2011 - Li & Fung Limited

NOTES TO THE ACCOUNTS (CONTINUED)
1 BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
1.22 BORROWING COSTS
Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset that necessarily takes a
substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset, until such time as the
assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are charged to the consolidated profit and loss account in the year in which they are incurred.
1.23 OPERATING LEASES
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated profit and loss
account on a straight-line basis over the period of the lease. The upfront prepayments made for leasehold land and land use rights
are amortised on a straight-line basis over the period of the lease or where there is impairment, the impairment is expensed in the
consolidated profit and loss account.
1.24 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their
fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument,
and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with a
recognized liability or a highly probable forecast transaction (cash flow hedge).
The Group documents, at the inception of the transaction, the intended relationship between hedging instruments and hedged items,
as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged items.
Movements in the fair values of hedging derivatives are included within shareholders’ equity (Note 26). The full fair value of a hedging
derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months. Trading
derivatives are classified as a current asset or liability.
(a) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in
other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated profit and
loss account.
Amounts accumulated in equity are recycled to the consolidated profit and loss account in the periods when the hedged item affects
profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of forward
foreign exchange contracts hedging export sales is recognized in the consolidated profit and loss account within sales. The gain or loss
relating to the ineffective portion is recognized in the consolidated profit and loss account within other gains/(losses) – net. However,
when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or property, plant
and equipment), the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement
of the cost of the asset. The deferred amounts are ultimately recognized in cost of goods sold in case of inventory, or in depreciation in
case of property, plant and equipment.
LI & FUNG LIMITED | ANNUAL REPORT 2011
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