Financial Statements - Entel

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Financial LiabilitiesEMPRESA NACIONAL DE TELECOMUNICACIONES S.A. & SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)For Translation Purposes OnlyIn the first instance, the Group records issued debt securities on the date they originate. All otherfinancial liabilities (including liabilities at fair value with changes in income) are initially recordedon the date they are contracted, this being the date on which the Group is bound by theinstrument’s contractual provisions.The Group classifies non-derivative financial liabilities under Other Financial Liabilities. Theseassets are initially recorded at fair value plus any directly attributable transaction costs. After beingrecorded for the first time, financial liabilities are valued at their amortized cost using the effectiveinterest method.Other financial liabilities include loans and obligations, the use of overdraft facilities, trade accountspayable and others.Financial liabilities covered by derivative instruments designated for managing exposure tochanges in variable cash flows (cash flow hedges), are measured at their amortized cost in line withIAS 39.Derivative Financial InstrumentsThe Entel Group uses derivative financial instruments to cover its exposure to foreign currenciesand interest rates.In the event that implicit derivative contracts are present in certain contracts, they are separatedfrom the principal contract and accounted for separately. This procedure is applied if the economiccharacteristics and risks of the principal contract and the implied derivative are not strictly related,if an independent instrument with the same conditions as the implicit derivative would meet thedefinition of a derivative, and if the combined instrument is not measured at its fair value withchanges in profits.In line with IAS 39, financial derivative instruments only qualify for hedge accounting when:the hedge relationship is formally designated and documented at the start of the hedge;the hedge is expected to be highly effective;its effectiveness can be reliably measured;the hedge is highly effective over all the periods corresponding to the financial statements inwhich it is recorded.All derivatives are measured at fair value in line with IAS 39.When a derivative financial instrument qualifies for hedge accounting, the following accountingprocedures apply:Cash Flow Hedge – When a derivative financial instrument is classified as a hedge againstexposure to changes in the cash flows of an asset, liability or a highly probable plannedtransaction, the effective proportion of any profit or loss from the derivative financialinstrument is directly recorded under the equity reserve (Cash Flow Hedge Reserve). Thecumulative income is removed from equity and recorded under income when the hedgedtransaction affects the income. The earnings or losses associated with the ineffective part of the–6–
EMPRESA NACIONAL DE TELECOMUNICACIONES S.A. & SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)For Translation Purposes Onlyhedge are immediately recorded under income. Where hedge operations are no longerprobable, the cumulative earnings or losses from the equity reserve are immediately recordedunder income.For hedges that follow risk management strategies without necessarily satisfying the requirementsand tests for effectiveness required by the accounting regulations for the application of hedgeaccounting, variations in the values of the instruments are recorded against income.d) InventoryGoods for sale are valued using the lowest of the weighted average cost and the net sale value,considering the purpose for which the inventories are kept.Mobile handsets for customers are included in this classification. In this case, and subsidies fortransferring equipment to the customer are recorded under the income statement in the period assales costs at that moment.The main inventories are mobile handsets and accessories. At the close of each accounting period,the existence of obsolete stock is evaluated in order to make the corresponding write offs. Thelifespan of the different handsets in the inventories is determined by the functionality and prices ofnew models on the market.e) Impairment– Non-Derivative Financial AssetsFinancial assets not measured at fair value with changes in income are evaluated on each reportingdate to determine if there is objective evidence of impairment. A financial asset is regarded asaffected if there is proof that a loss-causing event has occurred since the asset was first recordedand the event has a negative effect on the estimated future cash flows of the asset and can bereliably estimated.Differentiated percentages determined by factors such as the age of the debt and potential costs forhandling its collection are applied for different groups of customers to calculate impairment foraccounts receivable. Similarly, a distinction is made between current debts, and renegotiated anddocumented debts.The factors mentioned above are used to determine estimates for billed services.The discounted values of accounts receivable and loans are not considered when calculating theirimpairment since they are due in the short term and as such the difference between their currentvalue and the discounted value is not significant.– Non-Financial AssetsThe book value of the Group’s non-financial assets that are not classified as inventories or deferredtax assets is revised for each date on which the financial statements are prepared to determine ifthere are any signs of impairment. Where evidence of impairment exists, the recoverable value ofthe asset is then estimated. For goodwill and intangible assets with an indefinite useful life or stillunavailable for use, the recoverable value is calculated at the end of each year. The loss due toimpairment is recorded when the book value of an asset exceeds the estimated recoverable value.–7–
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