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Wiley IFRS: Practica l Implementation Guide and Workbook
Financial liabilities
With the exception of financial liabilities held for trading, bonds redeemable for STM shares,
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Espana' s credit lines, and derivative instruments which are measured at fair value through
profit or loss, borrowings and other financial liabilities are recognized at fair value and subse–
quently measured at amortized cost by the effective interest method.
Transaction costs that are directly attributable to the acquisition or issue of the financial li–
ability are deducted from the liability' s carryi ng value. This is because financial liabilities are
initially recognized at cost, corresponding to the fair value of the sums paid or received in ex–
change for the liability. The costs are subseq uently amort ized over the life of the debt, by the ef–
fective interest method.
The effective interest rate is the rate that exactly discounts estimated future cash payments
through the expected life of the financial instrument or, when appropriate, through the period to
the next interest adjustment date, to the net carrying amount of the financial liability. The calcu–
lation includes all fees and points paid or received between parties to the contract.
Certain borrowings are designated as being hedged by fair value hedges. A fair value hedge
is a hedge of the expos ure to changes in fair value of a recognized liability or an identified portion
of the liability that is attributed to a particular risk and cou ld affect profit or loss.
Certain other financial liabilities are designated as being hedged by cash flow hedges. A cash
flow hedge is a hedge of the expos ure to variability in cash flows that is attributable to a particular
risk associated with a recognized liability or a highly probable forecast transaction (such as a pur–
chase or sale) and could affect profit or loss.
Concerning the bonds redeemable for STM shares, it is not possible to measure the embedded
derivative separately from the host contract either at acquisition or at a subsequent financi al re–
porting date: consequently, the entire combined contract has been treated as a financial liability at
fair value.
Hybrid instruments
Certain financial instrumen ts comprise both a liability compone nt and an equ ity component.
For the France Teleco m Group, they comprise perpetual bonds redeema ble for shares (TDIRAs),
bonds convertible into or exchangeab le for new or existing shares (OCEANEs), and bonds with
an exchange option.
On initial recognition, the fair value of the liability component is the present value of the
contractually determined stream of future cash flows discounted at the rate of interest applied at
that time by the market to instruments of comparable credit status and providing substantially the
same cash flows , on the same terms, but without the conversion option.
The equity compo nent is assigned to the residua l amount after deducting from the fair value
of the instrument as a whole the amount separately determined for the liability component.
Financial liabili ties held fo r trading
Financial liabilities held for trading are measured at fair value.
• Measurement and recognition of derivative instruments
Derivative instruments are recognized in the balance sheet and measured at fair value. Ex–
cept as explained below, gains and losses arising from remeasurement at fair value of derivative
instruments are systematically recognized in the income statement.
Hedging instruments
Derivative instruments may be designated as fair value hedges or cash flow hedges:
A fair value hedge is a hedge of the exposure to changes in fair value of a recognized as–
set or liability or an identified portion of the asset or liability that is attributable to a particular
risk-notably interest rate and currency risks-and could affect profit or loss.
A cash flow hedge is a hedge of the exposure to variability in cash flows that is attribut–
able to a particular risk associated with a recognized asset or liability or a highly probable
forecast transaction (such as a future purchase or sale) and could affect profit or loss.
A hedging relationship qualifies for hedge accounting when
At the inception of the hedge, there is formal des ignation and documentation of the
hedging relationship.
At the inception of the hedge and in subsequent periods, the hedge is expected to be
highly effective in achieving offsetting changes in fair value or cash flows attributable to the
hedged risk during the period for which the hedge is designated (i.e., the actual results of the
hedge are within a range of 80% to 125%).