interest rate swap contracts
designated as hedges of variable interest rate bearing
debt.
The fair value of the derivative financial instruments
included in the balance sheet can be summarised as
follows:
amount of fixed assets, in which case recognition is
over the lifetime of the asset, or the gain or loss is
included in the initial amount recognised in the carrying
amount of the cost incurred on construction contracts
in which case recognition is based on the ‘percentageof-completion
method’.
Interest rate swaps
The principal amounts of the outstanding interest rate
swap contracts at 31 December 2010 were US$ 1.8 billion
(2009: US$ 1.6 billion).
The most important floating rate is US$ 3-month
LIBOR. Gains and losses recognised in the hedging
reserve in equity on interest rate swap contracts as of
31 December 2010 will be continuously released to
the income statement until the final repayment of the
bank borrowings (see note 20 - Equity attributable to
shareholders) . Details of interest percentages of the
long-term debt are included in the note 21 - Long-term
loans and other liabilities.
SBM Offshore – Annual Report 2010 155