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3 Significant accounting policies (continued)
Ahold at a glance
Notes to the consolidated
financial statements
Our strategy
Our performance
Governan
Financials
Investors
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 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 initially recognized at fair value at the date the derivative
contracts are entered into and are subsequently remeasured to their fair value at the end of
each reporting period. 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
Under Ahold's self-insurance program, part of the insurance risk is ceded under a reinsurance
treaty, which is a pooling arrangement between unrelated companies. Reinsurance assets
include estimated receivable balances related to reinsurance contracts purchased by the
Company. Reinsurance liabilities represent the expected insurance risks related to reinsurance
Ahold Annual Report 2013
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 actual surplus or deficit in Ahold's defined benefit plans measured
as the present value of the defined benefit obligations less the fair value of plan assets. Any
surplus resulting from this calculation is limited to 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 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 market yields on high-
quality corporate bonds (i.e., bonds rated AA) 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.