Nokia 2012 Annual Report Download - page 218

Generally, the cash flows of a hedge are classified as cash flows from operating activities in the
consolidated statement of cash flows as the underlying hedged items relate to the company’s operating
activities. When a derivative contract is accounted for as a hedge of an identifiable position relating to
financing or investing activities, the cash flows of the contract are classified in the same manner as the
cash flows of the position being hedged.
Derivatives not designated in hedge accounting relationships carried at fair value through profit and
loss
Forward foreign exchange contracts are valued at the market forward exchange rates. Changes in fair
value are measured by comparing these rates with the original contract forward rate. Currency options
are valued at each balance sheet date by using the Garman & Kohlhagen option valuation model.
Changes in the fair value on these instruments are recognized in profit and loss.
Fair values of forward rate agreements, interest rate options, futures contracts and exchange traded
options are calculated based on quoted market rates at each balance sheet date. Discounted cash flow
analyses are used to value interest rate and cross-currency interest rate swaps. Changes in the fair
value of these contracts are recognized in profit and loss.
For derivatives not designated under hedge accounting but hedging identifiable exposures such as
anticipated foreign currency denominated sales and purchases, the gains and losses are recognized in
other operating income or expenses. The gains and losses on all other derivatives not designated
under hedge accounting are recognized in financial income and expenses.
Embedded derivatives are identified and monitored by the Group. Embedded derivatives are measured
at fair valued at each balance sheet date with changes in the fair value are recognized in profit and
loss.
Hedge accounting
The Group applies hedge accounting on certain forward foreign exchange contracts, certain options or
option strategies and certain interest rate derivatives. Qualifying options and option strategies have
zero net premium or a net premium paid. For option structures the critical terms of the bought and sold
options are the same and the nominal amount of the sold option component is no greater than that of
the bought option.
Cash flow hedges: Hedging of forecast foreign currency denominated sales and purchases
The Group applies hedge accounting for “Qualifying hedges”. Qualifying hedges are those properly
documented cash flow hedges of the foreign exchange rate risk of future forecast foreign currency
denominated sales and purchases that meet the following requirements. The cash flow being hedged
must be “highly probable” and must present an exposure to variations in cash flows that could
ultimately affect profit or loss. The hedge must be highly effective both prospectively and
retrospectively.
For qualifying foreign exchange forwards, the change in fair value that reflects the change in spot
exchange rates is deferred in fair value and other reserves to the extent that the hedge is effective. For
qualifying foreign exchange options, or option strategies, the change in intrinsic value is deferred in fair
value and other reserves to the extent that the hedge is effective. In all cases, the ineffective portion is
recognized immediately in profit and loss as financial income and expenses. Hedging costs, expressed
either as the change in fair value that reflects the change in forward exchange rates less the change in
spot exchange rates for forward foreign exchange contracts, or change in the time value for options, or
options strategies, are recognized in other operating income or expenses.
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