• Consolidated income statement
• Consolidated statement of comprehensive income
• Consolidated and Parent Company balance sheets
• Consolidated statement of changes in equity
• Parent Company statement of changes in equity
• Consolidated and Parent Company statement of cash flows
• Accounting policies
• Notes to the financial statements
• Independent auditors’ report
• Group financial history
• Shareholders’ information

Accounting policies

Basis of preparation

The consolidated and Company financial statements are presented in sterling and all values are rounded to the nearest 0.1 million (£ million) except where otherwise indicated.

The consolidated financial statements of Dairy Crest Group plc have been prepared in accordance with IFRS as adopted by the European Union (‘EU’). The Company financial statements have been prepared in accordance with IFRS as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006. The Company has taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to publish its individual income statement and related notes.

The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are (i) the measurement of the impairment of goodwill, (ii) the measurement of defined benefit pension scheme assets and obligations and (iii) the measurement of fair value less costs to sell of Wexford Creamery Limited (‘WCL’), held as a disposal group.

(i) The Group determines whether goodwill is impaired on an annual basis and this requires an estimation of the value in use of the cash-generating units to which goodwill is allocated. This requires estimation of future cash flows and the selection of a suitable discount rate.

(ii) Measurement of defined benefit pension obligations requires estimation of future changes in salaries and inflation, mortality rates, the expected return on plan assets and the choice of a suitable discount rate.

(iii) Measurement of the fair value less costs to sell of WCL are based on expected consideration for our controlling stake taking into account expected consideration for any remaining stake and any other expected commercial arrangements to be put in place with WCL as a result of the expected disposal.

Further analysis of the key sources of estimation uncertainty and sensitivities are included in the relevant notes to the accounts.

Changes in accounting policies

The following accounting standards and interpretations became effective for the current reporting period:
IAS 1 (Revised) – Presentation of Financial Statements
Amendment to IFRS 2 – Share based payment: Vesting Conditions and Cancellations
IFRS 8 – Operating Segments
Amendments to IAS 23 – Borrowing Costs
Amendments to IFRS 7 – Improving disclosures about Financial Instruments
Amendments to IAS 32 and IAS 1 – Puttable Financial Instruments and Obligations Arising on Liquidation
IFRIC 13 – Customer Loyalty Programmes
IFRIC 15 – Agreements for the Construction of Real Estate
IFRIC 16 – Hedges of a Net Investment in a Foreign Operation
IFRIC 18 – Transfer of Assets from customers
Improvements to IFRSs (issued May 2008)

The application of IAS 1 (Revised) has resulted in the Group presenting a consolidated statement of changes in equity as a primary statement. The consolidated statement of changes in equity was previously presented as a note to the financial information andpresents all changes in equity including those arising from transactionswith the owners. The consolidated statement of comprehensive income was previously described as the Consolidated Statement of Recognised Income and Expense and presents all changes in financial position other than through transactions with owners. This presentation has been applied for the period ended 31 March 2010. Comparative information has been restated so that it is also in conformity with the revised standard.

The impact of the application of IFRS 8 is disclosed in Note 1 of the accounts.

The application of the remaining standards and interpretations has not had a material effect on the net assets, result and disclosures of the Group.

The IASB and IFRIC have issued the following standards (with an effective date after the date of these accounts) and interpretations:

International Accounting Standards (IAS/IFRSs)

IFRS 1 – First Time Adoption of International Reporting Standards (effective from 1 July 2009)
IFRS 1 – Amendments to IFRS 1 – Limited Exemption for First-time Adopters (effective from 1 January 2010)
IFRS 1 – Amendments to IFRS 1 – Limited Exemption from Comparative IFRS 7 disclosures (effective from 1 July 2010)
IFRS 2 – Amendments to IFRS 2 – Group Cash-settled Share-based Payment Transactions (effective from 1 January 2010)
IFRS 3 – Business Combinations (revised January 2008) (effective from 1 July 2009)
IFRS 9 – Financial Instruments: Classification & Measurement (effective from 1 January 2013)
IAS 24 – Related Party Disclosures (Revised) (effective from 1 January 2011)
IAS 27 – Consolidated and Separate Financial Statements (revised January 2008) (effective from 1 July 2009)
IAS 32 – Amendment to IAS 32: Classification of Rights Issues (effective from 1 February 2010)
IAS 39 – Eligible Hedged Items (effective from 1 July 2009)
Improvements to IFRS (issued April 2009)

