NOTES TO THE FINANCIAL STATEMENTS
For the Financial Year Ended 31 December 2014
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
2.30 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING (CONT’D)
At the inception of a hedge relationship, the Group formally designate and document the hedge relationship to which
the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge.
The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the
risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in
offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such
hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on
an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods
for which they were designated.
Hedge accounting will be discontinued in a situation where a derivative, which has been designated as a hedging instrument,
is novated to effect clearing within a central counterparty as a result of laws or regulation, if specific conditions are met
(in this context, a novation indicates that parties to a contract agree or replace their original counterparty with a new
one). Any change to the fair value of the derivative designated as a hedging instrument arising from the novation should
be included in the assessment and measure of hedge effectiveness with retrospective application.
Hedges that meet the strict criteria for hedge accounting are accounted for as described below:
(a)
Fair value hedges
The change in the fair value of a hedging derivative is recognised in profit or loss. The change in the fair value of
the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and
is also recognised in profit or loss.
For fair value hedges relating to items carried at amortised cost, any adjustment to carrying value is amortised
through profit or loss over the remaining term of the hedge using the effective interest rate method. Effective interest
rate amortisation may begin as soon as an adjustment exists and no later than when the hedged item ceases to be
adjusted for changes in its fair value attributable to the risk being hedged.
If the hedge item is de-recognised, the unamortised fair value is recognised immediately in profit or loss.
When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in
the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a
corresponding gain or loss recognised in profit or loss.
(b)
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive
income in the hedging reserve, while any ineffective portion is recognised immediately in profit or loss.
Amounts recognised as other comprehensive income are transferred to profit or loss when the hedged transaction
affects profit or loss, such as when the hedged interest income or interest expense is recognised or when a
forecast sale or purchase occurs. When the hedged item is the cost of a non-financial asset or non-financial
liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of
the non-financial asset or liability.
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THE STRAITS TRADING COMPANY LIMITED ANNUAL REPORT 2014
