2 www.ahold.com/reports2008
Notes to the consolidated financial statements
3 Significant accounting policies continued
attributable to inventories. The cost of inventories is determined
using either the first-in, first-out ("FIFO") method or the
weighted average cost method, depending on their nature or
use. For certain inventories, cost is measured using the retail
method, whereby the sales value of the inventories is reduced
by the appropriate percentage gross margin. Net realizable value
is the estimated selling price in the ordinary course of business,
less the estimated marketing, distribution and selling expenses.
Financial instruments
Financial assets and liabilities
Financial statements
AHOLD ANNUAL REPORT 2008 55
Financial assets and liabilities are recognized when the
Company becomes a party to the contractual provisions of the
instrument. Financial assets are derecognized when the rights
to receive cash flows from the financial assets expire, or if the
Company transfers the financial asset to another party and does
not retain control or substantially all risks and rewards of the
asset. Financial liabilities are derecognized when the Company's
obligations specified in the contract expire or are discharged or
canceled. Purchases and sales of financial assets in the normal
course of business are accounted for at settlement date, i.e.,
the date that the asset is delivered to or by the Company.
At initial recognition, management classifies its financial assets
as either (i) at fair value through profit or loss, (ii) loans and
receivables or (iii) available for sale, depending on the purpose
for which the financial assets were acquired. Financial assets
are initially recognized at fair value. For instruments not
classified as at fair value through profit or loss, any directly
attributable transaction costs are initially recognized as part of
the asset value. Directly attributable transaction costs related to
financial assets at fair value through profit or loss are expensed
when incurred.
The fair value of quoted investments is based on current bid
prices. If the market for a financial asset is not active or if the
financial asset represents an unlisted security, the Company
establishes fair value using valuation techniques. These include
the use of recent arm's-length transactions, reference to other
instruments that are substantially the same and discounted
cash flow analysis, making maximum use of market inputs.
Subsequent to initial recognition, financial assets are measured
as described below. At each balance sheet date, the Company
assesses whether there is objective evidence that a financial
asset or a group of financial assets is impaired.
Investments at fair value through profit or loss
Investments at fair value through profit or loss are those
investments that are either held for trading or designated as
such by the Company. A financial asset is classified as held for
trading if it is acquired principally for the purpose of selling in
the short term. Derivatives are classified as held for trading
unless they are designated as hedges. Financial instruments
held for trading are measured at fair value and changes therein
are recognized in the consolidated income statement.
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are carried at amortized cost using the effective
interest method, less any impairment losses. They are included
in current assets, except for loans and receivables with
maturities greater than 12 months after the balance sheet date.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial
assets that are either designated in this category or not
classified in any of the other categories. They are measured
at fair value based on quoted market prices with changes
therein recognized directly in equity until the investment is
derecognized or determined to be impaired, at which time
the cumulative gain or loss previously recorded in equity is
transferred to the consolidated income statement. Available-for-
sale financial assets are included in non-current assets unless
management intends to dispose of the investment within
12 months after the balance sheet date.
Loans and short-term borrowings
Loans and short-term borrowings are recognized initially at fair
value, net of transaction costs incurred. Loans and short-term
borrowings are subsequently stated at amortized cost, unless
they are designated as fair value hedges. Any difference
between the proceeds and redemption value is recognized in the
consolidated income statement over the period of the loans and
short-term borrowings using the effective interest method. Loans
are classified as current liabilities unless the Company has an
unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
Derivative financial instruments
All derivative financial instruments are recognized initially
on a settlement date basis and subsequently remeasured
at fair value. Gains and losses resulting from the fair value
remeasurement are recognized in the consolidated income
statement as fair value gains (losses) on financial instruments,
unless the derivative qualifies and is effective as a hedging
instrument in a designated hedging relationship. In order
for a derivative financial instrument to qualify as a hedging
instrument for accounting purposes, the Company must
document (i) at the inception of the transaction the relationship
between the hedging instrument and the hedged item, as well
as its risk management objectives and strategy for undertaking
various hedging transactions and (ii) its assessment, both at
hedge inception and on an ongoing basis, of whether the
derivative that is used in the hedging transaction is highly
effective in offsetting changes in fair values or cash flows of
hedged items. Derivatives that are designated as hedges are
accounted for as either cash flow hedges or fair value hedges.