International Financial Reporting Interpretations Committee (IFRIC)

IFRIC 17 – Distributions of Non-Cash Assets to Owners (effective from 1 July 2009)
IFRIC 18 – Transfer of Assets from Customers (effective from 1 July 2009)
IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments (effective from 1 July 2010)

The Group has not early adopted the revised IFRS 3 and so will apply it prospectively to all business combinations on or after 1 April 2010. Whilst it is not possible to estimate the outcome of adoption, the key features of the revised IFRS 3 include a requirement for acquisition-related costs to be expensed and not included in the purchase price; and for contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the income statement and not as a change to goodwill). The standard also changes the treatment of minority interests with an option to recognise these at full fair value as at the acquisition date and a requirement for previously held minority interests to be fair valued as at the date control is obtained, with gains and losses recognised in the income statement.

IAS 27 revised is effective for annual periods beginning on or after 1 July 2009, in line with revised IFRS 3. The revised standard no longer restricts the allocation to minority interest of losses incurred by a subsidiary to the amount of the minority equity investment in the subsidiary.

Any future partial disposal of equity interest in a subsidiary that does not result in a loss of control will be accounted for as an equity transaction and will have no impact on goodwill, nor will it give rise to any gain or loss. Where there is loss of control of a subsidiary, any retained interest will have to be remeasured to fair value, which will impact the gain or loss recognised on disposal.

The directors do not anticipate that the adoption of the remaining standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application.

Consolidation

The Group financial statements consolidate the accounts of Dairy Crest Group plc and its subsidiaries drawn up to 31 March each year using consistent accounting policies. All intercompany balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full.

Subsidiaries acquired during the year are consolidated from the date on which control is transferred to the Group. At 31 March 2010, minority interests represent the 20% interest in Wexford Creamery Limited not held by the Group.

Interest in associates

The Group’s investments in joint ventures are accounted for under the equity method of accounting. Joint ventures are entities over which the Group has joint control under contractual agreement and which are not subsidiaries. The Company and joint ventures both use consistent accounting policies. The investment in joint ventures is carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the joint ventures, less any impairment in value and any distributions received. The consolidated income statement reflects the share of the results of the joint ventures. Where there has been a change recognised directly in the joint ventures’ equity, the Group recognises its share of any changes and discloses this, when applicable in other comprehensive income.

Foreign currency translation

The functional and presentational currency of Dairy Crest Group plc and its United Kingdom (‘UK’) subsidiaries is Pound Sterling (£). The functional currency of Wexford Creamery Limited and St Hubert SAS,subsidiary companies incorporated in Ireland and France respectively,is the Euro.

Transactions in foreign currency are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the balance sheet date. Exchange differences on monetary items are taken to the income statement, except where deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

On consolidation, assets and liabilities of foreign subsidiaries are translated into Sterling at year end exchange rates. The results of foreign subsidiaries are translated into Sterling at average rates of exchange for the year (being an approximation of actual exchange rates). Exchange differences arising from the retranslation of the net investment in foreign subsidiaries at year end exchange rates, less exchange differences on borrowings, which finance or provide a hedge against those undertakings are taken to a separate component of equity as long as IFRS hedge accounting conditionsare met. Exchange differences relating to foreign currency borrowingsthat provide a hedge against a net investment in a foreign entity remain in equity until the disposal of the net investment, at which time they are recognised in the consolidated income statement. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. Cost comprises the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is calculated to write off the cost (less residual value) of property, plant and equipment, excluding freehold land, on a straight-line basis over the estimated useful lives of the assets as follows:

Freehold buildings: 25 years

Leasehold land and buildings: 25 years or, if shorter, the period of the lease

Office equipment: 4 to 6 years

Factory plant and equipment: 6 to 20 years

Vehicles: 4 to 10 years

The carrying value of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds the estimated recoverable value, the asset is written down to its recoverable amount. The recoverable amount of plant and equipment is the greater of the fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.Impairment losses are charged to the consolidated income statement.An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset is included in the consolidated income statement in the year that it is derecognised.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalised as part of the cost of the respective assets.

