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BRADKEN LIMITED ANNUAL REPORT 2013 41
Notes to the consolidated financial statements
30 June 2013
(continued)
1 Summary of significant accounting policies (continued)
(n) Derivatives and hedging activities
(i)
Fair value hedge
(ii) Cash flow hedge
(iii) Derivatives that do not qualify for hedge accounting
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedge item for which
the effective interest method is used is amortised to profit or loss over the period to maturity using a recalculated effective
interest rate.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income
statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognised in the income
statement within other income or other expense together with the gain or loss relating to the ineffective portion and changes in
the fair value of the hedge fixed rate borrowings attributable to the interest rate risk. The gain or loss relating to the ineffective
portion is recognised in the income statement within other income or other expenses.
The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged
items, as well as its risk management objective 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 have been and will continue to be highly effective in offsetting changes in fair values or cash flows of
hedged items.
The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 11. Movements in
the hedging reserve in shareholders' equity are shown in note 23.
Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or
loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest
rate swaps hedging variable rate borrowings is recognised in the income statement within "finance costs". The gain or loss
relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in the income
statement within "sales". However, when the forecast transaction that is hedged results in the recognition of a non-financial
asset (for example, inventory or a non-financial liability), the gains and losses previously deferred in equity are transferred from
equity and included in the measurement of the initial cost or carrying amount of the asset or liability.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently
remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value 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 either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value
hedge); or (2) hedges of the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow
hedge).
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that
does not qualify for hedge accounting are recognised immediately in the income statement and are included in other income or
other expenses.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is
recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the
income statement within other income or other expense.
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; it is classified as a current asset or liability when the remaining maturity of the hedged
item is less than 12 months.
When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast
transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
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Bradken Limited