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TEHO INTERNATIONAL INC LTD Annual Report 2012 38
Notes to the
Financial Statements
30 June 2012
2. Summary of Signifcant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include bank and cash balances, on demand deposits and
any highly liquid debt instruments purchased with an original maturity of three months or
less. For the statement of cash flows the item includes cash and cash equivalents less
cash subject to restriction and bank overdrafts payable on demand that form an integral
part of cash management.
Hedging
The entity is exposed to currency and interest rate risks. The policy is to reduce currency
and interest rate exposures through derivatives and other hedging instruments. From
time to time, there may be borrowings and foreign exchange arrangements or interest
rate swap contracts or similar instruments entered into as hedges against changes in
interest rates, cash flows or the fair value of the financial assets and liabilities. These
arrangements are not used for trading or speculative purposes. They are carried at
fair value. The gain or loss from remeasuring these hedging or other arrangement
instruments at fair value are recognised in profit or loss. The derivatives and other
hedging instruments used are described below in the notes to the financial statements.
Derivatives
All derivatives are initially recognised and subsequently carried at fair value. Accounting
for derivatives engaged in hedging relationships is described in the above section.
Certain derivatives are entered into in order to hedge some transactions and all the
strict hedging criteria prescribed by FRS 39 are not met. In those cases, even though
the transaction has its economic and business rationale, hedge accounting cannot be
applied. As a result, changes in the fair value of those derivatives are recognised directly
in profit or loss and the hedged item follows normal accounting policies.
2. Summary of Signifcant Accounting Policies (Continued)
Financial Liabilities
Initial recognition, measurement and derecognition:
A financial liability is recognised on the statement of financial position when, and only
when, the entity becomes a party to the contractual provisions of the instrument and it
is derecognised when the obligation specified in the contract is discharged or cancelled
or expires. The initial recognition of financial liability is at fair value normally represented
by the transaction price. The transaction price for financial liability not classified at fair
value through profit or loss includes the transaction costs that are directly attributable
to the acquisition or issue of the financial liability. Transaction costs incurred on the
acquisition or issue of financial liability classified at fair value through profit or loss are
expensed immediately. The transactions are recorded at the trade date. Financial
liabilities including bank and other borrowings are classified as current liabilities unless
there is an unconditional right to defer settlement of the liability for at least 12 months
after the end of the reporting year.
Subsequent measurement:
Subsequent measurement based on the classification of the financial liabilities in one of
the following two categories under FRS 39 is as follows:
1. Liabilities at fair value through profit or loss: Liabilities are classified in this category
when they are incurred principally for the purpose of selling or repurchasing in
the near term (trading liabilities) or are derivatives (except for a derivative that is
a designated and effective hedging instrument) or have been classified in this
category because the conditions are met to use the “fair value option” and it is
used. Financial guarantee contracts if significant are initially recognised at fair
value and are subsequently measured at the greater of (a) the amount determined
in accordance with FRS 37 and (b) the amount initially recognised less, where
appropriate, cumulative amortisation recognised in accordance with FRS 18. All
changes in fair value relating to liabilities at fair value through profit or loss are
charged to profit or loss as incurred.
2. Other financial liabilities: All liabilities, which have not been classified as in the
previous category fall into this residual category. These liabilities are carried at
amortised cost using the effective interest method. Trade and other payables and
borrowings are usually classified in this category. Items classified within current
trade and other payables are not usually re-measured, as the obligation is usually
known with a high degree of certainty and settlement is short-term.