Financial instruments
Financial assets
The Group classifies its financial assets into the following
categories:
- financial assets at fair value through profit or loss;
- loans and receivables; or
- derivative instruments designated as hedges.
The classification is dependent on the purpose for which
the financial asset is acquired. Management determines the
classification of its financial assets at the time of the initial
recognition.
Financial assets are recognised when the Company becomes a
party to the contractual provisions of the instrument or secures
other access to economic benefits. Such assets consist of cash or a
contractual right to receive cash or another financial asset.
Financial assets, or a portion of a financial asset, are derecognised
when, and only when, the entity loses control of the contractual
rights that comprise the financial asset (or a portion of the
financial asset). Such control is lost if the entity realises the right to
benefits specified in the contract, the rights expire, or the entity
surrenders those rights.
Financial assets at fair value through profit or loss
Financial instruments are classified under this category if held for
trading, or if designated at fair value through profit or loss at
inception. A financial instrument is classified as held-for-trading
if acquired or incurred principally for the purpose of selling it in
the short-term. For the purpose of these financial statements
short-term is defined as three months. Derivatives are also
classified as held for trading unless they are designated as hedges.
Financial instruments in this category are classified as current
assets and liabilities. Financial assets at fair value through profit or
loss are initially recognised at fair value, and transaction costs are
expensed in the income statement. Realised and unrealised gains
and losses arising from changes in the fair value of the financial
instruments at fair value through profit or loss are included in
the income statement during the period in which they arise.
Derivative financial instruments on the statement of financial
position are classified in this category.
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. These are included in current assets, except for maturities
greater than 12 months from year-end, which are classified as
non-current assets. Loans and receivables are initially recognised
at fair value and subsequently measured at amortised cost, less
impairments, using the effective interest rate method. Loans and
receivables comprise the preference share investment, other noncurrent
receivables, trade and other financial receivables, loans
due from Group companies and cash and cash equivalents.
Financial liabilities
Financial liabilities are classified into the following categories:
- financial liabilities at fair value through profit or loss; and
- financial liabilities at amortised cost.
The classification is dependent on the purpose for which the
financial liabilities were acquired or incurred. Management
determines the classification of its financial liabilities at the time
of initial recognition.
Financial liabilities are recognised when there is an obligation to
transfer benefits and that obligation is a contractual liability to
deliver cash or another financial asset or to exchange financial
instruments with another entity on potentially unfavourable
terms. Financial liabilities are derecognised when the obligation
specified in the contract is discharged, cancelled or expires.
Financial liabilities at amortised cost
This category of financial liabilities comprises preference
shares (liability component), borrowings, deferred earn-out
consideration, trade and other financial payables, loans due to
Group companies and the financial liability at amortised cost.
These financial liabilities are initially recognised at fair value plus
transaction costs, and are subsequently measured at amortised
cost using the effective interest method.
Accounting for derivative financial instruments and hedging
activities
The Group’s criteria for a derivative instrument to be designated
as a hedging instrument require that:
- the hedge transaction is expected to be highly effective
in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk;
- the effectiveness of the hedge can be reliably measured
throughout the duration of the hedge;
- there is adequate documentation of the hedging relationship
at the inception of the hedge; and
- for cash flow hedges, the forecast that is the subject of the
hedge must be highly probable.
The Group designates certain derivatives as one of the following
on the date the derivative contract is entered into:
- a hedge of the exposure to changes in fair value of a recognised
asset or liability or a firm commitment (fair value hedge); or
- a hedge of the exposure to variability in cash flows that is
attributable to particular risk associated with a recognised
asset or liability or a highly probable forecast transaction (cash
flow hedge).
Fair value hedges
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in the income statement
as finance costs/income, along with any changes in fair value of
the hedged asset or liability that is attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting,
the adjustment to the carrying amount of a hedged item for
which the effective interest method is used is amortised in the income statement over the period to maturity. The Group did
not designate any derivative instruments as fair value hedges
during the year.
Cash flow hedges
The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges are recognised
in equity. The ineffective portion is recognised immediately in the
income statement within financing costs. Where the forecast
transaction or firm commitment results in the recognition
of a non-financial asset or a non-financial liability, the gains or
losses previously deferred in equity are transferred from equity
into profit or loss in the same period or periods during which
the asset acquired or liability assumed affects profit or loss.
Otherwise, amounts deferred in equity are transferred to the
income statement and classified as gains or losses in the same
periods during which the hedged firm commitment or forecast
transaction affects the income statement.
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 equity at that time remains in equity and
is recognised when the forecast transaction is recognised in the
income statement. When the forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
At the inception of the transaction the Group documents the
relationship between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking
various hedge transactions. The Group also documents its
assessment, both at the hedge inception and on an ongoing basis,
of whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash
flows of hedged items.
