APC 2015 Annual Report Download - page 202

2015 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC200
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER31,2015
5NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 cover 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 any direct transaction costs are deducted.
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 mark 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.
Interest rate swaps
Interest rate swaps allow the Group to manage its exposure to
interest rate risk. The derivative instruments used are fi nancially
adjusted to the schedules, rates and currencies of the borrowings
they cover. They involve the exchange of fi xed and fl oating-rate
interest payments. The differential to be paid (or received) is accrued
(or deferred) as an adjustment to interest income or expense over
the life of the agreement. The Group applies hedge accounting as
described in IAS39 for interest rate swaps. Gains and losses on
re-measurement of interest rate swaps at fair value are recognized
in equity (for cash fl ow hedges) or in profi t or loss (for fair value
hedges).
Commodity contracts
The Group also purchases commodity derivatives including forward
purchase contracts, swaps and options to hedge price risks on
all or part of its forecast future purchases. Under IAS 39, these
qualify as cash fl ow hedges. These instruments are recognized in
the balance sheet at fair value at the period-end (mark to market).
The effective portion of the hedge is recognized separately in equity
(under«Other reserves») and then recognized in income (gross
margin) when the underlying hedge affects consolidated income.
The effect of this hedging is then incorporated in the cost price of
the products sold. The ineffective portion of the gain or loss on the
hedging instrument is recognized in«Net fi nancial income/(loss)».
Cash fl ows from fi nancial instruments are recognized in the
consolidated statement of cash fl ows in a manner consistent with
the underlying transactions.
Put options granted to minority shareholders
In line with the AMF’s recommendation of November2009 and in
the absence of a specifi c IFRS rule, the Group elected to retain
the accounting treatment for minority put options applied up to
December31, 2009, involving puts granted to minority shareholders
prior to this date. In this case, the Group elected to recognize the