2008 Annual report - Sappi

Notes to the group annual financial statements // continued
for the year ended September 2008
2. Accounting policies (continued)
(v) Derecognition
The group derecognises a financial asset when the rights to
receive cash flows from the asset have expired or have been
transferred and the group has transferred substantially all risks
and rewards of ownership.
A financial liability is derecognised when and only when the
liability is extinguished, i.e. when the obligation specified in the
contract is discharged, cancelled or has expired.
(vi) Impairment of financial assets
• Loans and receivables
An impairment is recognised when there is evidence that the
group will not be able to collect all amounts due according
to the original terms of the receivables. The amount of the
impairment is charged to the income statement.
• Available-for-sale financial assets
When there is objective evidence that an available for sale
financial asset is impaired, the cumulative unrealised gains and
losses previously recognised in equity are removed from equity
and recognised in profit or loss even though the financial asset
has not been derecognised.
If, in a subsequent period, the fair value of a debt instrument
classified as available-for-sale increases due to an objective
event occurring after the impairment loss was recognised in
profit or loss, the impairment loss is reversed in profit or loss
for the period. Impairment losses recognised in profit or loss
for an investment in an equity instrument classified as availablefor-sale
are not reversed through profit or loss.
(vii) Derivatives and hedge accounting
Hedge accounting recognises the offsetting effects on profit or
loss of changes in the fair values of the hedging instrument and
the hedged item.
Hedging relationships are of three types:
• Fair value hedges
If a fair value hedge meets the conditions for hedge accounting,
any gain or loss on the hedged item attributable to the hedged
risk is included in the carrying amount of the hedged item and
recognised in profit or loss. The changes in the fair value of the
hedging instrument and the hedged item is recognised in net
finance costs in profit or loss.
hedging instrument that is determined to be an effective hedge
is recognised directly in shareholders’ equity and the ineffective
portion is recognised in income.
The gains or losses, which are recognised directly in share -
holders’ equity, are transferred to income in the same period in
which the hedged transaction affects income. Any ineffective -
ness related to cash flow hedges is recognised in the profit or
loss for the period.
The group does not currently apply cash flow hedge accounting.
• Hedge of a net investment in a foreign operation
The group does not currently have any hedges of net
investments in foreign operations.
Hedge accounting is discontinued on a prospective basis
when the hedge no longer meets the hedge accounting criteria
(including when it becomes ineffective), when the hedge
instrument is sold, terminated or exercised when, for cash flow
hedges, the designation is revoked and the forecast transaction
is no longer expected to occur. Any cumulative gain or loss on
the hedging instrument for a forecast transaction is retained in
equity until the transaction occurs, unless the transaction is no
longer expected to occur, in which case it is transferred to profit
or loss for the period.
Critical areas of judgement and the use of estimates involving
hedge accounting are included in section 2.3 of the
accounting policies.
(viii) Offsetting financial instruments
and related income
Financial assets and liabilities are offset and the net amount
reported in the balance sheet only when there is a legally
enforceable right to set off and there is an intention of settling
on a net basis or realising the asset and settling the liability
simultaneously. Income and expense items are offset only to
the extent that their related instruments have been offset in the
balance sheet, with the exception of those relating to hedges,
which are disclosed in accordance with the profit or loss effect
of the hedged item.
(ix) Interest income and expense
Interest income and expense are recognised in profit or loss
using the effective interest rate method taking into account the
expected timing and amount of cash flows.
• Cash flow hedges
In relation to cash flow hedges, which meet the conditions
for hedge accounting, the portion of the gain or loss on the
(x) Other
Dividends from investments and gains or losses on the sale of
investments are recognised in profit or loss when the amount
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