building a STRONGER foundation - Cemex

foreign subsidiaries. These instruments have been negotiated with institutions with significant financial capacity; therefore, we
consider the risk of non-compliance with the obligations agreed to by such counterparties to be minimal.
Derivative financial instruments are recognized as assets or liabilities in the balance sheet at their estimated fair values, and the
changes in such fair values are recognized in the statements of operations for the period in which they occur, except for changes in the
fair value of derivative instruments that are designated and effective as cash flow hedges and hedges of the net investment in foreign
subsidiaries. Some of our instruments have been designated as cash flow hedges. For the years ended December 31, 2010, 2009 and
2008, we have not designated any fair value hedges. See note 12C to our consolidated financial statements included elsewhere in this
annual report.
Interest accruals generated by interest rate swaps and/or cross-currency swaps are recognized as financial expense, adjusting the
effective interest rate of the related debt.
Pursuant to their recognition at fair value under MFRS, our balance sheets and statements of operations are subject to volatility
arising from variations in interest rates, exchange rates, share prices and other conditions established in our derivative instruments.
The estimated fair value under MFRS represents the amount at which a financial asset could be bought or sold, or a financial liability
could be extinguished at the reporting date, between willing parties in an arm’s length transaction. Occasionally, there is a reference
market that provides the estimated fair value; in the absence of a market, such value is determined by the net present value of
projected cash flows or through mathematical valuation models. The estimated fair values of derivative instruments determined by us
and used by us for recognition and disclosure purposes in the financial statements and their notes are supported by the confirmations
of these values received from the counterparties to these financial instruments, which act as valuation agents in these transactions;
nonetheless, significant judgment is required to appropriately account for the effects of derivative financial instruments in the financial
statements. Beginning in 2008, the definition of fair value under U.S. GAAP was redefined by ASC 820, Fair Value Measurements
and Disclosure (formerly SFAS 157, Fair Value Measurements), as an “Exit Value,” which created a difference between MFRS and
U.S. GAAP. An “Exit Value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The difference between the fair value under MFRS, which is equivalent to a
settlement amount at the balance sheet date, and the Exit Value under U.S. GAAP, is that the latter considers the counterparty’s credit
risk in the valuation. See notes 12C and 24(h) to our consolidated financial statements included elsewhere in this annual report.
The estimated fair values of derivative financial instruments fluctuate over time, and are based on estimated settlement costs or
quoted market prices. These values should be viewed in relation to the fair values of the underlying instruments or transactions, and as
part of our overall exposure to fluctuations in foreign exchange rates, interest rates and prices of shares. The notional amounts of
derivative instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our
exposure through our use of derivatives. The amounts exchanged are determined on the basis of the notional amounts and other
variables included in the derivative instruments.
Impairment of long-lived assets
Our balance sheet reflects significant amounts of long-lived assets (mainly fixed assets and goodwill) associated with our
operations throughout the world. Many of these amounts have resulted from past acquisitions, which have required us to reflect these
assets at their fair market values at the dates of acquisition. According to their characteristics and the specific accounting rules related
to them, we assess the recoverability of our long-lived assets at least once a year, normally during the fourth quarter, as is the case for
goodwill and other intangible assets of indefinite life, or whenever events or circumstances arise that we believe trigger a requirement
to review such carrying values, as is the case with property, machinery and equipment and intangible assets of definite life.
Goodwill is evaluated for impairment by determining the value in use of the reporting units, which consists of the discounted
amount of estimated future cash flows to be generated by such reporting units to which goodwill relates. A reporting unit refers to a
group of one or more cash generating units. Each reporting unit, for purposes of the impairment evaluation, consists of all operations
in each country. An impairment loss under MFRS is recognized if such discounted cash flows are lower than the net book value of the
reporting unit. In applying the value in use method, we determine the discounted amount of estimated future cash flows over a period
of five years, unless a longer period is justified in a specific country considering its economic cycle and the situation of the industry.
For the years ended December 31, 2008, 2009 and 2010, the geographic segments we reported in note 3A to our consolidated
financial statements included elsewhere in this annual report, each integrated by multiple cash generating units, also represent our
reporting units for purposes of testing goodwill for impairment. Based on our analysis, we concluded that the operating components
that integrate the reported segments have similar economic characteristics, by considering: (a) the reported segments are the level used
by us to organize and evaluate our activities in the internal information system, (b) the homogenous nature of the items produced and
traded in each operative component, which are all used by the construction industry, (c) the vertical integration in the value chain of
the products comprising each component, (d) the type of clients, which are substantially similar in all components, (e) the operative
integration among operating components, evidenced by the adoption of shared service centers, and (f) the compensation system of any
of our country operations is based on the consolidated results of the geographic segment and not on the particular results of the
components.
81