Hydro Annual Report 2011b

Note 3 - Basis of presentation and measurement of fair value
Basis of presentation
The financial statements have been prepared on a historical cost basis except for certain assets, liabilities and financial
instruments, which are measured at fair value. Preparation of financial statement including note disclosures requires
management to make estimates and assumptions that affect amounts reported. Actual results may differ. See note 4 Critical
accounting judgment and key sources of estimation uncertainty.
Presentation and classification of items in the financial statements is consistent for the periods presented. Gains and losses on
disposal of non-current assets are presented net, as well as expenditures related to provisions that are reimbursed by a third
party. However, insurance compensation is reported on a gross basis.
The functional currency of Norsk Hydro ASA is the Norwegian krone (NOK). The Hydro group accounts are presented in
NOK.
As a result of rounding adjustments, the figures in one or more columns included in the financial statements may not add up to
the total of that column.
Net present value
Interest rates used for calculating net present values are rounded to the nearest 25 basis points.
FINANCIAL STATEMENTS
Note 3 - Basis of presentation and measurement of fair value F15
Measurement of fair value
For both financial statement measurement and note disclosure, fair value is estimated using inputs which are to varying degrees
objectively observable. Certain items are valued on the basis of quoted prices in active markets for identical assets or liabilities,
others are valued on the basis of inputs that are derived from observable prices, while certain positions are valued on the basis of
judgmental assumptions that are to a limited degree or not at all based on observable market data.
Financial instruments
The estimated fair value of Hydro's financial instruments is based on market prices and valuation methodologies. Valuations
are made with the objective to include relevant factors that market participants would consider in setting a price, and to apply
accepted economic and financial methodologies for the pricing of financial instruments. References for less active markets are
carefully reviewed to establish relevant and comparable data. Extrapolations and other accepted valuation techniques are
employed in periods with few or no transactions.
Hydro's credit spread for similar liabilities is used when determining the fair value of financial instruments where Hydro is net
liable. Hydro determines the appropriate discount factor and credit spread for financial assets based on both an individual and
portfolio assessment.
Marketable and non-marketable equity securities
Fair value for listed shares is based on quoted market prices as of the balance sheet date. Fair value for unlisted shares is
calculated based on commonly accepted valuation techniques utilizing significant unobservable data. If fair value cannot be
measured reliably unlisted shares are recognized at cost.
Derivatives
Fair value of financial derivatives, including currency swaps, foreign currency forward contracts and interest rate swaps, is
estimated as the present value of future cash flows, calculated by reference to quoted swap price curves and exchange rates as of
the balance sheet date.
Fair value of commodity derivatives, including futures, forwards and options, is measured as the present value of future cash
flows, calculated using forward curves and exchange rates as of the balance sheet date. Estimates from brokers and extrapolation
techniques are applied for non-quoted periods to achieve the most relevant forward curve. In addition, when deemed
appropriate, correlation techniques between commodities are applied. Options are revalued using appropriate option pricing
models and credit spreads are applied where deemed to be significant.