Annual Report 2012

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
for the year ended 31 December 2012
3 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(11) Financial Instruments (Continued)
(d) Hedge accounting (Continued)
– Fair value hedges
A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm
commitment, or an identified portion of such an asset, liability or unrecognised firm commitment.
The gain or loss from re-measuring the hedging instrument at fair value is recognised in profit or loss. The gain or loss on the hedged
item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognised in profit or loss.
When a hedging instrument expires or is sold, terminated or exercised, or no longer meets the criteria for hedge accounting, the Group
discontinues prospectively the hedge accounting treatments. If the hedged item is a financial instrument measured at amortised cost, any
adjustment to the carrying amount of the hedged item is amortised to profit or loss from the adjustment date to the maturity date using
the recalculated effective interest rate at the adjustment date.
– Hedge of net investment in foreign operation
A hedge of a net investment in a foreign operation is a hedge of the exposure to foreign exchange risk associated with a net investment
in a foreign operation. The portion of the gain or loss on a hedging instrument that is determined to be an effective hedge is recognised
directly in equity as a separate component until the disposal of the foreign operation, at which time the cumulative gain or loss
recognised directly in equity is recognised in profit or loss. The ineffective portion is recognised immediately in profit or loss.
(e) Convertible bonds
– Convertible bonds that contain an equity component
Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be
issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound
financial instruments which contain both a liability component and an equity component.
At initial recognition, the liability component of the convertible bonds is measured as the present value of the future interest and principal
payments, discounted at the market rate of interest applicable at the time of initial recognition to similar liabilities that do not have a
conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity
component. Transaction costs that relate to the issue of the convertible bonds are allocated to the liability and equity components in
proportion to the allocation of proceeds.
Subsequent to initial recognition, the liability component of a convertible corporate bond is measured at amortised cost using the effective
interest method, unless it is designated at fair value through profit or loss. The equity component of a convertible corporate bond is not
re-measured subsequent to initial recognition.
If the convertible corporate bond is converted, the liability component, together with the equity component, is transferred to share capital
and capital reserve (share premium). If the convertible corporate bond is redeemed, the consideration paid for the redemption, together
with the transaction costs that relate to the redemption, are allocated to the liability and equity components. The difference between the
allocated and carrying amounts is charged to profit or loss if it relates to the liability component or is directly recognised in equity if it
relates to the equity component.
– Other convertible bonds
Convertible bonds issued with a cash settlement option and other embedded derivative features are split into liability and derivative
components.
At initial recognition, the derivative component of the convertible bonds is measured at fair value. Any excess of proceeds over the amount
initially recognised as the derivative component is recognised as the liability component. Transaction costs that relate to the issue of the
convertible bonds are allocated to the liability and derivative components in proportion to the allocation of proceeds. The portion of the
transaction costs relating to the liability component is recognised initially as part of the liability. The portion relating to the derivative
component is recognised immediately as an expense in profit or loss.
The derivative component is subsequently remeasured at each balance sheet date and any gains or losses arising from change in the
fair value are recognised in profit or loss. The liability component is subsequently carried at amortised cost using the effective interest
method until extinguished on conversion or redemption. Both the liability and the related derivative components are presented together
for financial statements reporting purposes.
If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital
and share premium as consideration for the shares issued. If the convertible bonds are redeemed, any difference between the amount
paid and the carrying amount of both components is recognised in profit or loss.
89
CHINA PETROLEUM & CHEMICAL CORPORATION Annual Report 2012
Financial Statements (PRC)