4352 NEW ZEALAND GAZETTE, No. 179 4 DECEMBER 2009

Basis of preparation

The financial statements have been prepared on the historical cost basis, except for certain borrowings and financial instruments. Financial derivatives are carried at fair value and borrowings which have effective fair value hedges are carried at amortised cost adjusted for the fair value of interest rate risk covered by the effective hedge. The principal accounting policies adopted are set out below.

a) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised in the Income Statement in the period in which they are incurred.

b) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, cash in banks and investments in overnight money market instruments. Bank overdrafts are shown within borrowings in current liabilities in the Balance Sheet.

c) Derivative financial instruments

Financial derivatives are initially recognised in the Balance Sheet at fair value on the date a derivative contract is entered into and are subsequently measured at their fair value on each Balance Sheet date, though the method of recognising the resulting gains and losses is dependent on whether hedge accounting is applied. When derivative contracts are entered into, the division designates them as either:

• Hedges of the fair value of recognised assets or liabilities (fair value hedge); or
• Hedges of forecast transactions or firm commitments (cash flow hedge) which hedge exposures to variability in cash flows; or
• Hedges of net investments in foreign entities; or
• Other derivative financial instruments not meeting hedge accounting criteria.

The fair values of financial derivatives are determined by reference to the market quoted rates input into valuation models for interest and currency swaps, forwards and options. Changes in fair value of derivatives are recognised:

• For fair value hedges that are highly effective, the movements are recorded in the Income Statement alongside any changes in the fair value of the hedged items;
• For cash flow hedges that are determined to be highly effective to the extent the hedges are effective, the movements are recognised in equity with the ineffective portion recognised in the Income Statement; and for those that are ineffective the movements are recognised in the Income Statement;
• For hedges of net investments in foreign entities that are highly effective, the effective portion of the movements is recorded in equity (currency translation reserve) and the ineffective portion is recognised in the Income Statement.
• All other movements in the fair value of derivative financial instruments are recorded in the Income Statement.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or loss relating to the unrealised ineffective portion is recognised immediately in profit or loss in the "other losses" line in the Income Statement.