2012 Annual Report - ZTE

ZTE CORPORATIONNotes to Financial Statements (continued)(Prepared in accordance with PRC ASBEs)(All amounts in RMB’000 unless otherwise stated)(English translation for reference only)II.PRINCIPAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued)9. Financial instruments (continued)Classification and valuation of financial liabilities (continued)The subsequent measurement of financial liabilities is dependent on its classification:Financial liabilities at fair value through profit or lossFinancial liabilities at fair value through profit or loss comprise derivative financial liabilities and thosedesignated at fair value through profit or loss at inception. Financial liabilities are classified as derivativeif they satisfy one of the following conditions: they are acquired or incurred principally for the purposeof selling or repurchasing in the near term; they are part of a portfolio of identified financial instrumentsthat are managed together, and for which there is objective evidence of a recent pattern of short-termprofit taking; they are derivative financial instruments, with the exception of derivatives designated asvalid arbitrage, derivatives under financial guarantee contracts and derivatives linked to and settled byway of delivery of equity investments not quoted in an active market and whose fair value cannot bereliably measured. These financial liabilities are subsequently measured at fair value, and all realizedor unrealised gain or loss are recognized in current period’s profit or loss.Other financial liabilitiesSubsequent to initial recognition, these financial assets are carried at amortized cost using the effectiveinterest method.Financial guarantee contractsA financial guarantee contract is a contract under which the guarantor and the creditor agree that theguarantor shall assume the debts or liability in the event of default of the debtor. Financial guaranteecontracts are initially recognized as liability at fair value. Financial guarantee contracts not classified asfinancial liabilities designated at fair value through profit or loss, after initial recognition, are subsequentlymeasured at the higher of: (i) the amount of the best estimates of the expenditure required to settle thepresent obligations at the balance sheet date; and (ii) the initial amount less accumulated amortization.Derivative financial instrumentsThe Group uses derivative financial instruments such as forward currency contracts to hedge its risksassociated with foreign currency fluctuations and interest rate swaps to hedging against interest raterisks. Such derivative financial instruments are initially recognized at fair value on the date on which aderivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carriedas assets when the fair value is positive and as liabilities when the fair value is negative. Derivativeslinked to and settled by way of delivery of equity investments not quoted in an active market andwhose fair value cannot be reliably measured that are not quoted in an active market and whose fairvalue cannot be reliably measured are carried at cost.Any gains or losses arising from the change in fair value on derivatives are taken directly to theincome statement, except for those falling under cash flow hedging, which shall be recognized in othercomprehensive income.170