Annual Report 2012 - Indesit

Consolidated financial statements at 31 December 2012 – Notes
11.2 Recognition
of hedge
transactions and
categories of
financial asset/
liability
Hedge accounting
The Group carries out prospective and retrospective tests of the effectiveness of derivatives recognized
for hedge accounting purposes
The prospective effectiveness of a hedge is checked by stress testing, which involves comparing the
changes in its fair value with those of the underlying hedged assets or liabilities. In particular, two
distinct changes (positive and negative) in the market curves are simulated.
The retrospective effectiveness of a hedge is checked, commencing from the date when the
instrument was designated as a hedge, by comparing the cumulative changes in its fair value with
those of the underlying hedged assets or liabilities.
Effectiveness is assured if the relation between the change in the fair value of the hedging
instrument and the change in the fair value of the underlying falls in the range between 80% and
125%.
The Group arranged both fair value hedges and cash flow hedges during 2012. With regard to the
latter, Indesit Company hedges its exposure to changes in cash flows attributable to a specific risk
associated with a recognized asset or liability, as well as a planned transaction that is highly likely to
take place.
The Group regularly checks that hedged future transactions continue to be considered highly likely. No
significant effects were recognised in 2012 due to hedges with notionals in excess of the underlying
flows (overhedges).
The ineffective cash flow hedges identified in 2012 resulted in the recognition of costs totalling
1.2 million euro. With regard to the fair value hedges, the changes in the fair value of derivatives and
the related underlyings are summarized in the table of transactions outstanding at year end.
Fair value
The Group uses the valuation techniques applied in established market practice and internationallyrecognized
software to determine the fair value of derivatives for which there is no active market. These
techniques establish the value that these instruments would have had at the measurement date in an
arms’-length transaction between knowledgeable and willing parties.
The valuation methodologies applied solely refer to market factors, ignoring any factors specific to the
Group, in order to make a reasonable estimate of the market value of the financial instruments.
When determining fair value, the following market factors are considered and identified at the
measurement date: the exchange rates for foreign currencies, the yield curves of government
securities, the prices of goods and their volatility.
The market value obtained by applying these valuation techniques is periodically compared with the
mark-to-market values provided by banking counterparts.
In particular, the fair value of each instrument is calculated as follows:
• the fair value of currency forwards is calculated considering the exchange rate and the interest rates
in the two currencies at the reporting date;
• the fair value of currency options is calculated using the Black-Scholes model and market
parameters at the reporting date (exchange rates, interest rates and volatilities of the currencies);
• the fair value of interest-rate swaps and forward-rate agreements is calculated considering the
interest rates at the reporting date and using DCF techniques;
• the fair value of cross currency swaps is calculated considering the exchange rate and the interest
rates at the reporting date and using DCF techniques;
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