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(c) Liquidity riskPrudent liquidity risk management implies maintaining sufficientcash and marketable securities, the availability of funding throughan adequate level of committed credit facilities and the ability to closeout market positions. Due to the dynamic nature of the underlyingbusinesses, Group Treasury aims to maintain flexibility in fundingby keeping committed credit lines available.Local liquidity is ensured by maintaining local bank credit facilitiesand by funding the excess funding requirements by the Group overlaycash pool.3.2. Accounting for derivative financial instruments andhedging activitiesDerivatives are initially recognised at fair value on the date a derivativecontract is entered into and are subsequently re-measured at their fairvalue. The method of recognising the resulting gain or loss dependson whether the derivative is designated as a hedging instrument, andif so, the nature of the item being hedged. The Group designatescertain derivatives as hedges of highly probable forecast transactions(cash flow hedge).The Group documents at the inception of the transaction therelationship between hedging instruments and hedged items, as wellas its risk management objective and strategy for undertaking varioushedge transactions. The Group also documents its assessment, bothat hedge inception and on an ongoing basis, of whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in cash flows of hedged items.The fair values of various derivative instruments used for hedgingpurposes are disclosed in note 15. Movements in the hedge reservein shareholders’ equity are shown in note 17.4.(a) Cash flow hedgeThe effective portion of changes in the fair value of derivativesthat are designated and qualify as cash flow hedges are recognisedin equity. The gain or loss relating to the ineffective portion isrecognised immediately in the income statement.Amounts accumulated in equity are recycled in the income statementin the periods when the hedged item will affect profit or loss (forexample, when the forecast transaction that is hedged takes place).However, when the forecast transaction that is hedged results in therecognition of a non-financial asset (for example, inventory) or anon-financial liability, the gains and losses previously deferred inequity are transferred from equity and included in the initialmeasurement of the cost of the asset or liability.When a hedging instrument expires or is sold, or when a hedge nolonger meets the criteria for hedge accounting, any cumulative gain orloss existing in equity at that time remains in equity and is recognisedwhen the forecast transaction is ultimately recognised in the incomestatement. When a forecast transaction is no longer expected to occur,the cumulative gain or loss that was reported in equity is immediatelytransferred to the income statement.(b) Derivatives that do not qualify for hedge accountingCertain derivative instruments do not qualify for hedge accounting.Such derivatives are classified as at fair value through profit or lossand changes in the fair value of any derivative instruments that donot qualify for hedge accounting are recognised immediately in theincome statement.3.3. Fair value estimationThe fair value of financial instruments traded in active markets(such as publicly traded derivatives, trading and available-for-salesecurities) is based on quoted market prices at the balance sheet date.The quoted market price used for financial assets held by the Groupis the current bid price; the appropriate quoted market price forfinancial liabilities is the current ask price.The fair value of financial instruments that are not traded in an activemarket (for example, over-the-counter derivatives) is determinedby using valuation techniques. The Group uses a variety of methodsand makes assumptions that are based on market conditions existingat each balance sheet date. Quoted market prices or dealer quotesfor similar instruments are used for long-term debt. Other techniques,such as estimated discounted cash flows, are used to determinefair value for the remaining financial instruments. The fair value ofinterest rate swaps is calculated as the present value of the estimatedfuture cash flows. The fair value of forward foreign exchange contractsis determined using forward exchange market rates at the balancesheet date.The nominal values less estimated credit adjustments of trade receivablesare assumed to approximate their fair values. The fair value of financialliabilities for disclosure purposes is estimated by discounting thefuture contractual cash flows at the current market interest rate thatis available to the Group for similar financial instruments.3.4. Capital risk managementThe Board’s policy is to maintain a strong capital base so as tomaintain investor, creditor and market confidence and to sustainfuture development of the business. The Board monitors the returnof capital to shareholders which the Group defines as total equityexcluding minority interests and the level of dividends to ordinaryshareholders.From time to time the Group will approve special dividends.These distribute to shareholders exceptional non-recurring profitsand cash flows.The Board seeks to maintain a balance between business returns anda secure capital position. The Group’s target is to achieve a return onshareholders’ equity, excluding buy-backs, in excess of 12 per cent.There were no changes in the Group’s approach during the year.The Group is not subject to any externally imposed capital requirements.Richemont Annual Report and Accounts 2009 69Consolidated financial statements