Bradken Limited Annual Report 2015 - page 72

37 l BRADKEN LIMITED ANNUAL REPORT 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Notes to the consolidated financial statements
30 June 2015
(continued)
2 Summary of significant accounting policies (continued)
Measurement
Fair value
Impairment
(n) Derivatives and hedging activities
(i)
Fair value hedge
(ii) Cash flow hedge
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of
financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only
if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the
asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated. In the case of equity investments classified as available-for-sale, a
significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are
impaired.
Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value.
Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are
presented in profit or loss within other income or other expenses in the period in which they arise. Dividend income from
financial assets at fair value through profit or loss is recognised in profit or loss as part of revenue from continuing operations
when the group's right to receive payments is established. Interest income from these financial assets is included in the net
gains/(losses).
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.
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.
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.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for
unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm's
length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option
pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs.
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.
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).
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.
Loans and receivables and held-to-maturity investments are subsequently carried at amortised cost using the effective interest
method.
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of
financial assets carried at fair value through profit or loss are expensed in profit or loss.
The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 13. Movements in
the hedging reserve in shareholders' equity are shown in note 23.
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