2008 Annual Report - SBM Offshore

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SBM Offshore Annual Report 2008 / Financial Statements 2008 97Joint venturesJoint ventures are those entities over whose activities the Company has joint control, established by contractual agreement. Thefinancial statements include the Company’s proportionate share of the joint venture entities’ assets, liabilities, revenue and expenses,with items of a similar nature on a line by line basis, from the date that joint control commences until the date that joint control ceases.The Company recognises the portion of gains and losses on the sale of assets by the Company to the joint venture that is attributableto the other venturers.Transactions eliminated on consolidationIntragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions (which aremade at arms length), are eliminated in preparing the consolidated financial statements. Accounting policies of subsidiaries have beenchanged where necessary to ensure consistency with the policies adopted by the Company. Unrealised gains arising from transactionswith associates and jointly controlled entities are eliminated to the extent of the Company’s interest in the entity. Unrealised losses areeliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.Segment reportingA segment is a group of assets and operations engaged in providing products and services that are subject to risks and returns thatare different from those of other segments. A geographical segment relates to the provision of products or services within a particulareconomic environment that is subject to risks and returns that are different from other economic environments. The classification bygeographical area is determined by the final destination of the product.Foreign currency translationFunctional and reporting currencyItems included in the financial statements of each of the Company’s entities are measured using the currency of the primary economicenvironment in which the entity operates (the ‘functional currency’). The functional currency of the offshore oil and gas activities is theUS Dollar. The consolidated financial statements are presented in US Dollars, which is the reporting currency of the Company.Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of thetransactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translationat period end exchange rate of monetary assets and liabilities denominated in foreign currencies are recognised in the incomestatement, except where hedge accounting is applied.At year-end 2008 the most important rate was the Euro at US$ 1.398 (opening 2008: US$ 1.472). The average Euro rate amounted toUS$ 1.469 (2007: US$ 1.368).Group companiesThe result and financial position of all Group companies that have a functional currency different from the reporting currency aretranslated into the reporting currency as follows:• assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet;• income and expenses are translated at the average exchange rate (unless this average rate is not a reasonable approximation of thecumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the date ofthe transactions); and• all resulting exchange differences are recognised as a separate component of equity (Translation reserve).Exchange differences arising from the translation of the net investment in foreign entities, and of borrowings of such investments, aretaken to Group equity on consolidation. When an operation denominated in foreign currency is sold, such exchange differences arerecognised in the income statement as part of the gain or loss on sale.Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entityand translated at the closing rate.
98 SBM Offshore Annual Report 2008 / Financial Statements 2008Derivative financial instruments and hedging activitiesGeneralThe Company uses derivative financial instruments such as forward currency contracts and interest rate swaps to hedge its risksassociated with foreign currency and interest rate fluctuations. Such financial instruments are initially recognised at fair value on thedate on which a financial contract is entered into and are subsequently remeasured at their fair value. The method of recognising theresulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item beinghedged. Financial instruments are presented as assets when the fair value is positive and as liabilities when the fair value is negative.Any gains or losses arising from changes in fair value on financial instruments that do not qualify for hedge accounting are takendirectly to the income statement.The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similarmaturity profiles using quoted market rates. The fair value of interest rate swap contracts is determined by reference to market ratesfor similar contracts.For hedge accounting, hedges are classified as:• fair value hedges when hedging exposure to changes in fair value of a recognised asset or liability or a firm commitment (fair valuehedge);• cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated witha recognised asset or liability or a highly probable forecasted transaction (cash flow hedge);• hedges of net investments in a foreign operation (net investment hedge).At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which theCompany wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. Thedocumentation includes identification of the hedging instruments, the hedged item, or transaction, the nature of the risk being hedgedand how the Company will assess the hedging instrument’s effectiveness in offsetting exposure to changes in the fair value of thehedged item or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in offsetting changes in thefair value of the hedged item or cash flows and are assessed periodically to determine that they actually have been highly effectivethroughout the financial reporting periods for which they were designated. The Company uses cash flow hedges and hedges of netinvestments in a foreign operation.Hedges which meet the strict criteria for hedge accounting are accounted for as follows: The effective portion of the gain or loss on thehedging instrument is recognised directly in equity, while the ineffective portion is recognised in the income statement. Amounts takento equity are added or deducted from the recognised value of the hedged item upon its recognition and to the income statement whenthe hedged transaction affects the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised whenthe forecasted transaction is ultimately recognised in the income statement.If the forecasted transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the incomestatement.The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 18 of the financialstatements. Movements in the hedging reserve in equity attributable to shareholders are shown in note 20 of the financial statements.LeasingA lease is an agreement whereby the lessor conveys to the lessee in return for a payment, or series of payments, the right to use anasset for an agreed period of time. Leases in which a significant portion of the risk and rewards of ownership are retained by the lessorare classified as operating leases.When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The differencebetween the gross receivable and the present value of the receivable is recognised as unearned finance income.Lease income is, as of the commencement date of the lease contract, recognised over the term of the lease using the net investmentmethod, which reflects a constant periodic rate of return. During the construction period of the facility, the contract is treated as aconstruction contract, whereby the stage of completion method is applied.When assets are leased out under an operating lease, the asset is included in the balance sheet based on the nature of the asset.Lease income is recognised over the term of the lease on a straight line basis.
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2008 Annual Report - SBM Offshore

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