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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
depends onwhether thederivative is designated andqualifies as a
hedging instrument, and if so, the nature of the itembeing hedged.
According to IAS39, derivatives are categorized as held for trading
unless they aredesignated andqualify as hedging instruments.
Derivatives embedded in other financial instruments or other non-
financial host contracts are treated as separate derivatives when
their risk and characteristics are not closely related to those of the
host contract and the host contract is not carried at fair value with
gains or losses reported in profit or loss. Currently, for the
REC Group this is relevant for currency derivatives embedded in
committed sales contracts in which the currency in the contract is
not the functional currency of one of the parties to the contract or a
commonly used currency (see note 4.1(D)). The embedded currency
derivative is separated based on the forward currency rates at the
date of the contract and the host contract is treated as a sales
contract in the relevant REC entity’s functional currency.
Historically, the REC Group has applied cash flow hedge accounting
for a portion of its risks associated with foreign currency
fluctuations related to highly probable future purchase or sales
transactions. However, at December 31, 2011 and 2010 REC had
no hedge accounting for currency risk and the only remaining
designated hedge instruments related to fair value interest rate
hedge of NOK bonds.
At the inception of a hedge relationship, the RECGroup formally
designates and documents the hedge relationship towhich the
RECGroupwishes to apply hedge accounting and the risk
management objective and the strategy for undertaking the hedge.
The documentation includes identification of the hedging instrument,
the hedged itemor transaction, the nature of the risk being hedged
and how the entity will assess the hedging instrument’s effectiveness
in offsetting the exposure to change 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.
A cash flowhedge is a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associatedwith a
recognized asset or liability or a highly probable forecasted
transaction that could affect profit or loss. The effective portion of the
gain or loss on the hedging instrument is recognized in equity through
other comprehensive income, while the ineffective portion is
recognized in profit or loss. Amounts recognized in equity through
other comprehensive income are transferred to profit or losswhen
the hedged transaction affects profit or loss, such aswhen a
forecasted sale or purchase occurs. If the forecasted transaction is no
longer expected to occur, amounts previously recognized in equity
through other comprehensive income are 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, amounts previously recognized in equity remain in equity
until the forecasted transaction occurs. If the related transaction is
not expected to occur, the amount is taken to profit or loss.
A fair value hedge is a hedge of the exposure to changes in fair
value of a recognized asset or liability or an unrecognized firm
commitment, or an identified portion of such an asset, liability or
firm commitment, that is attributable to a particular risk and could
affect profit or loss. The gain or loss from remeasuring the hedging
instrument at fair value (for a derivative hedging instrument) or the
foreign currency component of its carrying amount measured in
accordance with IAS 21 (for a non-derivative hedging instrument)
shall be recognized in profit or loss; and the gain or loss on the
hedged item attributable to the hedged risk shall adjust the carrying
amount of the hedged item and be recognized in profit or loss. Fair
value hedge accounting shall be discontinued prospectively if the
hedging instrument expires or is sold, terminated or exercised (for
this purpose, the replacement or rollover of a hedging instrument
into another hedging instrument is not an expiration or termination
if such replacement or rollover is part of the entity’s documented
hedging strategy); the hedge no longer meets the criteria for hedge
accounting in IAS 39; or the designation is revoked.
Starting from the end of the third quarter 2009, REC has applied
fair value hedge accounting for the NIBOR interest part of fixed rate
NOK bond loans (hedge items) using interest rate derivatives. The
change in fair value of the part of the fixed interest bond relating to
NIBOR, as well as the derivatives is recognized to profit or loss as
parts of financial items. The part of the fixed rate bond that
represents the credit risk premium at the inception (pricing) of
the bond as well as the variable NIBOR rate of the derivatives are
recognized at amortized cost (reported as interest expense).
2.11 TRADE RECEIVABLES
Trade receivables are recognized initially at fair value and
subsequently measured at amortized cost, less provisions for
impairment. A provision for impairment of trade receivables is
recognized in the statement of income and is established when
there is objective evidence that the REC Group will not be able
to collect all amounts due according to the original terms of the
receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial
reorganization, and default or delinquency in payments, are
considered indicators that the trade receivable is impaired.
2.12 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in hand and demand
deposits at banks.
2.13 PAID-IN EQUITY CAPITAL
Incremental costs directly attributable to the issue of new shares
are shown in equity as a deduction, net of tax, from the proceeds.
2.14 BORROWINGS
Borrowings are recognized initially at fair value, net of transaction
costs incurred unless it is at fair value through profit or loss.
Borrowings that are not at fair value through profit or loss are
subsequently stated at amortized cost. Any difference between the
proceeds (net of transaction costs) and the redemption value is
recognized in the statement of income over the period the
borrowings are outstanding using the effective interest method.