Notes to the Financial Statements - Efacec

2.2 Accounting for financial instruments – derivatives and hedging
Derivatives are initially recognised at fair value and subsequently readjusted to their fair value. The method for recognising changes
in fair value depend on whether the derivative is defi ned as a hedge instrument and if so, the nature of the asset/liability to
be covered. The group arranges certain derivatives as: (1) fair value cover of recognised assets and liabilities or of commitments
(fair value cover); (2) cover of highly probable forecast transactions (cash fl ow cover).
For each transaction, the Group prepares documentation to justify the relationship between the hedge instruments and the related
assets/liabilities covered, as well as the objective of risk management and the strategy for taking out cover. The Group also
documents its evaluation, both at the start of the cover and on a continuous basis, as to whether the derivatives used for cover
effectively compensate for fl uctuations in fair value or in the cash fl ows of the items covered.
The fair value of derivatives used to take out cover is disclosed in Note 5, as well as the movements that took place in Shareholders’
Funds.
a) Fair value hedging
Changes in the fair value of derivatives that are arranged and qualifi ed for fair value hedging are recognised in the profi t and loss
account, together with changes to the fair value of the assets and liabilities covered (in the covered position) attributable to the
risk covered.
b) Cash fl ow hedging
The effective part of the change in fair value of derivatives that are arranged and qualifi ed for cash fl ow hedging is recognised in
shareholders’ funds. The gain or loss related to the ineffective part is immediately recognised in the profi t and loss account.
Concerning cover strategies that use options, in accordance with IAS 39 and complying with the effi ciency test, the strategy value
is split into the intrinsic value and the temporary value.
In accordance with the treatment referred above, the intrinsic value should be presented in shareholders’ funds (assuming the
strategy is effi cient), while the temporal value should be booked to the profi t and loss account.
The cumulative amounts in shareholders’ funds are reclassifi ed to profi t and loss in the same period in which the item covered generates
gains and losses (for example, when the Sales forecast covered occurs). However, when the forecast covered transaction
results in a non fi nancial asset (for example, stocks) or non fi nancial liability being recognised, the previously deferred gains and
losses in shareholders’ funds are transferred and included in the initial measurement of that asset or liability.
When a hedge instrument expires or is sold, or when a hedging does not comply with the accounting and qualifi cation criteria, any
cumulative gain or loss existing at that moment in shareholders’ funds, remains in shareholders’ funds and is recognised when
the forecast transaction is fi nally refl ected in the profi t and loss account. When the expected occurrence of a forecast transaction
is no longer highly probable, the cumulative gains or losses refl ected in shareholders’ funds are immediately transferred to profi t
and loss.
c) Non qualifi ed derivatives for hedging purposes
Certain derivatives do not comply with hedging accounting and qualifi cation criteria. Changes in fair value of these derivatives are
immediately recognised in the profi t and loss account.
2.3 Estimates of fair value
The fair value of fi nancial instruments available on the open market (for example publicly negotiated derivatives, negotiable instruments
available for sale) is determined on the basis of quoted market prices on the balance sheet date. The quoted market
price used for fi nancial assets of the Group is the price received by shareholders on the open market; the quoted market price for
fi nancial liabilities is the price paid on the open market.
The fair value of fi nancial instruments not traded on the open market (for example unquoted derivatives) is determined using valuation
techniques. The Group uses a variety of methods and reaches its conclusions based on market conditions at each balance
sheet date. Quoted market prices or negotiation quotas for similar instruments are used for long term debts. Other techniques,
such as estimates of discounted cash fl ows, are used to determine the fair value of other fi nancial instruments. The fair value of
interest rate swaps is calculated based on the present value of estimated future cash fl ows. The fair value of exchange rate futures
contracts is determined using market exchange rates at the balance sheet date.
The nominal value of debtor and creditor balances less estimated credit adjustments is assumed to be close to their fair value. The
fair value of fi nancial liabilities is estimated by updating future contractual cash fl ows at the current market interest rate available
for similar fi nancial instruments.
51
2007 Consolidated and
Individual Financial Statments