At the inception of the transaction the Group documents
for long-term debt. Other techniques, such as options pricing
the relationship between hedging instruments and hedged
models and estimated discounted value of future cash flows,
items, as well as its risk management objective and strategy
are used to determine fair value of the remaining financial
for undertaking various hedge transactions. The Group also
instruments.
documents its assessment, both at the hedge inception and on an on-going basis, of whether the derivatives that are used in
INVENTORIES
hedging transactions are highly effective in offsetting changes in
Inventories are valued at the lower of cost and net realisable
fair values or cash flows of hedged items.
value. Cost is determined on the first-in-first-out basis. The values of finished goods and work-in-progress include raw
The fair values of various derivative instruments used for hedging
materials, direct labour, other direct costs and related production
purposes are disclosed in note 35. Movements on the hedging
overheads (based on normal operating capacity) but exclude
reserves in shareholders’ equity are shown under non-distributable
borrowing costs. Net realisable value is the estimate of the
reserves in the statement of changes in equity.
selling price in the ordinary course of business, less the costs of completion and applicable variable selling expenses. Cost of
Embedded derivatives
inventories includes the transfer from equity of gains/losses on
An embedded derivative is a component of a hybrid instrument
qualifying cash flow hedges relating to inventory purchases.
that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in
TRADE RECEIVABLES
a way similar to a stand-alone derivative. Embedded derivative
Trade receivables are recognised initially at fair value and
instruments are accounted for separately if the economic
subsequently measured at amortised cost using the effective
characteristics of the embedded derivative are different from
interest rate method, less the allowance account for credit
those of the host contract and the embedded derivative would
losses. No fair value adjustment is made for the effect of time
meet the definition of a derivative if seen separately. Embedded
value of money where trade receivables have a short-term profile.
derivatives are not split out from instruments already measured
A provision for impairment of trade receivables is established
at fair value through profit and loss. In addition, embedded
when there is objective evidence that the Group will not be able
foreign currency derivatives are not split out if payments are
to collect all amounts due according to the original terms of
required in one of the following currencies:
the receivables. Significant financial difficulties of the debtor,
• The functional currency of any substantial party to the
probability that the debtor will enter bankruptcy or financial
contract;
reorganisation and default or late payments are considered
• The currency in which the price of the related good or service is routinely denominated; or
indicators that the trade receivable is impaired. The amount of the provision is the difference between the carrying amount
• A currency that is commonly used in contracts to purchase
and the recoverable amount, being the present value of the
non-financial items in the economic environment in which the
estimated future cash flow discounted at the effective interest
transaction takes place.
rate. This provision is recognised either directly or through the use of an allowance account. The amount of the loss is included
Fair value estimation
in the income statement for the period.
The fair value of publicly traded derivatives and available-forsale securities is based on quoted market prices at the balance
TAX
sheet date. The fair value of interest rate swaps and cross-
The income tax charge is computed on the basis of reported
currency swaps is calculated as the present value of estimated
income before tax for the year under the laws and regulations
future cash flows. The fair value of forward exchange contracts
of the countries in which the respective Group companies are
is determined using forward exchange market rates at the
registered. Income tax comprises current tax, deferred tax and
balance sheet date.
dividend taxes including STC.
In assessing the fair value of non-traded derivatives and other
Current tax
financial instruments, the Group uses a variety of methods
The current tax charge is the expected tax payable on taxable
and makes assumptions that are based on market conditions
income for the year using substantively enacted tax rates and
existing at each balance sheet date. Quoted market prices or
any adjustments to tax payable in respect of prior years.
dealer quotes for the specific or similar instruments are used
79
Aspen Annual Report 2006