Movements on the hedging reserves in shareholders’ equity are
shown under non-distributable reserves in the statement of
changes in equity. The full fair value of a hedging derivative is
classified as a non-current asset or liability when the remaining
hedged item is more than 12 months, and as a current asset or
liability when the remaining maturity of the hedged item is less
than 12 months. Trading derivatives are classified as a current
asset or liability.
Certain derivative transactions, while providing effective
economic hedges under the Group’s risk management policies,
do not qualify for hedge accounting. Changes in the fair value
of any derivative instruments that do not qualify for hedge
accounting are recognised immediately in the income statement
within finance costs.
Fair value estimation
The fair value of publicly traded derivatives is based on quoted
market prices at year-end. The fair value of interest rate swaps
and cross-currency swaps is calculated as the present value of estimated future cash flows. The fair value of forward exchange
contracts is determined using forward exchange market rates at
year-end.
Financial instruments that are measured in the statement of
financial position at fair value, are classified into the following
levels of the fair value measurement hierarchy:
- quoted prices (unadjusted) in active markets for indential
assets or liabilities (level 1);
- inputs other than quoted prices included within level 1 that
are observerable for the assets or liabilities, either directly (ie
as prices) or indirectly (ie derived from prices) (level 2); and
- inputs for the assets or liabilities that are not based on
observerable market data (ie unobserverable inputs) (level 3).
Quoted market prices or dealer quotes for the specific or similar
instruments are used for non-current debt. The fair values of
non-current financial assets and deferred-payables for disclosure
purposes are estimated by discounting the future contractual
cash flows at the interest rates available to the Group at year-end.
Other techniques, such as options pricing models and estimated
discounted value of future cash flows, are used to determine fair
value of the remaining financial instruments.
In assessing the fair value of non-traded derivatives and other
financial instruments, the Group makes assumptions that are
based on market conditions existing at each year-end.
The carrying amounts of the following financial assets and
financial liabilities approximate their fair values:
- trade and other financial receivables;
- cash and cash equivalents;
- other non-current financial receivables;
- loans due to Group companies;
- loans due by Group companies, trade and other financial
payables;
- financial liability at amortised cost;
- deferred earn-out liabilities;
- current borrowings; and
- non-current borrowings.
Information on the fair value of financial instruments is included
in the respective notes.
Leased assets
Finance leases
Leases of property, plant and equipment where the Group has
substantially all the risks and rewards of ownership are classified
as finance leases. Finance leases are capitalised at the inception
of the lease at the lower of the fair value of the leased property
or the present value of the minimum lease payments. Each lease
payment is allocated between the liability and finance charges so
as to achieve a constant rate on the finance balance outstanding.
The corresponding rental obligations, net of finance charges,
are included in borrowings. The interest element is charged to
the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of
the liability for each period. The property, plant and equipment
acquired under finance leases are depreciated over the shorter
of the useful life of the asset or the lease term.
Operating leases
Leases where a significant portion of risks and rewards of
ownership are retained by the lessor are classified as operating
leases. Operating lease costs (net of any incentives from the
lessor) are charged against operating profit on a straight-line
basis over the period of the lease.
Inventories
Inventories are valued at the lower of cost and net realisable
value. Cost is determined on the first-in-first-out basis. The
carrying values of finished goods and work-in-progress include
raw materials, direct labour, other direct costs and related
production overheads (based on normal operating capacity) but
exclude borrowing costs. Net realisable value is the estimate of
the selling price in the ordinary course of business, less the costs
of completion and applicable variable selling expenses.
Trade receivables
Trade receivables are recognised initially at fair value (fair value is
deemed to equal cost) and subsequently measured at amortised
cost using the effective interest rate method, less the allowance
account for losses. No fair value adjustment is made for the effect
of time value of money where trade receivables have a shortterm
profile. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will
not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the
debtor, probability that the debtor will enter bankruptcy or financial
reorganisation and default or late payments are considered
indicators that the trade receivable is impaired. The amount of
the provision is the difference between the carrying amount and
the recoverable amount of the asset, being the present value of
the estimated future cash flow discounted at the original effective
interest rate. This provision is recognised through the use of an
allowance account. The amount of the loss is included in the
income statement within administrative expenses. When a trade
receivable is uncollectible, it is written off against the allowance
account for losses. Subsequent recoveries of amounts previously
written off are credited against administrative expenses in the
income statement.
Cash and cash equivalents
Cash and cash equivalents are initially measured at fair value
and subsequently carried at amortised cost. For the purposes
of the statement of financial position, cash and cash equivalents
comprise cash-on-hand and deposits held on call with banks.
For the purposes of the statement of cash flows, cash and cash
equivalents comprise cash-on-hand, deposits held on call with
banks, less bank overdrafts. Bank overdrafts are shown within
borrowings in current liabilities on the statement of financial
position.
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