Significant Accounting Policies

2.3 Significant Accounting Policies

2.3.11 Financial Assets and Liabilities

Financial assets include available-for-sale assets, held-to-maturity assets, assets held for trading, de- rivative instruments, cash collateral paid on derivative instruments, loans and receivables, and cash and cash equivalents.

Financial liabilities include borrowings, other financing and bank overdrafts, derivative instruments, cash collateral received on derivative instruments, and accounts payable. Financial assets and liabilities are measured and recognized in accordance with IAS 39, Financial Instruments: Recognition and Measurement.

• Measurement and recognition of financial assets Held-to-maturity assets Held-to-maturity assets are nonderivative financial assets with fixed or determinable pay-

ments and fixed maturity, other than loans and receivables, that the Group has the positive inten- tion and ability to hold to maturity. They are recognized initially at fair value and are subse- quently measured at amortized cost by the effective interest method.

At each balance sheet date, the Group assesses whether there is any objective evidence that held-to-maturity assets are impaired. If any such evidence exists, the asset’s recoverable amount is calculated. If the recoverable amount is less than the asset’s book value, an impairment loss is recognized in the income statement.

Assets available for sale Assets available for sale consist mainly of shares in nonconsolidated companies and market-

able securities that do not fulfill the criteria for classification in any of the other categories of fi- nancial assets. They are measured at fair value and gains and losses arising from remeasurement at fair value are recognized in equity.

Fair value corresponds to market price for listed securities and estimated fair value for unlisted securities, determined according to the most appropriate financial criteria in each case. When there is objective evidence that available-for-sale assets are impaired, the cumulative impairment loss included in equity is taken to income.

Loans and receivables Loans and receivables include loans to and receivables from nonconsolidated companies,

other loans and receivables, and trade receivables. They are recognized at fair value upon origi- nation and are subsequently measured at amortized cost by the effective interest method. Short- term receivables with no stated interest rate are measured at the original invoice amount if the ef- fect of discounting is immaterial. Cash flows on loans and receivables at variable rates of interest are remeasured periodically, to take into account changes in market interest rates.

At each balance sheet date, the Group assesses whether there is any objective evidence that loans or receivables are impaired. If any such evidence exists, the asset’s recoverable amount is calculated. If the recoverable amount is less than the asset’s book value, an impairment loss is recognized in the income statement.

Assets at fair value through profit or loss Assets at fair value through profit or loss are assets held for trading that the Group acquired

principally for the purpose of selling them in the near term in order to realized a profit, that form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. This category also includes assets not fulfilling the above criteria that the Group has opted to measure using the fair value op- tion.

Assets at fair value through profit or loss are carried in the balance sheet under “Other finan- cial and current assets.”

Cash and cash equivalents Cash equivalents are held primarily to meet the Group’s short-term cash needs rather than for

investment or other purposes. They consist of instruments that are readily convertible into known amounts of cash and are not exposed to any material risk of change in value.

• Measurement and recognition of financial liabilities

280 Wiley IFRS: Practical Implementation Guide and Workbook

Financial liabilities With the exception of financial liabilities held for trading, bonds redeemable for STM shares,

FT Espana’s credit lines, and derivative instruments which are measured at fair value through profit or loss, borrowings and other financial liabilities are recognized at fair value and subse- quently measured at amortized cost by the effective interest method.

Transaction costs that are directly attributable to the acquisition or issue of the financial li- ability are deducted from the liability’s carrying value. This is because financial liabilities are initially recognized at cost, corresponding to the fair value of the sums paid or received in ex- change for the liability. The costs are subsequently amortized over the life of the debt, by the ef- fective interest method.

The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial instrument or, when appropriate, through the period to the next interest adjustment date, to the net carrying amount of the financial liability. The calcu- lation includes all fees and points paid or received between parties to the contract.

Certain borrowings are designated as being hedged by fair value hedges. A fair value hedge is a hedge of the exposure to changes in fair value of a recognized liability or an identified portion of the liability that is attributed to a particular risk and could affect profit or loss.

Certain other financial liabilities are designated as being hedged by cash flow hedges. A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized liability or a highly probable forecast transaction (such as a pur- chase or sale) and could affect profit or loss.

Concerning the bonds redeemable for STM shares, it is not possible to measure the embedded derivative separately from the host contract either at acquisition or at a subsequent financial re- porting date: consequently, the entire combined contract has been treated as a financial liability at fair value.

Hybrid instruments Certain financial instruments comprise both a liability component and an equity component.

For the France Telecom Group, they comprise perpetual bonds redeemable for shares (TDIRAs), bonds convertible into or exchangeable for new or existing shares (OCEANEs), and bonds with an exchange option.

On initial recognition, the fair value of the liability component is the present value of the contractually determined stream of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option.

The equity component is assigned to the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component.

Financial liabilities held for trading Financial liabilities held for trading are measured at fair value. • Measurement and recognition of derivative instruments Derivative instruments are recognized in the balance sheet and measured at fair value. Ex-

cept as explained below, gains and losses arising from remeasurement at fair value of derivative instruments are systematically recognized in the income statement.

Hedging instruments

Derivative instruments may be designated as fair value hedges or cash flow hedges:

A fair value hedge is a hedge of the exposure to changes in fair value of a recognized as- set or liability or an identified portion of the asset or liability that is attributable to a particular risk—notably interest rate and currency risks—and could affect profit or loss.

A cash flow hedge is a hedge of the exposure to variability in cash flows that is attribut- able to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (such as a future purchase or sale) and could affect profit or loss.

A hedging relationship qualifies for hedge accounting when At the inception of the hedge, there is formal designation and documentation of the

hedging relationship. At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated (i.e., the actual results of the hedge are within a range of 80% to 125%).

Chapter 25 / Financial Instruments: Recognition and Measurement (IAS 39)

The effects of applying hedge accounting are as follows: For fair value hedges of existing assets and liabilities, the hedged portion of the asset or

liability is recognized in the balance sheet at fair value. The gain or loss from remeasuring the hedged item at fair value is recognized in profit or loss and is offset by the effective por- tion of the loss or gain from remeasuring the hedging instrument at fair value.

For cash flow hedges, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in equity—because the change in the fair value of the hedged portion of the underlying item is not recognized in the balance sheet—and the ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss. Amounts recognized directly in equity are subsequently recognized in profit or loss in the same period or periods during which the hedged item affects profit or loss.