2007 Annual Report - Sappi

31. Financial Instruments continued
The hedging instrument is recorded at fair value in the balance sheet with changes in fair value recorded through the income
statement. The full fair value method is used to calculate the changes in fair value of the hedging instrument. At maturity of
the FEC the related cash flows will be booked at the spot rate of that day according to IAS 21.
The changes in fair value of the firm commitment are calculated by determining the present value of the future cash flows
and the obtained cash flows in foreign currency is translated into ZAR at the Sappi month-end spot rate.
The value of the firm commitments hedge accounted for was EUR 31.4 million and US$2.7 million(2006: EUR 15.4.7 million,
US$1.1 million). The hedging instrument, i.e. the foreign currency forward exchange contracts, had a negative fair value of
US$3.1 million (2006 postive fair value US$0.3 million). The changes in fair value of the underlying hedged item (the firm
commitments) amounted to a gain of US$3.4 million.
In assessing the effectiveness of the hedge of foreign currency risk Sappi compares the critical terms (expected maturity dates,
underlying foreign currencies and the notional amounts) of the hedging instrument to the hedged item. An assessment is then
performed on a cumulative basis.
6. Fair values
All financial instruments are carried at fair value or amounts that approximate fair value, except the non-current interest-bearing
borrowings at fixed rates of interest. The carrying amounts for cash, cash equivalents, accounts receivable, certain
investments, accounts payable and current portion of interest-bearing borrowings approximate fair value due to the short-term
nature of these instruments. Where these fixed rates of interest have been hedged into variable rates of interest and
fair value hedge accounting has been applied, then the non-current interest-bearing borrowings are carried at fair value
calculated by discounting all future cash flows at market data valid at closing date. The same data is used to value the related
hedging instrument.
No financial assets were carried at an amount in excess of fair value.
Direct and incremental transaction costs are included in the initial fair value of financial assets and financial liabilities, other
than those at fair value through profit or loss. The best evidence of the fair value of a financial asset or financial liability at initial
recognition is the transaction price, unless the fair value of the instrument is evidenced by comparison with other current
observable market transactions. Where market prices or rates are available, such market data is used to determine the fair
value of financial assets and financial liabilities.
If quoted market prices are unavailable, the fair value of financial assets and financial liabilities is calculated using pricing
models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows
are based on management’s best estimates and the discount rate used is a market-related rate at the balance sheet date
for an instrument with similar terms and conditions. Where pricing models are used market-related inputs are used to measure
fair value at the balance sheet date.
Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot
be reliably measured, and derivatives that are linked to and have to be settled by delivery of such unquoted equity instruments,
are not measured at fair value but at cost.
Fair values of foreign exchange and interest rate derivatives are calculated by using recognised treasury tools which use
discounted cash flow techniques based on effective market data valid at closing date.
The fair value of loan commitments are based on the commitment fees paid.
sappi limited | 07 | annual report 151