All other borrowing costs are recognised as an expense in the period they occur.

Investments

The Company recognises its investments in subsidiaries at cost being the fair value of consideration paid. Income is recognised from these investments only in relation to distributions received from post-acquisition profits. Distributions received in excess of post-acquisition profits are deducted from the cost of investment.

Goodwill

Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at the net book value as at this date and is not subsequently amortised. Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the Group’s (acquirer’s) interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. All goodwill was tested for impairment at the time of transition to IFRS and no impairment was identified.

As at the acquisition date, any goodwill acquired is allocated to the cash-generating unit or groups of cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

The Group’s cash-generating units, for the purpose of considering goodwill, are ‘Dairies’, ‘UK Spreads’, ‘St Hubert’, ‘Speciality Cheese’ and ‘Cheese excluding Speciality Cheese’. These represent the lowest level at which goodwill is monitored for management purposes and are no larger than the segments being ‘Dairies’ and ‘Foods’.

Goodwill arising on acquisitions before 1 April 1998 has been charged against the merger reserve and will remain set off against reserves even if the related investment becomes impaired or the business sold.

The Group has not restated business combinations prior to the transition date of 1 April 2004. Acquisitions prior to this date are recorded under previous accounting rules. IFRS 1 requires that an impairment review of goodwill should be conducted in accordance with IAS 36 at the date of transition and at the balance sheet date. This review was performed and no adjustment was required.

Intangible assets

Intangible assets acquired as part of an acquisition of a business are capitalised at fair value separately from goodwill if the fair value can be measured reliably on initial recognition and the future expected economic benefits flow to the Group. Following initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Currently, all the Group’s intangible assets have finite useful lives and are amortised over 3 to 25 years. The significant acquired brands have useful lives as follows:

St Hubert 25 years

Le Fleurier 15 years

Vallé 15 years

Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.

Intangible assets acquired separately from business combinations include software development expenditure. Software is carried at cost less accumulated amortisation. Software is amortised over five years. Intangible assets that are not yet available for use are tested for impairment annually either individually or at the cash-generating unit level or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

Research and development

Expenditure on research is written off as incurred. Development expenditure is also written off as incurred unless the future recoverability of this expenditure can reasonably be assured as required by IAS 38: Intangible Assets.

Recoverable amount of non-current assets

At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost includes the purchase price of raw materials (on a first in first out basis), direct labour and a proportion of manufacturing overheads based on normal operating capacity incurred in bringing each product to its present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and selling costs.

Trade and other receivables

Trade and other receivables are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Assets in disposal groups classified as held for sale

Non-current assets and disposal groups are classified as held for sale only if available for immediate sale in their present condition; a sale is highly probable and expected to be completed within one year from the date of classification. Such assets are measured at the lower of carrying amount and fair value less costs to sell and are not depreciated or amortised.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank overdrafts.

Interest-bearing loans

All loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in net profit or loss when the liabilities are derecognised.

Net debt

The Group and Company define net debt as cash and cash equivalents, interest bearing loans and finance leases. The calculation of net debt excludes the fair value of derivative financial instruments with the exception of cross currency swaps to fix foreign currency debt in Sterling where they are designated as cash flow hedges. In this case the fixed Sterling debt, not the underlying foreign currency debt retranslated, is included in net debt. It includes any cash or borrowings included within disposal groups classified as held for sale.

Retirement benefit obligations

The asset or liability in respect of defined benefit schemes is the present value of the relevant defined benefit obligation at the balance sheet date less the fair value of plan assets and an adjustment for past service costs not yet recognised. The independent actuary completes a full actuarial valuation of the Dairy Crest Group pension fund and the Wexford Creamery plan triennially. The obligation is updated annually for financial reporting purposes by the actuary using the projected unit credit method. The present value of the obligation is determined by the estimated future cash outflows using interest rates of high quality corporate bonds, which have terms to maturity approximating the terms of the related liability.

