2006 - TCL Communication Technology Holdings Limited

TCL COMMUNICATION TECHNOLOGY HOLDINGS LIMITED
Notes to Financial Statements
31 December 2006
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative financial instruments and hedging (continued)
Fair value hedges (continued)
For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised
through the income statement over the remaining term to maturity. Any adjustment to the carrying amount of a
hedged financial instrument for which the effective interest method is used is amortised to the income statement.
Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases
to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognised,
the unamortised fair value is recognised immediately in the income statement.
When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the
fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a
corresponding gain or loss recognised in the income statement. The changes in the fair value of the hedging
instrument are also recognised in the income statement.
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the
ineffective portion is recognised immediately in the income statement.
Amounts taken to equity are transferred to the income statement when the hedged transaction affects the income
statement, such as when hedged financial income or financial expense is recognised or when a forecast sale occurs.
Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to equity are
transferred to the income statement in the same period or periods during which the asset acquired or liability
assumed affects the income statement.
If the forecast transaction or firm commitment is no longer expected to occur, the amounts previously recognised in
equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised
without replacement or rollover, or if its designation as a hedge is revoked, the amounts previously recognised in
equity remain in equity until the forecast transaction or firm commitment occurs.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined on weighted average or
standard costing basis and, in the case of work in progress and finished goods, comprises direct materials, direct
labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any
estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and
demand deposits, and short term highly liquid investments which are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value and have a short maturity of generally within three
months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the
Group’s cash management.
For the purpose of the balance sheets, cash and cash equivalents comprise cash on hand and at banks, including
term deposits, and assets similar in nature to cash, which are not restricted as to use.
Annual Report 2006
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