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Ascott Residence Trust
Annual Report 2015
3 Significant accounting policies
(continued)
3.5 Financial instruments
(continued)
Derivative financial instruments, including hedge accounting
The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures.
Embedded derivatives are separated from the host contract and accounted for separately if the economic
characteristics and risks of the host contract and the embedded derivative are not closely related, a separate
instrument with the same terms as the embedded derivative would meet the definition of a derivative, and
the combined instrument is not measured at fair value through total return.
On initial designation of the hedge, the Group formally documents the relationship between the hedging
instrument(s) and hedged item(s), including the risk management objectives and strategy in undertaking the
hedge transaction and the hedged risk, together with the methods that will be used to assess the effectiveness
of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship
as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in
offsetting the changes in the fair value or cash flows of the respective hedged items during the period for
which the hedge is designated, and whether the actual results of each hedge are within a range of 80%-125%.
For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should
present an exposure to variations in cash flows that could ultimately affect reported total return.
Derivatives are recognised initially at fair value; attributable transaction costs are recognised in the statement of
total return as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes
therein are accounted for as described below.
Cash flow hedges
When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable
to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that
could affect total return, the effective portion of changes in the fair value of the derivative is recognised in the
hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognised immediately
in the statement of total return.
When the hedged item is a non-financial asset, the amount recognised in the hedging reserve is reclassified
to total return in the same period or periods during which the non-financial item affects total return. In other
cases, the amount recognised in the hedging reserve is transferred to total return in the same period that the
hedged item affects total return. If the hedging instrument no longer meets the criteria for hedge accounting,
expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued
prospectively. If the forecast transaction is no longer expected to occur, then the balance in the hedging
reserve is recognised immediately in the statement of total return.
Fair value hedges
Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognised
in the statement of total return. The hedged item is stated at fair value in respect of the risk being hedged;
the gain or loss attributable to the hedged risk is recognised in the statement of total return and the carrying
amount of the hedged item is adjusted.
Other non-trading derivatives
When a derivative financial instrument is not held for trading, and is not designated in a qualifying hedge
relationship, all changes in its fair value are recognised immediately in total return.
