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NOTES TO THE COMPANY FINANCIAL STATEMENTSContinuedi. Deferred taxationDeferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, wheretransactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at thebalance sheet date.A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can beregarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from whichthe future reversal of underlying timing differences can be deducted.Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected toreverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measuredon a non-discounted basis.j. Dividend distributionsIn accordance with FRS 21, dividend distributions to equity holders are recognised as a liability in the financial statements of the companyin the period in which the dividends are approved by the company’s shareholders. Interim dividends are recognised when paid. Dividendsdeclared after the balance sheet date are not recognised, as there is no present obligation at the balance sheet date.k. Share-based compensationThe company operates several equity-settled share-based compensation schemes. These include option plans (with and without non-marketperformance conditions attached).In accordance with FRS 20, an expense is recognised to spread the fair value of each award granted after 7 November 2002 over the vestingperiod on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. This expense is offset by acorresponding adjustment made to equity over the remaining vesting period. The estimate of the level of vesting is reviewed at least annually,with any impact on the cumulative charge being recognised immediately. The charge is based on the fair value of the award at the date ofgrant, as calculated by binomial model calculations.The charge is not reversed if the options have not been exercised because the market value of the shares is lower than the option price at thedate of grant. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and sharepremium when the options are exercised.l. Hedge accountingThe derivative instruments used by the company, which are used solely for hedging purposes (i.e. to offset foreign exchange and interest raterisks), comprise interest rate swaps and forward foreign exchange contracts. Such derivative instruments are used to alter the risk profile ofan existing underlying exposure of the company in line with the company’s risk management policies. The company also has derivativesembedded in other contracts, primarily cross border foreign currency supply contracts for raw materials.Derivatives are initially recorded at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fairvalue. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so,the nature of the hedging relationship.In order to qualify for hedge accounting, the company is required to document the relationship between the hedged item and the hedginginstrument. The company is also required to document and demonstrate that the relationship between the hedged item and the hedginginstrument will be highly effective. This effectiveness test is re-performed at each period end to ensure that the hedge has remained and willcontinue to remain highly effective.The company designates certain derivatives as hedges of the fair of recognised assets or liabilities or a firm commitment (fair value hedge).Interest costs are charged against income in the year in which they accrue. Premiums or discounts arising from the difference between the netproceeds of financial instruments purchased or issued and the amounts receivable or repayable at maturity are included in the effective interestcalculation and taken to net interest payable over the life of the instrument.(i) Fair value hedgesFair value hedges comprise derivative financial instruments designated in a hedging relationship to manage the company’s interest rate risk towhich the fair value of certain assets and liabilities are exposed. Changes in the fair value of the derivative offset the relevant changes in the fairvalue of the underlying hedged item attributable to the hedged risk in the profit and loss account in the period incurred. Gains or losses on fairvalue hedges that are regarded as highly effective are recorded in the profit and loss account together with the gain or loss on the hedged itemattributable to the hedged risk.Where a derivative ceases to meet the criteria of being a hedging instrument or the underlying exposure which it is hedging is sold, maturesor is extinguished, hedge accounting is discontinued. Certain derivative instruments, while providing effective economic hedges under thecompany’s policies, are not designated as hedges. Changes in the fair value of any derivative instruments that do not qualify or have not beendesignated as hedges are recognised immediately in the profit and loss account. The company does not hold or issue derivative financialinstruments for speculative purposes.Details of the group’s financial risk management objectives and policies are provided on pages 39 and 40.(ii) Cash flow hedgesCash flow hedges comprise derivative financial instruments designated in a hedging relationship to manage currency risk to which the cashflows of certain liabilities are exposed. The effective portion of changes in the fair value of the derivative that is designated and qualifies forhedge accounting is recognised as a separate component of equity. The ineffective portion is recognised immediately in the income statement.Amounts accumulated in equity are recycled to the income statement in the period in which the hedged item affects profit or loss. However,where a forecasted transaction results in a non-financial asset or liability, the accumulated fair value movements previously deferred in equityare included in the initial cost of the asset or liability.m. Operating leasesRentals paid on operating leases are charged to the profit and loss account on a straight-line basis over the lease term.132SABMiller plc Annual Report 2007 Notes to the company financial statements