Include loans received and bonds issued, which are initially recognized by the cash received, net of transaction costs. They are subsequently measured at the amortized cost using the effective interest method and recognizing interest expenses on the basis of effective return.
3. Write-offs
A financial liability or a part thereof is written off in the accounts upon settlement or expiry of the contract obligation.
4. Effective interest method
The effective interest method is the method to calculate the amortized cost of a financial liability and the allocation of interest expenses over the relevant period. The effective interest rate is the rate that accurately discounts estimated future cash flows payable during the expected life of a financial liability, or, as appropriate, a shorter period wherever a prepayment option is associated to the liability and it is likely to be exercised.
Embedded derivatives
The Group has implemented a procedure that enables assessing the existence of embedded derivatives in financial and non-financial agreements. Should an embedded derivative exist, and if the main agreement is not accounted for at fair value, the procedure defines whether the characteristics and risks thereof are not closely related with the core agreement, in which event separate booking is required.
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Derivative financial instruments
Derivative financial instruments are recognized, both initially and subsequently, at fair values. Derivative instruments are recognized as financial assets when its fair value involves a right, and as financial liabilities when its fair value involves an obligation.
The fair value of these instruments is estimated on the closing date of presentation of the financial statements.
The gains or losses arising from changes in the fair value of derivative instruments are directly recognized in the statement of income, except those maintained under hedge accounting and deemed to be cash flow hedges or net investment hedges abroad.
Derivative transactions involve "forwards" and "swaps", aimed at reducing the market risk of assets and liabilities by using the best hedging structures available in the market, being able to stabilize debt service cash flows.
By using such hedging structures, regarding "forwards" the intention is to manage the foreign exchange risk, and regarding "swaps", additionally to manage the interest rate risk in foreign currency. The effects of both, derivative financial instruments and elements under the line item of net financial results are recognized in the statement of income.
Even if it is true that the Group does not use derivative financial instruments for speculative purposes, in these financial statements such derivatives have not been deemed hedge instruments given that they do not meet the requirements of International Financial Reporting Standards adopted in Colombia.
"Forwards" and "swaps" that meet hedge accounting requirements are recognized pursuant to the hedge accounting policy.
Financial derivatives are measured at fair value using financial valuation techniques based on discounted cash flows. The variables used for valuation are exchange rates in force on the valuation date applicable to the currencies agreed upon in the instrument and the interest rates associated thereto.
Hedge accounting
The Group carries out hedge transactions under future-performance "forward" contracts and "swap" contracts, to cover the risks associated with changes in the exchange rates applicable to its investments and in the exchange rates and interests rates applicable to its liabilities.
Hedge instruments are measured at its fair value and shall only be used if: - The hedge relationship has been clearly defined and documented initially, and - The efficacy of the hedge may be evidenced initially and throughout its life.
Documents include the identification of the hedge instrument, the item or transaction hedged, the nature of the risk being hedged and the manner in which the Group will measure the efficacy of the hedge instrument to offset the exposure to changes in the fair value of the item hedged or to changes in the cash flows attributable to the hedged risk.
Hedges are deemed to be efficient when there is an economic relationship between the item hedged and the hedge instrument, the effects of the credit risk do not prevail over the value changes arising from such economic relationship, and the hedge ratio is the same as that arising from the item hedged and the amount of the hedge instrument used.
Hedge instruments are recognized initially at fair value, on the date of execution of the derivative contract, and subsequently measured at fair value. They are shown as non-current assets or non-current liabilities wherever the remaining maturity of the item hedged goes beyond 12 months, and, failing that, as current assets and current liabilities if the maturity of the item hedged does not exceed 12 months.
Hedges are classified and booked as follows, upon compliance with strict hedge accounting criteria:
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- Cash flow hedges: This category includes hedges covering the exposure to the variation in cash flows arising from a particular risk associated to a recognized asset or liability or to a foreseen transaction, which occurrence is highly probable and may have an impact on period results.
