Osim FR 050407.indd

Notes to the Financial Statements - 31 December 2006 (cont’d)2. Summary of significant accounting policies (cont’d)2.28 Derivative financial instruments and hedging activitiesThe Group uses derivative fi nancial instruments such as forward currency contracts and interest rate swaps to hedge itsrisks associated with foreign currency and interest rates fl uctuations. Such derivative fi nancial instruments are initiallyrecognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fairvalue. Derivative fi nancial instruments are carried as assets when the fair value is positive and as liabilities when the fairvalue is negative.Any gains or losses arising from changes in fair value on derivative fi nancial instruments that do not qualify for hedgeaccounting are taken to the profi t and loss account for the year.The fair value of forward currency contracts and interest rate swaps is based on fair valuation reports from reputable fi nancialinstitutions.At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which theGroup wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. Thedocumentation include identifi cation of the hedging instrument, the hedged item or transaction, the nature of the risk beinghedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in thehedged item’s fair value or cash fl ows attributable to the hedged risk. Such hedges are expected to be highly effective inachieving offsetting changes in fair value or cash fl ows and are assessed on an ongoing basis to determine that they havebeen highly effective throughout the fi nancial reporting periods for which they were designated.a) Fair value hedgesFor the purpose of hedge accounting, the Group has entered into hedges that is classifi ed as fair value hedges.A hedge is classifi ed as a fair value hedge when it is used to hedge the exposure to changes in the fair value of arecognised asset or liability or an unrecognised fi rm commitment that is attributable to a particular risk and couldaffect profi t or loss.For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the riskbeing hedged, the derivative is remeasured at fair value and gains and losses from both are taken to the profi t andloss account.For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised throughthe profi t and loss account over the remaining term to maturity. Any adjustment to the carrying amount of a hedgedfi nancial instrument for which the effective interest method is used is amortised to the profi t and loss account.Amortisation begins as soon as an adjustment exists but no later than when the hedged item ceases to be adjustedfor changes in its fair value attributable to the risk being hedged.Notes to the Financial Statements 105Annual Report 2006