DOOSAN HEAVY INDUSTRIES & CONSTRUCTION CO., LTD. AND ...

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Doosan Heavy Industries & Construction Co., Ltd. and SubsidiariesNotes to the Consolidated Financial StatementsFor the years ended December 31, 2012 and 20113. Significant Accounting Policies, Continued(16) Employee benefits, continuedPast service costs which are the change in the present value of the defined benefits obligation for employeeservice in prior periods, resulting in the current period from the introduction of, or change to postemploymentbenefits, is recognized as an expense on a straight-line basis over the average period until thebenefits become vested. To the extent that the benefits are already vested immediately following theintroduction of, or changes to, a defined benefit plan, the Group recognizes the past service cost immediately.(v) Termination benefitsTermination benefits are recognized as an expense when the Group is committed demonstrably, withoutrealistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normalretirement date, or to provide termination benefits as a result of an offer made to encourage voluntaryredundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group hasmade an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number ofacceptances can be estimated reliably. If benefits are payable more than 12 months after the reportingperiod, then they are discounted to their present value.(17) ProvisionsProvisions are recognized when the Group has a present legal or constructive obligation as a result of a pastevent, it is probable that an outflow of resources embodying economic benefits will be required to settle theobligation and a reliable estimate can be made of the amount of the obligation.The risks and uncertainties that inevitably surround many events and circumstances are taken into account inreaching the best estimate of a provision. Where the effect of the time value of money is material,provisions are determined at the present value of the expected future cash flows.Where some or all of the expenditures required to settle a provision are expected to be reimbursed byanother party, the reimbursement shall be recognized when, and only when, it is virtually certain thatreimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as aseparate asset.Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates.If it is no longer probable that an outflow of resources embodying economic benefits will be required to settlethe obligation, the provision is reversed.A provision for warranties is recognized when the underlying products or services are sold. The provision isbased on historical warranty data and a weighting of all possible outcomes against their associatedprobabilities.A provision for restructuring is recognized when the Group has approved a detailed and formal restructuringplan, and the restructuring either has commenced or has been announced publicly. Future operating lossesare not provided for.A provision shall be used only for expenditures for which the provision was originally recognized.28
Doosan Heavy Industries & Construction Co., Ltd. and SubsidiariesNotes to the Consolidated Financial StatementsFor the years ended December 31, 2012 and 20113. Significant Accounting Policies, Continued(18) Derivative financial instruments, including hedge accountingDerivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measuredat fair value, and changes therein are either recognized in profit or loss or, when the derivatives aredesignated in a hedging relationship and the hedge is determined to be an effective hedge, othercomprehensive income.(i) Hedge accountingThe Group holds forward exchange contracts, interest rate swaps, currency swaps and other derivativecontracts to manage interest rate risk and foreign exchange risk. The Group designated derivatives ashedging instruments to hedge the risk of changes in the fair value of assets, liabilities or firm commitments (afair value hedge) and foreign currency risk of highly probable forecasted transactions or firm commitments (acash flow hedge).On initial designation of the hedge, the Group formally documents the relationship between the hedginginstrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking thehedge transaction, together with the methods that will be used to assess the effectiveness of the hedgingrelationship. The Group makes an assessment, both at the inception of the hedge relationship as well as ona quarterly basis, whether the hedging instruments are expected to be ‘‘highly effective’’ in offsetting thechanges in the fair value or cash flows of the respective hedged items during the period for which the hedgeis designated, and whether the actual results of each hedge are within a range of 80%-125%. For a cashflow hedge of a forecasted transaction, the transaction should be highly probable to occur and should presentan exposure to variations in cash flows that could ultimately affect reported net income.Fair value hedgeChanges in the fair value of a derivative hedging instrument designated as a fair value hedge are recognizedin profit or loss. The gain or loss from remeasuring the hedging instrument at fair value for a derivativehedging instrument and the gain or loss on the hedged item attributable to the hedged risk are recognized inprofit or loss in the same line item of the consolidated statement of income.The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminatedor exercised, or if the hedge no longer meets the criteria for hedge accounting. Any adjustment arising fromgain or loss on the hedged item attributable to the hedged risk is amortized to profit or loss from the date thehedge accounting is discontinued.Cash flow hedgeWhen a derivative is designated to hedge the variability in cash flows attributable to a particular riskassociated with a recognized asset or liability or a highly probable forecasted transaction that could affectprofit or loss, the effective portion of changes in the fair value of the derivative is recognized in othercomprehensive income, net of tax, and presented in the hedging reserve in equity. Any ineffective portionof changes in the fair value of the derivative is recognized immediately in profit or loss.If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated,exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. Thecumulative gain or loss on the hedging instrument that has been recognized in other comprehensive incomeis reclassified to profit or loss in the periods during which the forecasted transaction occurs. If theforecasted transaction is no longer expected to occur, then the balance in other comprehensive income isrecognized immediately in profit or loss.29
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