NATS-Annual-Report-2015

Annual Report and Accounts 2015 | NATS Holdings Limited
Financial Statements 99
Notes forming part of the
consolidated accounts
(continued)
Equity
Equity instruments are also classified according to the
substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual
interest in the assets of the group after deducting all of
its liabilities. Equity instruments issued by the group are
recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedging activities
The group’s activities expose it primarily to the financial
risks of changes in interest rates, inflation and foreign
currency exchange rates. The group uses interest rate and
index-linked swap contracts and forward foreign exchange
contracts to hedge these exposures. These are disclosed in
notes 18 and 19 to the accounts.
Under IFRS derivatives are initially recognised at fair value
on the date a derivative contract is entered into and are
subsequently measured at their fair value. The method of
recognising the resulting gain or loss depends on whether
the derivative is designated as a hedging instrument, and if
so, the nature of the item being hedged.
The use of financial derivatives is governed by the group’s
policies approved by the Board of directors, which provides
written principles on the use of financial derivatives. The
group documents at the inception of the transaction
the relationship between hedging instruments and the
hedged items, as well as its risk management objectives
and strategy for undertaking various hedge transactions.
The group also documents its assessment, both at
hedge inception and on an ongoing basis, of whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items.
Changes in the fair value of derivative financial instruments
that are designated and effective as hedges of future cash
flows are recognised directly in equity and the ineffective
portion is recognised immediately in the income statement.
If a hedge of a forecast transaction subsequently results
in the recognition of a financial asset or a financial liability,
the associated gains or losses that were recognised directly
in equity are reclassified into the income statement in the
same period or periods during which the asset acquired
or liability assumed affects profit or loss. For hedges that
do not result in the recognition of an asset or a liability,
amounts deferred in equity are recycled to the income
statement in the same period in which the hedged item
affects the income statement.
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in
the income statement as they arise.
Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated, or exercised, or
no longer qualifies for hedge accounting. At that time,
any cumulative gain or loss on the hedging instrument
recognised in equity is retained in equity until the forecast
transaction occurs. If a hedging transaction is no longer
expected to occur, the net cumulative gain or loss
recognised in equity is transferred to net income or expense
for the period.
Derivatives embedded in other financial instruments or
other host contracts are treated as separate derivatives
when their risks and characteristics are not closely related
to those of host contracts and the host contracts are not
carried at fair value with unrealised gains or losses reported
in the income statement.
Financial
Statements