34 AVESCOGROUPPLC ANNUAL REPORT 2009
www.avesco.com
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED 30 SEPTEMBER 2009
Regular purchases and sales of investments are recognised on trade date – the date on which the Group commits to purchase or sell the asset. Investments
are initially recognised at fair value plus, in the case of all financial assets not carried at fair value through profit or loss, transaction costs that are directly
attributable to their acquisition. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or where they
have been transferred and the Group has also transferred substantially all risks and rewards of ownership. Available for sale financial assets and financial
assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective
interest method.
Realised and unrealised gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are
included in the income statement for the period in which they arise. 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 the income statement within ‘Other gains/(losses)’ in the period in which they arise.
Changes in the fair value of monetary securities denominated in a foreign currency and classified as available for sale are analysed between translation
differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on
monetary securities are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair
value of monetary securities classified as available for sale are recognised in equity.
When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income
statement as ‘gains and losses from investment securities’.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, 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.
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the
case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an
indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference
between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed
from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through
the income statement.
2.10 Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value.
The method of recognising the resulting gain or loss depends on whether the derivative is designed as a hedging instrument, and if so, the nature of the item
being hedged. The Group designates certain derivatives as either:
a) fair value hedges (where the gain or loss on the hedging instrument and gains or losses on the hedged item arising from the hedged risk are recognised in
profit or loss);
b) cash flow hedges (where the gain or loss on the effective portion of the hedging instrument is taken to equity until the hedged transaction affects the income
statement); or
c) hedges of a net investment in a foreign operation (where the gain or loss on the effective portion of the hedging instrument is taken to equity to match the
gain or loss on net assets).
The Group documents at the inception of the hedge identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged
and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows
attributable to the hedged risk. 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.
a) Fair value 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 the hedge
is recognised in the income statement within ‘Finance costs’. The gain or loss relating to the ineffective portion of the hedge is recognised in the income
statement within ‘Other gains/(losses)’. Changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognised in the
statement within ‘Finance costs’.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest
method is used is amortised to profit or loss over the period to maturity.
b) Cash flow hedge
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity. The gain or loss relating the ineffective
portion is recognised immediately in the income statement within ‘Other gains/(losses)’.
Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss. The gain or loss relating to
the effective portion of the hedge is recognised in the income statement within ‘Finance costs’. The gain or loss relating to the ineffective portion of the hedge
is recognised in the income statement within ‘Other gains/(losses)’. However, when the forecast transaction that is hedged results in the recognition of a non-
financial asset the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in
equity at the 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 within
‘Other gains/(losses)’.
c) Net investment hedge
Hedges of net investments in foreign operations are accounted similarly to cash flow hedges.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity. The gain or loss relating the ineffective
portion is recognised immediately in the income statement within ‘Other gains/(losses)’.
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