The effective portion of the changes in the fair value of derivative instruments defined as cash flow hedge instruments is recognized in other comprehensive income. The gain or loss related to the non-effective portion is immediately recognized in the statement of income.
Values recognized in other comprehensive income are reclassified to the statement of income wherever the hedged transaction has an impact on the results, on the same line item of the statement of income where the hedged item was recognized. However, when the foreseen transaction that is hedged results in recognition of a non-financial asset or a non-financial liability, the gains or losses previously recognized in other comprehensive income are reclassified at the initial value of such asset or liability.
Hedge accounting is discontinued upon the Group's voiding the hedge relation, when the hedge instrument matures or is sold, expires, or is exercised, or no longer qualifies for hedge accounting. In those events, any gain or loss recognized in other comprehensive income is maintained in shareholders' equity and is recognized when the foreseen transaction actually has an impact on period results. When it is no longer expected that a foreseen transaction would occur, then the retained gain or loss recognized in other comprehensive income is immediately recognized in the statement of income.
- Fair-value hedges: this category includes hedges covering the exposure to changes in the fair value of recognized assets or liabilities or unrecognized firm commitments.
A change in the fair value of a derivative that is a fair-value hedging instrument is recognized in the statement of income as financial expense or revenue. A change in the fair value of a hedged item attributable to the hedged risk is booked as part of the book value of the hedged item, and is recognized in the statement of income as financial expense or revenue.
Wherever an unrecognized firm commitment is identified as a hedged item, the subsequent accrued change in the fair value of the firm commitment attributable to the hedged risk will be recognized as an asset or liability and the relevant gain or loss will be recognized in period results.
- Net investment hedges abroad: this category includes hedges covering exposure to the variation in exchange rates arising from the translation of foreign businesses to the Group's presentation currency.
The effective portion of the changes in the fair value of derivative instruments defined as instruments to hedge a net investment abroad is recognized in other comprehensive income. The gain or loss related to the non-effective portion is immediately recognized in the statement of income.
If the Group would dispose of a foreign business, in whole or in part, the accrued value of the effective portion recorded to other comprehensive income is reclassified to the statement of income.
Share-based payments
Employees (including senior management) of Grupo Companhia Brasileira de Distribuição - CBD, receive compensation in the form of share-based payments, by means of which employees render services in exchange for equity instruments ("Transactions settled with shares").
The cost of transactions settled with shares is recognized as a period expense with an increase in net shareholders' equity as balancing entry, over the period during which the performance and service conditions are met. Service conditions require that an employee complete a certain service period and performance conditions require than an employee complete a certain service period and certain performance goals.
Accrued expenses recognized from equity instruments at the closing of each period until the vesting date (irrevocability) of the benefit, reflect the degree in which the vesting period has expired and the best Group's estimation of the number of equity instruments that will eventually vest. It is understood that the vesting date is that on which Companhia Brasileira de Distribuição – CBD and employees reach agreement on share-based payments, that is to say, when
67 the parties jointly agree on the terms and conditions of the agreement. On such date, Companhia Brasileira de Distribuição – CBD confer upon its counterparty the right to receive equity instruments, subject to compliance, where appropriate, of certain vesting conditions (irrevocability).
When an equity instrument is amended, the minimum expense recognized is the expense that would have been incurred if the conditions had not changed; an additional expense is recognized for any change that may increase the fair value of the share-based payment, or is of benefit to the employee, measured on the date of the amendment.
Upon cancellation of an equity instrument, treatment is given as if fully vested on the date of cancellation, and any unrecognized expense related to the premium is immediately recognized in period results. This includes any premium whose non-consolidation conditions, under the Group's or employee's control, are not met. However, if the plan that has been cancelled is replaced by another plan and is named as replacement on the date it is carried out, the granting plan cancelled and the new plan are treated as if they were and amendment of the original plan, as described in the preceding paragraph. All cancellations of settled equity instrument transactions are treated equally (Note 27 Share-based payments),
Employee benefits