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 activities (cont’d)a) Fair value hedges (cont’d)When an unrecognised fi rm commitment is designated as a hedged item, the subsequent cumulative change inthe fair value of the fi rm commitment attributable to the hedged risk is recognised as an asset or liability with acorresponding gain or loss recognised in the profi t and loss account. The changes in the fair value of the hedginginstrument are also recognised in the profi t and loss account.The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated orexercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. Anyadjustment to the carrying amount of a hedged fi nancial instrument for which the effective interest method is used isamortised to the profi t and loss account. Amortisation begins as soon as an adjustment exists but no later than whenthe hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.b) Cash flow hedgesFor the purpose of hedge accounting, the Group has entered into hedges that is classifi ed as a cash fl ow hedge. Ahedge is classifi ed as a cash fl ow hedge when it is used to hedge the exposure to variability in cash fl ows that is eitherattributable to a particular risk associated with a recognised asset or liability or highly probable forecast transactionand could affect profi t or loss.For cash fl ow hedge, the effective portion of the gain or loss on the hedging instrument is recognised directly in thehedging reserve, while the ineffective portion is recognised in the profi t and loss account.Amounts taken to hedging reserve are transferred to the profi t and loss account when the hedged transaction affectsprofi t or loss, such as when hedged fi nancial income or fi nancial expense is recognised or when a forecast sale orpurchase occurs. Where the hedged item is the cost of a non-fi nancial asset or liability, the amounts taken to hedgingreserve are transferred to the initial carrying amount of the non-fi nancial asset or liability.If the forecast transaction is no longer expected to occur, amounts previously recognised in hedging reserve aretransferred to the profi t and loss account. If the hedging instrument expires or is sold, terminated or exercised withoutreplacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in hedging reserveremain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amountis taken to the profi t and loss account.2.29 Cumulative preference sharesCumulative preference shares that exhibit the characteristics of a liability are recognised as a liability and accordingly thecorresponding dividends on these preference shares are charged as an interest expense in the profi t and loss account.Preference shares of a joint venture of the Group that have the potential to become redeemable upon occurrence of certainevents as stipulated in the partnership agreement are recorded as a liability.Notes to the Financial Statements 106Annual Report 2006