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Aggreko plc Annual Report and Accounts 2013

ACCOUNTS

28 NOTES TO THE GROUP ACCOUNTS — APPENDICES

28.A1 ACCOUNTING POLICIES

DERIVATIVE FINANCIAL INSTRUMENTS

The activities of the Group expose it directly to the inancial risks of changes in forward foreign currency exchange

rates and interest rates. The Group uses forward foreign exchange contracts, foreign currency options and interest

rate swap contracts to hedge these exposures. The Group does not use derivative inancial instruments for

speculative purposes.

Derivatives are initially recorded and subsequently measured at fair value, which is calculated using standard

industry valuation techniques in conjunction with observable market data. The fair value of interest rate swaps

is calculated as the present value of estimated future cash lows using market interest rates and the fair value of

forward foreign exchange contracts is determined using forward foreign exchange market rates at the reporting

date. The treatment of changes in fair value of derivatives depends on the derivative classiication. The Group

designates derivatives as hedges of highly probable forecasted transactions or commitments (cash low hedge).

In order to qualify for hedge accounting, the Group is required to document in advance the relationship between

the item being hedged and the hedging instrument. The Group is also required to document and demonstrate

an assessment of the relationship between the hedged item and the hedging instrument, which shows that the

hedge will be highly effective on an ongoing basis. This effectiveness testing is re-performed at each period end

to ensure that the hedge remains highly effective.

CASH FLOW HEDGES

Changes in the fair value of derivative inancial instruments that are designated, and effective, as hedges of

future cash lows are recognised directly in equity and any ineffective portion is recognised immediately in the

income statement. If the cash low hedge is of a irm commitment or forecasted transaction that subsequently

results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the

associated gains or losses on the derivative that had previously been recognised in equity are included in the

initial measurement of the asset or liability. For hedges of transactions that do not result in the recognition

of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period

in which the hedged item affects net proit and loss.

Changes in the fair value of derivative inancial instruments that do not qualify for hedge accounting are

recognised in the income statement as they arise.

Hedge accounting is discontinued when the hedging instrument no longer qualiies for hedge accounting. At

that time any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until

the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain

or loss recognised in equity is transferred to the income statement.

OVERSEAS NET INVESTMENT HEDGES

Certain foreign currency borrowings are designated as hedges of the Groups overseas net investments, which are

denominated in the functional currency of the reporting operation.

Exchange differences arising from the retranslation of the net investment in foreign entities and of borrowings

are taken to equity on consolidation to the extent the hedges are deemed effective. All other exchange gains

and losses are dealt with through the income statement.

SHARE-BASED PAYMENTS

IFRS 2 Share-based Payment has been applied to all grants of equity instruments. The Group issues equitysettled share-based payments to certain employees under the terms of the Groups various employee-share and

option schemes. Equity-settled share-based payments are measured at fair value at the date of the grant. The fair

value determined at the grant date of equity-settled share-based payments is expensed on a straight line basis

over the vesting period, based on an estimate of the shares that will ultimately vest. Fair value is measured using

the Black-Scholes option-pricing model.

Own shares held under trust for the Groups employee share schemes are classed as Treasury shares and deducted

in arriving at shareholders equity. No gain or loss is recognised on disposal of Treasury shares. Purchases of own

shares are disclosed as changes in shareholders equity.