notes to the financial statements - Singapore Technologies ...

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122 SIMPLY SMARTERNOTES TO THE FINANCIAL STATEMENTS31 December 2011(Currency - Singapore dollars unless otherwise stated)3. Summary of significant accounting policies (continued)(c)Financial instruments (continued)(i)Non-derivative financial assets (continued)Available-for-sale financial assets (continued)The fair value of available-for-sale financial assets that are actively traded in organised financial markets is determined by referenceto quoted market prices at the close of business on the balance sheet date. For those financial assets where there is no activemarket, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions;reference to the current market value of another instrument, which is substantially the same; discounted cash flow analysis andoption pricing models.For those financial assets where there is no active market and where fair value cannot be reliably measured, they are measured at cost.Available-for-sale financial assets comprise equity securities and bonds.(ii)Non-derivative financial liabilitiesFinancial liabilities are recognised on the balance sheet when, and only when, the Group becomes a party to the contractual provisionsof the financial instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled orexpired.Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has alegal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.Non-derivative financial liabilities are recognised initially at fair value plus directly attributable transaction costs. Subsequent to initialrecognition, these financial liabilities are measured at amortised cost using the effective interest method.The Group’s financial liabilities comprise bank overdrafts, trade and other payables (including lease obligations and amounts due torelated parties) and borrowings.Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash and cash equivalents are included as acomponent of cash and cash equivalents for the purpose of the statement of cash flows.(iii)Derivative financial instruments and hedge accountingThe Group uses derivative financial instruments such as forward currency contracts, interest rate swaps and cross currency swapsto hedge its risks associated with foreign currency and interest rate fluctuations. From time to time, the Group also uses monetaryassets and liabilities and embedded derivatives as hedging instruments to hedge its risks associated with foreign currency fluctuations.Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks ofthe host contract and the embedded derivatives are not closely related, a separate instrument with the same terms as the embeddedderivatives would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.
SINGAPORE TECHNOLOGIES ENGINEERING LTD Annual Report 2011123NOTES TO THE FINANCIAL STATEMENTS31 December 2011(Currency - Singapore dollars unless otherwise stated)3. Summary of significant accounting policies (continued)(c)Financial instruments (continued)(iii)Derivative financial instruments and hedge accounting (continued)On initial designation of the derivative as the hedging instrument, the Group formally documents the hedge relationship to which theGroup wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentationincludes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and the methodsused in assessing the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cashflows attributable to the hedged risk. The Group makes an assessment, both at the inception of the hedge relationship as well as onan ongoing basis, of whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair valueor cash flows of the respective hedged items attributable to the hedged risk, and whether the actual results of each hedge are within arange of 80% to 125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and shouldpresent an exposure to variations in cash flows that could ultimately affect profit or loss.Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into. Attributabletransaction costs are recognised in profit or loss as incurred. Derivatives are carried as assets when the fair value is positive and asliabilities when the fair value is negative. Subsequent to initial recognition, derivatives are measured at fair value, and changes thereinare accounted for as described below.Fair value hedgesThe gain or loss from re-measuring the hedging instrument at fair value (for a derivative hedging instrument) or the foreign currencycomponent of its carrying amount measured in accordance with Note 3(b)(i) (for a non-derivative hedging instrument) is recognised inprofit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss.For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through profit or loss overthe remaining term to maturity. Any adjustment to the carrying amount of a hedging instrument for which the effective interest methodis used is amortised in the income statement. Amortisation may begin as soon as an adjustment exists and shall begin no later thanwhen the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of thefirm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised inprofit or loss. The changes in the fair value of the hedging instrument are also recognised in profit or loss.The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedgeno longer meets the criteria for hedge accounting or the Group revokes the designation. Any adjustment to the carrying amount of ahedging instrument for which the effective interest method is used is amortised in the income statement. Amortisation may begin assoon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair valueattributable to the risk being hedged.Cash flow hedgesThe portion of the gain or loss on a derivative designated as the hedging instrument that is determined to be an effective hedge isrecognised in other comprehensive income and presented in the fair value reserve in equity, while the ineffective portion is recognisedimmediately in profit or loss.
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