KUWAIT ENERGY plc GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
F-136
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative financial instruments
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and
oil price fluctuations, including interest rate caps and oil put options.
Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are
subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is
recognised in the consolidated statement of income immediately unless the derivative is designated and
effective as a hedging instrument, in which event the timing of the recognition in the consolidated statement
of income depends on the nature of the hedge relationship (see below). A derivative with a positive fair value
is recognised as a financial asset while a derivative with a negative fair value is recognised as a financial
liability.
Hedge accounting
The Group designates certain hedging instruments which include oil put options as cash flow hedges in order
to mitigate the risk arising from fluctuations in oil prices.
At the inception of the hedge relationship, the Group documents the relationship between the hedging
instrument and the hedged item, along with its risk management objectives and its strategy for undertaking
various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group
documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash
flows of the hedged item attributable to the hedged risk.
Note 23 sets out details of the fair values of the derivative instrument used for hedging purposes.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is
recognised immediately in the consolidated statement of income.
Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to
finance income or costs in the consolidated statement of income in the periods when the hedged item is
recognised in the consolidated statement of income. However, when the forecast transaction that is hedged
results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously
recognised in other comprehensive income and accumulated in equity are transferred from equity and
included in the initial cost of the non-financial asset or non-financial liability.
Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging
instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting.
When a forecast transaction is expected to occur, any gain or loss accumulated in equity at that time remains
separately in equity and is recognised in the consolidated statement of income when the forecast transaction is
ultimately recognised in the consolidated statement of income. When a forecast transaction is no longer
expected to occur, the gain or loss accumulated in equity is recognised immediately in the consolidated
statement of income.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and
revenue can be reliably measured.
Revenue represents the value of sales exclusive of related sales taxes of oil and gas arising from upstream
operations when the oil has been lifted and the title has passed.
Interest income is recognised on an accrual basis in accordance with the substance of the relevant agreement.
