marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market
value of items of plant, equipment, fixtures and fittings is based on the quoted market prices for similar items when available and replacement cost when appropriate.
5.6.2 Intangible assets
The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.
5.6.3 Inventories
The fair value of inventory (including seismic libraries) acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventory.
5.6.4 Investments in equity and debt securities
The fair value of available-for-sale financial assets is determined by reference to their quoted closing bid price at the reporting date.
5.6.5 Trade and other receivables
The fair value of trade and other receivables, at initial recognition, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes.
5.6.6 Derivatives
The fair value of forward exchange contracts is based on the listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds).
Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate.
5.6.7 Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future repayments and interest cash flows, discounted at the market rate of interest at the reporting date.
5.6.8 Share-based payment transactions
The fair value of the employee share options are measured using a binomial model. Measurement inputs include share price on measurement date (year-end date of granting year), exercise price of the instrument, expected volatility (based on weighted average historic volatility over the period 1993 through the reporting date adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
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5.7 D e r i v a t i v e f i n a n c i a l i n s t r u m e n t s a n d h e d g i n g
5.7.1 Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational and financing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
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, if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative and if the combined instrument is not measured at fair value through profit or loss.
On initial designation of a 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, 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 profit or loss.
Derivative financial instruments are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, measurement of derivative financial instruments is at fair value. The gain or loss on remeasurement at fair value is recognised immediately in profit or loss except when hedge accounting is applied. Recognition of any resultant gain or loss on hedge accounting depends on the nature of the item being hedged (refer to accounting policy 5.7.2 and beyond).
5.7.2 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 ultimately affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the Hedging reserve in equity. The amount recognised in the Hedging reserve is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss under the same line item in the statement of comprehensive income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss.
If the hedging instrument no longer meets the criteria for hedge accounting, expires, is sold, is terminated, is exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in other comprehensive income and presented in the Hedging reserve in equity remains there until the forecast transaction affects profit or loss. When the hedged item is a non-financial asset, the amount recognised in other comprehensive income is transferred to the carrying amount of the asset when the asset is recognised. If the forecast transaction is no longer expected to occur, then the balance in the Hedging reserve is recognised immediately in profit or loss. In other cases the amount recognised in the Hedging reserve is transferred to profit or loss in the same period that the hedged item affects profit or loss.
5.7.3 Other non-trading derivatives
Where 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 profit or loss.
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