NOTES TO THE FINANCIAL STATEMENTS
For the financial year ended 31 December 2015
78
THE STRAITS TRADING COMPANY LIMITED
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
2.29 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING (CONT’D)
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.
If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously
recognised in equity is transferred to profit or loss. If the hedging instrument expires or is sold, terminated or
exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss
previously recognised in other comprehensive income remains in other comprehensive income until the forecast
transaction or firm commitment affects profit or loss.
(c)
Hedges of a net investment
Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as
part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging
instrument relating to the effective portion of the hedge are recognised as other comprehensive income while
any gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign
operation, the cumulative value of any such gains or losses recorded in equity is transferred to profit or loss.
