Page 240 - BTSGroup ONE REPORT 2021/22_EN

238 l Introduction l Nature of Business l Organisation and Shareholding Structure l Business Review l Corporate Governance l Financial Statements l Other Information l
and documents the hedging relationship to which it wishes to apply
hedge accounting and the risk management objective and strategy for
undertaking the hedge.
The documentation, at the inception of the hedge and on an ongoing basis,
includes identification of the hedging instrument, the hedged item,
the nature of the risk being hedged and how the Group will assess
whether the hedging relationship meets the hedge effectiveness
requirements, including analysis of the sources of hedge ineffectiveness
and how the hedge ratio is determined.
A hedging relationship qualifies for hedge accounting if it meets all of
the following hedge effectiveness requirements:
- There is ‘an economic relationship’ between the hedged item and
the hedging instrument.
- The effect of credit risk is not the dominant factor in the value changes
that result from that economic relationship.
- The hedge ratio of the hedging relationship is the same as that
resulting from the quantity of the hedged item that the Group actually
hedges and the quantity of the hedging instrument that the Group
actually uses to hedge that quantity of hedged item.
Hedges that meet all of the qualifying criteria for hedge accounting are
accounted for, as described below:
Fair value hedges
For fair value hedges of equity instruments designated at fair value
through other comprehensive income, the changes in fair value of
the hedged items is recognised in other comprehensive income.
The changes in fair value for spot element of forward contracts is
recognised in other comprehensive income for offset of the fair value
risk of the hedged items in part of the exchange rate translation.
The cumulative effect of gains or losses on hedging instruments that is
stored in other comprehensive income remains there until disposal of
the hedged item, when it is transferred to retained earnings. In addition,
gains or losses on changes in the fair value of hedging instruments
are immediately recognised in the income statement when use of the
hedging instrument ceases.
The Group designates only the spot element of forward contracts as
a hedging instrument. The change in fair value of the forward element
of forward contracts is separately accounted for as a cost of hedging
which is recognised in other comprehensive income.
If the hedged item is transaction-related, the cost of hedging reserve
accumulated in other comprehensive income is reclassified to profit
or loss when the hedged item affects profit or loss. If the hedged
item is time-period related, then the reserve accumulated in other
comprehensive income is reclassified to profit or loss on systematic
and rational basis. Furthermore, if the Group expects that some or all of
the loss accumulated in cost of hedging reserve will not be recovered
in the future, that amount is immediately reclassified to profit or loss.
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is
recognised in other comprehensive income in the cash flow hedge reserve,
while any ineffective portion is recognised immediately in profit or loss.
The cash flow hedge reserve is adjusted to the lower (in absolute amounts)
of the cumulative gain or loss on the hedging instrument and the
cumulative change in fair value of the hedged item.