APC 2012 Annual Report Download - page 178

2012 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC176
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER31, 2012
5NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Only plans set up after November7, 2002 that did not vest prior to
January1, 2005 are affected by the application of IFRS2 – Share-
based payments.
Pursuant to this standard, these plans are measured on the date
of grant and an employee benefi ts expense is recognized on a
straight-line basis over the vesting period, in general three or four
years depending on the country in which it is granted.
The Group uses the Cox, Ross, Rubinstein binomial model to
measure these plans.
For stock grants and stock options, this expense is offset in the own
share reserve. In the case of stock appreciation rights, a liability is
recorded corresponding to the amount of the benefi t granted, re-
measured at each balance sheet date.
As part of its commitment to employee share ownership, Schneider
Electric gave its employees the opportunity to purchase shares at a
discount (note21.5).
1.21 – Provisions for contingencies and pension
accruals
A provision is recorded when the Group has an obligation to a third
party prior to the balance sheet date, and where the loss or liability is
likely and can be reliably measured. If the loss or liability is not likely
and cannot be reliably estimated, but remains possible, the Group
discloses it as a contingent liability. Provisions are calculated on a
case-by-case or statistical basis and discounted when due in over a
year. The discount rate used for long-term provisions was 2.05% at
December31, 2012 versus 3.42% at December31, 2011.
Provisions are primarily set aside to cover:
•economic risks:
these provisions cover tax risks arising from tax audits performed
by local tax authorities and fi nancial risks arising primarily on
guarantees given to third parties in relation to certain assets and
liabilities;
•customer risks:
these provisions are primarily established to covers risks arising
from products sold to third parties. This risk mainly consists of
claims based on alleged product defects and product liability;
•product risks:
these provisions comprise:
–statistical provisions for warranties: the Group funds provisions
on a statistical basis for the residual cost of Schneider Electric
product warranties not covered by insurance,
–provisions to cover disputes concerning defective products
and recalls of clearly identifi ed products;
•environmental risks:
these provisions are primarily funded to cover cleanup costs;
•restructuring costs, when the Group has prepared a detailed
plan for the restructuring and has either announced or started to
implement the plan before the end of the year.
1.22 – Financial liabilities
Financial liabilities primarily comprise bonds and short and long-
term bank borrowings. These liabilities are initially recorded at
fair value, from which are deducted any direct transaction costs.
Subsequently, they are measured at amortized cost based on their
effective interest rate.
1.23 – Financial instruments and derivatives
Risk hedging management is centralized. The Group’s policy is
to use derivative fi nancial instruments exclusively to manage and
hedge changes in exchange rates, interest rates or prices of certain
raw materials. The Group accordingly uses instruments such
as swaps, options and futures, depending on the nature of the
exposure to be hedged.
Foreign currency hedges
The Group periodically buys foreign currency derivatives to hedge the
currency risk associated with foreign currency transactions. Some
of these instruments hedge operating receivables and payables
carried in the balance sheets of Group companies. The Group does
not apply hedge accounting to these instruments because gains
and losses on this hedging is immediately recognized. At year-
end, the hedging derivatives are marked to market and gains or
losses are recognized in “Net fi nancial income/(loss)”, offsetting the
gains or losses resulting from the translation at end-of-year rates
of foreign currency payables and receivables, in accordance with
IAS21 – The Effects of Changes in Foreign Exchange Rates.
The Group also hedges future cash fl ows, including recurring
future transactions, intra-group foreign currency loans or planned
acquisitions or disposals of investments. In accordance with IAS39,
these are treated as cash fl ow hedges. These hedging instruments
are recognized in the balance sheet and are measured at fair
value at the end of the year. The portion of the gain or loss on the
hedging instrument that is determined to be an effective hedge is
accumulated in equity, under “Other reserves”, and then recognized
in the income statement when the hedged item affects profi t or loss.
The ineffective portion of the gain or loss on the hedging instrument
is recognized in “Net fi nancial income/(loss)”.
In addition, certain long-term receivables and loans to subsidiaries
are considered to be part of a net investment in a foreign operation,
as defi ned by IAS21 – The Effects of Changes in Foreign Exchange
Rates. In accordance with the rules governing hedges of net
investments, the impact of exchange rate fl uctuations is recorded
in equity and recognized in the statement of income when the
investment is sold.