19. Derivatives and hedge accounting CONTINUED Policies
Vector initially recognises derivatives at fair value on the date the derivative contract is entered into, and subsequently they are re-measured to their fair value at each balance date. All derivatives are classified as level 2 on the fair value hierarchy explained in Note 20. Fair value is calculated as the present value of the estimated future cash flows based on observable interest yield curves and/or foreign exchange market prices. The carrying values of the financial instruments are the fair values excluding any interest receivable or payable, which is separately presented in the balance sheet in other receivables or other payables. The resulting gain or loss on re-measurement is recognised in profit or loss immediately, unless the derivative is designated and effective as a hedging instrument, in which case the timing of recognition in profit or loss depends on the nature of the designated hedge relationship. Vector designates certain derivatives as either: —— Fair value hedges (of the fair value of recognised assets or liabilities or firm commitments); or —— Cash flow hedges (of highly probable forecast transactions). At inception each transaction is documented, detailing: —— The economic relationship and the hedge ratio between hedging instruments and hedged items; —— The risk management objectives and strategy for undertaking the hedge transaction; and —— The assessment (initially and on an ongoing basis) of whether the derivatives that are used in the hedging transaction are highly effective in offsetting changes in fair values or cash flows of hedged items. The underlying risk of the derivative contracts is identical to the hedged risk component (i.e. the interest rate risk and the foreign exchange risk) therefore the group has established a one-to-one hedge ratio. Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. Vector has entered into cross currency interest rate swaps (the hedging instruments) to hedge the interest rate risk and foreign currency risk (the hedged risk) arising in relation to its USD senior notes (the hedged items). These transactions have been designated into fair value hedges. The following are recognised in profit or loss: —— The change in fair value of the hedging instruments; and —— The change in fair value of the underlying hedged items attributable to the hedged risk. Once hedging is discontinued, the fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised through profit or loss from that date through to maturity of the hedged item.
Fair value hedges
81 ―
Made with FlippingBook HTML5