Annual Report 2011 - Mandarin Oriental Hotel Group

40 Mandarin Oriental International Limited
Principal Accounting Policies Continued
R Derivative financial instruments
The Group only enters into derivative financial instruments in order to hedge underlying exposures. Derivative
financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are
subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss is dependent on the
nature of the item being hedged. The Group designates certain derivatives as a hedge of a forecasted transaction or of
the foreign currency risk on a firm commitment (cash flow hedge), or a hedge of a net investment in a foreign entity.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly
effective, are recognized in other comprehensive income and accumulated in equity under hedging reserves. Where
the forecasted transaction or firm commitment results in the recognition of a non-financial asset or of a non-financial
liability, the gains and losses previously deferred in hedging reserves are transferred from hedging reserves and included
in the initial measurement of the cost of the asset or liability. Otherwise, amounts deferred in hedging reserves are
transferred to profit and loss in the same periods during which the hedged firm commitment or forecasted transaction
affects profit and loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss existing in hedging reserves at that time remains in the hedging
reserves and is recognized when the committed or forecasted transaction ultimately is recognized in profit and loss.
When a committed or forecasted transaction is no longer expected to occur, the cumulative gain or loss that was
reported in hedging reserves is immediately transferred to profit and loss.
Certain derivative transactions, while providing effective economic hedges under the Group’s risk management
policies, do not qualify for hedge accounting under the specific rules in IAS 39. Changes in the fair value of any
derivative instruments that do not qualify for hedge accounting under IAS 39 are recognized immediately in profit
and loss.
Hedges of net investments in foreign entities are accounted for on a similar basis to that used for cash flow hedges.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in exchange
reserves; the gain or loss relating to the ineffective portion is recognized immediately in profit and loss.
The fair value of derivatives which are designated and qualified as effective hedges are classified as non-current assets or
liabilities if the remaining maturities of the hedged assets or liabilities are greater than twelve months after the balance
sheet date.
S Financial guarantee contracts
Financial guarantee contracts under which the Group accepts significant risk from a third party by agreeing to
compensate that party on the occurrence of a specified uncertain future event are accounted for in a manner similar
to insurance contracts. Provisions are recognized when it is probable that the Group has obligations under such
guarantees and an outflow of resources embodying economic benefits will be required to settle the obligations.
T Non-trading items
Non-trading items are separately identified to provide greater understanding of the Group’s underlying business
performance. Items classified as non-trading include items such as gains on disposals, provisions against asset
impairment and other material items which are non-recurring in nature that require disclosure in order to provide
additional insight into underlying business performance.