Form 20-F 2005

3.13. Borrowings
All borrowings are initially recognized at cost, corresponding to the fair value of the consideration received less borrowing costs.
Subsequently, the borrowings are recognized at amortized cost, using the effective interest rate method, the difference between
the cost and the amount of repayment being recognized in the income statement over the term of the borrowing.
The effective interest rate is the rate used to calculate the initial carrying amount of the borrowing by discounting future cash
payments or receipts through its term. The initial carrying amount comprises transaction costs and any issue premiums.
3.14. Derivatives
The Group uses derivatives (interest rate swaps, currency futures, commodity options and swaps and energy purchase and
sale contracts) to hedge its exposure to foreign exchange, interest rate and commodity risk arising from its operating, financing
and investing activities. Derivatives are initially measured at fair value. Changes in fair value are recognized in the income statement
under finance income or costs unless they are designated as hedging instruments. They are in this case measured and recognized
in accordance with the hedge accounting criteria in IAS 39 Financial instruments: recognition and measurement.
Hedge accounting is applicable if:
the hedging relationship is clearly documented at inception; and
the effectiveness of the hedging relationship is demonstrated prospectively and retrospectively at each period-end.
The Group distinguishes between three possible hedging relationships:
cash flow hedge: the change in the value of the effective portion of the derivative is recognized in a separate component of
equity. It is reclassified to profit or loss under a heading corresponding to the hedged item and when the item is recognized
in profit or loss or the Group no longer expects the hedged transaction to be realized. However, the change in value
corresponding to the ineffective portion of the derivative is recognized directly in the income statement. When the expected
transaction gives rise to the recognition of a non-financial asset or liability, the cumulative changes in the fair value of the
hedging instrument previously recognized in equity are included in the initial measurement of the asset or liability;
fair value hedge: the change in the value of the derivative and the hedged item for the portion attributable to the hedged
risk is recognized in profit or loss in the same period;
hedge of a net investment in a foreign entity: it is recognized in the same way as a cash flow hedge. The changes in the
fair value of the hedging instrument are recognized in equity for the effective portion of the hedging relationship, while the
changes in fair value relating to the ineffective portion of the hedge are recognized in profit or loss from financial items. Upon
disposal of the net investment in the foreign entity, all changes in fair value of the hedging instrument previously recognized
in equity are transferred to the other operating income and expenses heading in the income statement.
3.15. Provisions for retirement benefits and similar obligations
The Group’s employees are offered various short-term and post-employment benefits as a result of legislation applicable in
certain countries and contractual agreements entered into by the Group with its employees. These benefits are classified under
defined benefit or defined contribution plans.
(a) Defined contribution plans:
Defined contribution plans involve the payment of contributions to a separate entity, thus releasing the employer from any
subsequent obligation, as the separate entity is responsible for paying the amounts due to the employee. Once the contributions
have been paid, no liability is shown on Rhodia’s Consolidated Financial Statements.
F-20 Form 20 - F 2005 - Rhodia