ANNUAL REPORT 2011 AVESCO GROUP PLC www.avesco.com


STATEMENT OF DIRECTORS’ RESPONSIBILITIES


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)’.


d) Derivatives at fair value through profit or loss and accounted for at fair value through profit or loss Certain derivative financial instruments do not qualify for hedge accounting. Changes in the fair value of any of these derivative financial instruments are recognised immediately in the income statement within ‘Other gains/(losses)’.


2.11 Inventories


Inventories and work in progress are valued at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. Consumables relate to cabling and other low value items used within the business. Costs of work in progress comprises design costs, raw materials, direct labour and other direct costs and related production overheads. Cost excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable selling expenses. Provision is made for obsolete, slow moving and defective stock. Work in progress contains costs in relation to jobs not yet complete at the year end.


2.12 Trade receivables


Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within ‘Operating expenses’. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to ‘Operating expenses’ within the income statement.


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