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3 Significant accounting policies continued
Ahold
Annual Report 2011
Groupata glance
Performance
Governance
Investors
Notes to the consolidated financial statements continued
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 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.
The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash flow hedges is recognized
initially in the cash flow hedging reserve, a separate component
of equity. The gain or loss relating to the ineffective portion is
recognized immediately in the income statement. Amounts
accumulated in equity are reclassified into the income statement in
the same period in which the related exposure impacts the income
statement. When a cash flow hedge no longer meets the criteria for
hedge accounting, any cumulative gain or loss existing in equity at
that time remains in equity and is recognized when the forecasted
transaction is ultimately recognized in the income statement.
When a forecasted transaction is no longer expected to occur, the
cumulative gain or loss existing in equity is immediately recognized
in the income statement.
Fair value changes of derivative instruments that qualify for fair
value hedge accounting treatment are recognized in the income
statement in the periods in which they arise, together with any
changes in fair value of the hedged asset or liability. If the hedging
instrument no longer meets the criteria for hedge accounting, the
adjustment to the carrying amount of the hedged item is amortized
in the income statement over the remaining period to maturity of the
hedged item.
Reinsurance assets and liabilities
Reinsurance assets include estimated receivable balances related
to reinsurance contracts purchased by the Company. Reinsurance
liabilities represent the expected insurance risks related to
reinsurance contracts sold by the Company. Reinsurance assets
and liabilities are measured on a discounted basis using accepted
actuarial methods.
Financial guarantees
Financial guarantees are recognized initially as a liability at fair
value. Subsequently, the liability is measured at the higher of the
best estimate of the expenditure required to settle the obligation
and the amount initially recognized less cumulative amortization.
Equity
Equity instruments issued by the Company are recorded at the
value of proceeds received. Own equity instruments that are
bought back (treasury shares) are deducted from equity.
Incremental costs that are directly attributable to issuing or buying
back own equity instruments are recognized directly in equity, net
of the related tax. No gain or loss is recognized in the income
statement on the purchase, sale, issue or cancellation of the
Company's own equity instruments.
Cumulative preferred financing shares
Cumulative preferred financing shares, for which dividend
payments are not at the discretion of the Company, are classified
as non-current financial liabilities and are stated at amortized cost.
The dividends on these cumulative preferred financing shares are
recognized as interest expense in the income statement, using
the effective interest method. From the date when Ahold receives
irrevocable notification from a holder of cumulative preferred
financing shares to convert these shares into common shares,
the cumulative preferred financing shares are classified as a
separate class of equity.
Pension and other post-employment benefits
The net assets and net liabilities recognized on the consolidated
balance sheet for defined benefit plans represent the present
value of the defined benefit obligations, less the fair value of plan
assets, adjusted for unrecognized actuarial gains or losses and
unamortized past service costs. Any net asset resulting from
this calculation is limited to unrecognized actuarial losses and
past service cost, plus the present value of available refunds and
reductions in future contributions to the plan. No adjustment for the
time value of money is made if the Company has an unconditional
right to a refund of the full amount of the surplus, even if such a
refund is realizable only at a future date.
Defined benefit obligations are actuarially calculated at least
annually on the balance sheet date using the projected unit credit
method. The present value of the defined benefit obligations is
determined by discounting the estimated future cash outflows
using interest rates of high-quality corporate bonds denominated in
the currency in which the benefits will be paid, and that have an
average duration similar to the expected duration of the related
pension liabilities. Actuarial gains and losses are recognized using
the corridor approach, which assumes that actuarial gains and
losses may offset each other over the long term. Under this
approach, if, for a specific plan, the net unrecognized actuarial
gains and losses at the balance sheet date exceed the greater of
10 percent of the fair value of the plan assets and 10 percent of
the defined benefit obligation, the excess is taken into account in
determining net periodic expense for the subsequent period.
The amount then recognized in the subsequent period is the
excess divided by the expected remaining average working lives
of employees covered by that plan on the balance sheet date.
Past service costs are recognized immediately to the extent that the
associated benefits are already vested, and are otherwise
amortized on a straight-line basis over the average period until the
associated benefits become vested. Results from curtailments or
settlements, including the related portion of net unrecognized
actuarial gains and losses, are recognized immediately.
