By Himanshu V. Kishnadwala
Chartered Accountant
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From Significant Accounting Policies
The Company uses foreign currency forward contracts and currency options to hedge its risks associated with foreign currency fluctuations relating to certain firm commitments and forecasted transactions. The Company designates these hedging instruments as cash flow hedges applying the recognition and measurement principles set out in the Indian Accounting Standard 39 ‘Financial Instruments: Recognition and Measurement’ (Ind AS-39).
The use of hedging instruments is governed by the Company’s policies approved by the Board of Directors, which provide written principles on the use of such financial derivatives consistent with the Company’s risk management strategy.
Hedging instruments are initially measured at fair value, and are re-measured at subsequent reporting dates. Changes in the fair value of these derivatives that are designated and effective as hedges of future cash flows are recognised directly in shareholders’ funds and the ineffective portion is recognised immediately in the profit and loss account.
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the profit and loss account as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time for forecasted transactions, any cumulative gain or loss on the hedging instrument recognised in shareholders’ funds is retained there until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in shareholders’ funds is transferred to the profit and loss account for the period.
From Notes to Accounts The Company, in accordance with its risk management policies and procedures, enters into foreign currency forward contracts and currency option contracts to manage its exposure in foreign exchange rates. The counter-party is generally a bank. These contracts are for a period between one day and eight years.
The Company does not have any outstanding foreign exchange forward contracts, which have been designated as Cash Flow Hedges as at 31 March, 2011 and as at 31 March, 2010.
The Company has the following outstanding derivative instruments as at 31 March, 2011:
The following are outstanding currency option contracts, which have been designated as Cash Flow Hedges, as at:
Net gain on derivative instruments of Rs.20.20 crores recognised in Hedging Reserve as of 31 March, 2011 is expected to be reclassified to the profit and loss account by 31 March, 2012.
The movement in Hedging Reserve during the year ended 31 March, 2011, for derivatives designated as Cash Flow Hedges is as follows:
In addition to the above Cash Flow Hedges, the Company has outstanding foreign exchange forward contracts and currency option contracts with notional amount aggregating Rs.4432.67 crores (31 March, 2010: Rs.3316.41 crores) whose fair value showed a gain of Rs.27.45 crores as at 31 March, 2011 (31 March, 2010: Rs.4.67 crores). Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as derivative instruments at fair value with changes in fair value recorded in the profit (Previous year: exchange gain Rs.91.46 crores) on foreign exchange forward contracts and currency option contracts have been recognised in the year ended 31 March, 2011.
As of the balance sheet date, the Company has net foreign currency exposures that are not hedged by a derivative instrument or otherwise amounting to Rs.857.03 crores (31 March, 2010: Rs.764.85 crores).
