Hydro Annual Report 2011b

FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and reporting entity F13
and cash flow hedges are recognized in the current period's income statement. For fair value hedges, both the changes in the
fair value of the designated derivative instrument and the changes in the fair value of the hedged item are recognized currently
in earnings.
An embedded derivative is bifurcated and accounted for as a separate financial instrument, provided that the economic
characteristics and risks of the embedded derivative are not closely related to those of the host contract, a separate instrument
with the same terms as the embedded derivative would meet the definition of a derivative, and the host contract is not
accounted for at fair value. Embedded derivatives are classified both in the income statement and on the balance sheet based on
the risks in the derivatives' underlying.
Income taxes, current and deferred
Taxes payable is based on taxable profit for the year which excludes items of income or expense that are taxable or deductible in
other years. Taxable profit also excludes items that are never taxable or deductible. Hydro's liability for current tax is calculated
using tax rates that have been enacted or substantively enacted as of the balance sheet date.
Deferred income tax expense is calculated using the liability method in accordance with IAS 12 Income Taxes. Deferred tax
assets and liabilities are classified as non-current in the balance sheet and are measured based on the difference between the
carrying value of assets and liabilities for financial reporting and their tax basis when such differences are considered temporary
in nature. Temporary differences related to intercompany profits are deferred using the buyer's tax rate. Deferred tax assets are
reviewed for recoverability every balance sheet date, and the amount probable of recovery is recognized.
Deferred income tax expense represents the change in deferred tax asset and liability balances during the year except for the
deferred tax related to items recognized in Other comprehensive income or resulting from a business combination or disposal.
Changes resulting from amendments and revisions in tax laws and tax rates are recognized when the new tax laws or rates
become effective or are substantively enacted. Uncertain tax positions are recognized in the financial statements based on
management's expectations.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current
tax liabilities, when they relate to income taxes levied by the same taxation authority, and when the Group intends to settle its
current tax assets and liabilities on a net basis.
Deferred taxes are not provided on undistributed earnings of subsidiaries when the timing of the reversal of this temporary
difference is controlled by Hydro and is not expected to happen in the foreseeable future. This is applicable for the majority of
Hydro's subsidiaries.
Share-based compensation
Hydro accounts for share-based compensation in accordance with IFRS 2 Share-based Payment. Share-based compensation
expense is measured at fair value over the service period and includes social security taxes that will be paid by Hydro at the
settlement date. All changes in fair value are recognized in the income statement.
Employee benefits and post-employment benefits
Payments to employees, such as wages, salaries, social security contributions, paid annual leave, as well as bonus agreements are
accrued in the period in which the associated services are rendered by the employee.
Post-employment benefits are recognized in accordance with IAS 19 Employee Benefits. The cost of providing pension benefits
under a defined benefit plan is determined separately for each plan using the projected unit credit method. Past service costs are
recognized in the income statement on a straight-line basis over the remaining vesting period. Past service cost related to
benefits that are already vested are recognized immediately. Net cumulative actuarial gains and losses in excess of the greater of
10 percent of the benefit obligation (before deducting plan assets) and 10 percent of the fair value of any plan assets are
recognized in the income statement over the remaining service period of active plan participants. When the number of active
plan participants is negligible as compared to the number of inactive plan participants, then the excess cumulative actuarial gain
(loss) is fully recognized at the beginning of the following year. The funded status of a defined benefit pension plan is measured
as of December 31, and disclosed in note 32 Employee retirement plans.