2005 Annual report - Virbac

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several strict conditions as regards documentation,
likelihood of implementation, effectiveness of the hedge and
possibility of reliably measuring the effectiveness.
On conclusion of the transaction, the Group documents
the relationship between this hedging instrument and the
underlying transaction, as well as the risks, strategy and aim
of the hedge. This process involves establishing the
relationship with the stipulated assets or liabilities,
commitments or transactions. The Group also documents
its measurement of the effectiveness of the hedge in
offsetting changes in the fair value of the instrument as well
as the item underlying it from the implementation of
the instrument until the maturity of the hedge.
When entering into a derivative contract, the Group
determines the type of the hedge and the classification for
accounting purposes a) as a hedge of the exposure to
changes in the fair value of a recognised asset or liability
(fair value hedge), b) as a hedge of the exposure of cash
flows attributable to a forecast transaction or firm
commitment (cash flow hedge) or c) hedge of a net
investment in a foreign operation.
Hedge accounting ceases to be applied when the hedging
instrument expires or is sold, terminated or exercised, or no
longer qualifies for hedge accounting (effectiveness tests).
❖ Measurement and recognition of derivatives
The Group holds derivatives solely for the purpose of
reducing its exposure to exchange rate and interest rate risks
on the items in its balance sheet, its commitments that are
either firm or highly probable and certain foreign currency
investments in foreign entities. Foreign exchange forwards are
used to hedge the exposure to exchange rate risk. In order to
manage its interest rate risk exposure, the Group has also
implemented an interest-rate swap, the aim of which is to
convert a variable-rate borrowing into a fixed-rate borrowing.
Derivatives are initially recognised in the balance sheet at their
fair value. They are re-measured at each balance sheet date by
reference to their market value. This market value is obtained
by means of internal pricing in the case of foreign exchange
derivatives and from the Group’s bankers in the case of
interest rate derivatives. The recognition of subsequent
changes in value depends on their accounting classification:
- derivative classed as a cash flow hedge (CFH): the portion of
the gain or loss on the hedging instrument that is determined
to be an effective hedge is recognised directly in shareholders’
equity on a specific line, whereas the ineffective portion of the
gain or loss on the hedging instrument is recognised in
income. The gains or losses that are recognised directly in
shareholders’ equity in respect of the effective portion are
transferred to income at the same rate as the hedged item.
In the event of the derecognition of the hedged item, the
gains and losses accumulated in shareholders’ equity are
transferred to income for the period;
- derivative classed as a fair value hedge (FVH): gains or
losses on the derivative are recognised in income in a
symmetrical manner to gains and losses on the hedged risk.
They offset each other up to the amount of the effective
portion of the hedge;
- derivative classed as a net investment hedge (NIH): hedges
of net investments in foreign operations are accounted for
similarly to cash flow hedges. Gains or losses on the
effective portion of the hedge are recognised directly in
shareholders’ equity on a separate line, whereas gains or
losses on the ineffective portion are recognised in income.
Gains and losses accumulated in shareholders’ equity in
respect of the effective portion are transferred to income
upon the disposal of the foreign operation.
- derivative not classed as hedging: due to the constraints
concerning documentation of hedging relationships, the
Group has chosen not to classify certain of its derivatives
as hedges for accounting purposes. In such cases, gains or
losses are recognised directly in income for the period.
❖ Testing effectiveness
◆ Prospective tests
In the case of a hedge of a single asset or liability,
the prospective test involves verifying that the financial
characteristics of the hedged item and the hedging
instrument are identical.
In the event of a hedge of a group of assets or liabilities,
the prospective test involves the drawing up, in accordance
with the type of documentation used, of:
- a maturity analysis of aggregate amounts of variable-rate
liabilities and fixed-rate borrower swaps (CFH),
- a maturity analysis of aggregate amounts of variable-rate
assets and fixed-rate lender swaps (CFH),
- a maturity analysis of aggregate amounts of fixed-rate
liabilities and fixed-rate lender swaps (FVH).
The hedge is recognised if, for each of the maturity bands
of these maturity analyses, the nominal amount of the items
to be hedged exceeds the notional amount of the hedging
derivatives.
◆ Retrospective tests
The retrospective test enables the Group to carry out an
ex-post assessment, at least at each balance sheet date,
of hedge effectiveness. In the case of a cash flow hedge,
the test involves comparing, over the period concerned:
- the change in value of a “hypothetical” swap, such that the
flows of the variable portion are perfectly backed by those
of the hedged liability and the fixed rate is the market rate
prevailing on the date of implementation
of the hedge, and
- the change in the market value of the hedging swap.