Connect - Schneider Electric

Provisions are primarily set aside to cover:
• economic risks:
These provisions cover tax risks arising from tax audits performed
by local tax authorities and fi nancial risks arising primarily on
guarantees given to third parties in relation to certain assets and
liabilities;
• customer risks:
These provisions are primarily established to covers risks arising
from products sold to third parties. This risk mainly consists of
claims based on alleged product defects and product liability;
• product risks:
These provisions comprise:
– statistical provisions for warranties: the Group funds provisions
on a statistical basis for the residual cost of Schneider Electric
product warranties not covered by insurance.
– provisions to cover disputes concerning defective products
and recalls of clearly identifi ed products;
• environmental risks:
These provisions are primarily funded to cover cleanup costs;
• restructuring costs, when the Group has prepared a detailed
plan for the restructuring and has either announced or started to
implement the plan before the end of the year.
1.21 – Financial liabilities
Financial liabilities primarily comprise bonds and short and
long- term bank borrowings. These liabilities are initially recorded at
fair value, from which are deducted any direct transaction costs.
Subsequently, they are measured at amortised cost based on their
effective interest rate.
1.22 – Financial instruments and derivatives
Risk hedging management is centralised. The Group’s policy is
to use derivative fi nancial instruments exclusively to manage and
hedge changes in exchange rates, interest rates or prices of certain
raw materials. The Group accordingly uses instruments such
as swaps, options and futures, depending on the nature of the
exposure to be hedged.
Foreign currency hedges
The Group periodically buys foreign currency derivatives to hedge the
currency risk associated with foreign currency transactions. Some
of these instruments hedge operating receivables and payables
carried in the balance sheets of Group companies. The Group does
not apply hedge accounting to these instruments because gains
and losses on this hedging is immediately recognised. At year- end,
the hedging derivatives are marked to market and gains or losses
are recognised in “Net fi nancial income/(loss)”, offsetting the gains
or losses resulting from the translation at end-of-year rates of foreign
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
currency payables and receivables, in accordance with IAS 21 –
The Effects of Changes in Foreign Exchange Rates.
The Group also hedges future cash fl ows, including recurring
future transactions, intra-group foreign currency loans or planned
acquisitions or disposals of investments. In accordance with IAS 39,
these are treated as cash fl ow hedges. These hedging instruments
are recognised in the balance sheet and are measured at fair
value at the end of the year. The portion of the gain or loss on the
hedging instrument that is determined to be an effective hedge is
accumulated in equity, under “Other reserves”, and then recognised
in the statement of income when the hedged item affects profi t
or loss. The ineffective portion of the gain or loss on the hedging
instrument is recognised in “Net fi nancial income/(loss)”.
In addition, certain long-term receivables and loans to subsidiaries
are considered to be part of the net investment, as defi ned by
IAS 21 – The Effects of Changes in Foreign Exchange Rates. In
accordance with the rules governing hedges of net investments,
the impact of exchange rate fl uctuations is recorded in equity and
recognised in the statement of income when the investment is sold.
Interest rate swaps
Interest rate swaps allow the Group to manage its exposure to
interest rate risk. The derivative instruments used are fi nancially
adjusted to the schedules, rates and currencies of the borrowings
they cover. They involve the exchange of fi xed and fl oating-rate
interest payments. The differential to be paid (or received) is accrued
(or deferred) as an adjustment to interest income or expense over
the life of the agreement. The Group applies hedge accounting as
described in IAS 39 for interest rate swaps. Gains and losses on
re-measurement of interest rate swaps at fair value are recognised
in equity (for cash fl ow hedges) or in profi t or loss (for fair value
hedges).
Commodity contracts
The Group also purchases commodity derivatives including forward
purchase contracts, swaps and options to hedge price risks on all
or part of its forecast future purchases. Under IAS 39, these qualify
as cash fl ow hedges. These instruments are recognised in the
balance sheet and are measured at fair value at the period- end.
The effective portion of the hedge is recognised separately in equity
(under “Other reserves”) and then recognised in income (gross
margin) when the hedged item affects consolidated income. The
effect of this hedging is then incorporated in the cost price of the
products sold. The ineffective portion of the gain or loss on the
hedging instrument is recognised in “Net fi nancial income/(loss)”.
Cash fl ows from fi nancial instruments are recognised in the
consolidated statement of cash fl ows in a manner consistent with
the underlying transactions.
Put options granted to minority shareholders
In line with the AMF’s recommendation of November 2010 and in
the absence of a specifi c IFRS rule, the Group elected to retain
the accounting treatment for minority put options applied up to
2011 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC
165
5