Notes to the consolidated financial statements
74 Financial statements
3. Significant accounting policies
(v) Other
Other non-derivative financial instruments are measured at amortised cost using the effective interest
method, less any impairment losses. Included in non-derivative financial instruments are advances
to customers. Subsequently the advances are amortised over the term of the contract as a reduction
of revenue.
(d) Derivative financial instruments
(i) General
Heineken uses derivatives in the ordinary course of business in order to manage market risks. Generally
Heineken seeks to apply hedge accounting in order to minimise the effects of foreign currency
fluctuations in the income statement.
Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, forward
exchange contracts and options. Transactions are entered into with a limited number of counterparties
with strong credit ratings. Foreign currency and interest rate hedging operations are governed by an
internal policy and rules approved and monitored by the Executive Board.
Derivative financial instruments are recognised initially at fair value, with attributable transaction
costs recognised in the income statement when incurred. Derivatives for which hedge accounting
is not applied are accounted for as instruments at fair value through profit or loss. When derivatives
qualify for hedge accounting, subsequent measurement is at fair value, and changes therein accounted
for as described in note 3d(ii).
The fair value of interest rate swaps is the estimated amount that Fleineken would receive or pay
to terminate the swap at the balance sheet date, taking into account current interest rates and the
current creditworthiness of the swap counterparties.
(ii) Cash flow hedges
Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are
recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge
is ineffective, changes in fair value are recognised in the income statement.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold,
terminated or exercised, then hedge accounting is discontinued and the cumulative unrealised gain or
loss recognised in equity is recognised in the income statement immediately. When a hedging instrument
is terminated, but the hedged transaction still is expected to occur, the cumulative gain or loss at that
point remains in equity and is recognised in accordance with the above-mentioned policy when the
transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity
is transferred to the carrying amount of the asset when it is recognised. In other cases the amount
recognised in equity is transferred to the income statement in the same period that the hedged item
affects the income statement.
(iii) Economic hedges
Fledge accounting is not applied to derivative instruments that economically hedge monetary assets and
liabilities denominated in foreign currencies. Changes in the fair value of such derivatives are recognised
in the income statement as part of foreign currency gains and losses.
Heineken N.V. Annual Report 2007