145 ANNUAL REPORT 2023 NOTES TO THE FINANCIAL STATEMENTS For the financial year ended 31 December 2023 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) 2.27 Derivative financial instruments and hedge accounting (cont’d) Initial recognition and subsequent measurement (cont’d) At the inception of a hedging relationship, the Group formally designates and documents the hedging relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements. A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: (a) There is ‘an economic relationship’ between the hedged item and the hedging instrument. (b) The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship. (c) The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. Cash flow hedges which meet the criteria for hedge accounting are accounted as follows: The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. Amounts accumulated in other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. When a cash flow hedged is discontinued, the cumulative gain or loss previously recognised in other comprehensive income will remain in the cash flow hedge reserve if the hedged future cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or loss as a reclassification adjustment. After discontinuation, once the hedged cash flow occurs, any amount remaining in accumulated other comprehensive income must be accounted for depending on the nature of the underlying transaction as described above. Gain or losses arising from the changes in fair value of derivative instruments that do not qualify for hedge accounting are taken to the profit and loss account.
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