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ICI » Topics » Financial derivatives - UK GAAP (2004)

This excerpt taken from the ICI 20-F filed Mar 31, 2006.
Financial derivatives – UK GAAP (2004)
Hedge accounting
The Group uses various derivative financial instruments to reduce exposure to foreign exchange risks. These include currency swaps, forward currency contracts and currency options. The Group also uses interest rate swaps, forward rate agreements and interest rate caps to adjust interest rate exposures. The Group considers its derivative financial instruments to be “hedges” (i.e. an offset of foreign exchange and interest rate risks) when certain criteria are met. Under hedge accounting for currency options, the Group defers the instrument’s impact on profit until it recognises the underlying hedged item in profit. Other material instruments do not involve deferral since the profit impact they offset occurs during the terms of the contracts.

Foreign currency derivative instruments
The Group’s criteria to qualify for hedge accounting are:

• The instrument must be related to a foreign currency asset or liability that is probable and whose characteristics have been identified;
   
• It must involve the same currency as the hedged item; and
   
• It must reduce the risk of foreign currency exchange movements on the Group’s operations.

Interest rate derivative instruments
The Group’s criteria to qualify for hedge accounting are:

• The instrument must be related to an asset or a liability; and
   
• It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa.
   
Derivative financial instruments reported in the financial statements are:
   
• The unamortised premium paid on purchased currency options is included in debtors in the balance sheet.

Cash flows related to foreign currency derivative transactions are reported along with related transactions in net cash inflow from operating activities or financing activities, as appropriate, in the Group cash flow statement.

Currency swaps
Principal amounts are revalued at exchange rates ruling at the date of the Group balance sheet and included in the sterling value of loans. Exchange gains/losses are included in the statement of recognised income and expense along with similar movements in the values of the investments being hedged.

Forward currency contracts
Those forward currency contracts hedging transaction exposures (purchases and sales held in the books of account) are retranslated to balance sheet rates with net unrealised gains/losses being shown as debtors/creditors. Both realised gains and losses on purchases/sales and unrealised gains/losses on forward contracts are recognised in operating profit.

Those contracts used to change the currency mix of net debt are revalued to balance sheet rates with net unrealised gains/losses being shown as part of the debt they are hedging. The difference between spot and forward rate for these contracts is recognised as part of net interest payable over the period of the contract. Realised and unrealised exchange gains/losses are shown in the financial statements in the same place as the underlying borrowing/deposit.

Currency options
Option premia are recognised at their historic cost in the Group balance sheet as “other debtors”. At maturity, the option premia net of any realised gains on exercise, are taken to the income statement as operating profit.

Interest rate swaps and forward rate agreements
Interest payments/receipts are accrued with interest income/expense as appropriate. They are not revalued to fair value or shown on the Group balance sheet at period end. If they are terminated early, the gain or loss is spread over the remaining maturity of the original instrument.

Interest rate caps
The option premia are recognised on the Group balance sheet as “other debtors”. The option premia, net of any realised gains on individual caplets, are taken to net interest payable and spread evenly over the lifetime of the cap.

 

Accounts		 ICI Annual Report and Accounts 2005 59

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This excerpt taken from the ICI 6-K filed Mar 14, 2006.
Financial derivatives – UK GAAP (2004)
Hedge accounting
The Group uses various derivative financial instruments to reduce exposure to foreign exchange risks. These include currency swaps, forward currency contracts and currency options. The Group also uses interest rate swaps, forward rate agreements and interest rate caps to adjust interest rate exposures. The Group considers its derivative financial instruments to be “hedges” (i.e. an offset of foreign exchange and interest rate risks) when certain criteria are met. Under hedge accounting for currency options, the Group defers the instrument’s impact on profit until it recognises the underlying hedged item in profit. Other material instruments do not involve deferral since the profit impact they offset occurs during the terms of the contracts.

Foreign currency derivative instruments
The Group’s criteria to qualify for hedge accounting are:

• The instrument must be related to a foreign currency asset or liability that is probable and whose characteristics have been identified;
   
• It must involve the same currency as the hedged item; and
   
• It must reduce the risk of foreign currency exchange movements on the Group’s operations.

Interest rate derivative instruments
The Group’s criteria to qualify for hedge accounting are:

• The instrument must be related to an asset or a liability; and
   
• It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa.
   
Derivative financial instruments reported in the financial statements are:
   
• The unamortised premium paid on purchased currency options is included in debtors in the balance sheet.

Cash flows related to foreign currency derivative transactions are reported along with related transactions in net cash inflow from operating activities or financing activities, as appropriate, in the Group cash flow statement.

Currency swaps
Principal amounts are revalued at exchange rates ruling at the date of the Group balance sheet and included in the sterling value of loans. Exchange gains/losses are included in the statement of recognised income and expense along with similar movements in the values of the investments being hedged.

Forward currency contracts
Those forward currency contracts hedging transaction exposures (purchases and sales held in the books of account) are retranslated to balance sheet rates with net unrealised gains/losses being shown as debtors/creditors. Both realised gains and losses on purchases/sales and unrealised gains/losses on forward contracts are recognised in operating profit.

Those contracts used to change the currency mix of net debt are revalued to balance sheet rates with net unrealised gains/losses being shown as part of the debt they are hedging. The difference between spot and forward rate for these contracts is recognised as part of net interest payable over the period of the contract. Realised and unrealised exchange gains/losses are shown in the financial statements in the same place as the underlying borrowing/deposit.

Currency options
Option premia are recognised at their historic cost in the Group balance sheet as “other debtors”. At maturity, the option premia net of any realised gains on exercise, are taken to the income statement as operating profit.

Interest rate swaps and forward rate agreements
Interest payments/receipts are accrued with interest income/expense as appropriate. They are not revalued to fair value or shown on the Group balance sheet at period end. If they are terminated early, the gain or loss is spread over the remaining maturity of the original instrument.

Interest rate caps
The option premia are recognised on the Group balance sheet as “other debtors”. The option premia, net of any realised gains on individual caplets, are taken to net interest payable and spread evenly over the lifetime of the cap.

 

Accounts		 ICI Annual Report and Accounts 2005 59

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EXCERPTS ON THIS PAGE:

20-F
Mar 31, 2006
6-K
Mar 14, 2006

RELATED TOPICS for ICI:

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