The current service costs are recognised in operating costs in the consolidated income statement, classified as cost of sales, distribution costs or administrative expenses depending upon which area of the business active members are employed in. Past service costs are included in operating costs where the benefits have vested, otherwise they are amortised on a straight-line basis over the vesting period. The expected return on assets of funded defined benefit schemes and the interest on pension scheme liabilities comprise the finance element of the pension cost and the difference between these amounts are included in other finance income or costs. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full and are charged or credited to other comprehensive income in the period in which they arise.

IFRIC 14 was implemented in the year ended 31 March 2008. The recognition of any future retirement benefit surplus as calculated by the actuary as part of the annual update for reporting purposes, is limited to the present value, using an appropriate discount rate, of any real cash benefit the Company will obtain in the future through either reduced potential contributions or cash on a winding up of the scheme. In order to calculate the potential future benefits consideration is given to any minimum funding requirements agreed between the Company and the Pension Trustee.

Share based payments

Equity based performance payments The Group and Company have issued equity-settled share based payment schemes for which they receive services from employees in consideration for the equity instrument. Equity-settled share based payment schemes are measured at fair value at the grant date by an external valuer using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and performance (vesting conditions), other than performance conditions linked to the price of the shares of the Company (market conditions). Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value.

The cost of equity settled transactions with employees is measured by reference to the fair value and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees became fully entitled to the award. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied,provided that all other performance or service conditions are satisfied.Where an equity-settled award is cancelled (including when a non-vesting condition within the control of the entity or employee is not met), it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the income statement for the award is expensed immediately.

The Company adopted IFRIC 11 in the year ended 31 March 2008. Rights granted to employees of subsidiary undertakings over equity instruments of the Company are treated as an investment in the Company’s balance sheet.

Employees’ Share Ownership Plan (‘ESOP’)

The shares in the Company held by the Dairy Crest Employees’ Share Ownership Plan Trust to satisfy Long Term Incentive Share Plan awards are presented as a deduction from equity in arriving at shareholders’ equity. Consideration received from the sale of such shares is also recognised in equity with no gain or loss recognised in the consolidated income statement.

The Group and Company have not adopted the exemption to apply IFRS 2 Share-based payments only to awards made after 7 November 2002.

Leased assets

Assets acquired under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at fair value of the leased asset or, if lower, the present value of the minimum lease payments. The net present value of future lease rentals is included as a liability on the balance sheet. The interest element of lease rentals is charged to the consolidated income statement in the year. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease rentals are charged to the consolidated income statement on a straight-line basis over the lease term.

Revenue

Revenue on sale of food and dairy products is recognised on delivery. Revenue comprises the invoiced value for the sale of goods net of value added tax, rebates and discounts and after eliminating sales within the Group.

Dividend income is recognised when the Company’s right to receive payment is established.

Other income

Other income comprises the profit on disposal of closed sites and household depots.

Exceptional items

Certain items are recorded separately in the consolidated income statement as exceptional. Only items of a material, one-off nature, which result from a restructuring of the business or some other event or circumstance are disclosed in this manner in order to give a better understanding of the underlying operational performance of the Group. The profits arising on disposal of closed sites, other than as a result of depot rationalisation, are reported within exceptional items.

Government and other grants

Government grants are initially recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the consolidated income statement over the expected useful life of the relevant asset in equal annual instalments.

Income tax

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except as indicated below.

Deferred income tax liabilities are recognised for all taxable temporary differences except:

• where the deferred income tax liability arises from initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carry-forward of unused tax assets and unused tax losses can be utilised except:

• where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset only if a legal enforcement right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the Group to make a single net payment.

Income tax is charged or credited to other comprehensive income if it relates to items that are charged or credited to other comprehensive income. Similarly, income tax is charged or credited directly to equity if it relates to items that are credited or charged directly to equity. Otherwise income tax is recognised in the income statement.

Financial assets

The Group and Company classifies financial assets that are within the scope of IAS 39 as financial assets at fair value through profit and loss; loans and receivables; held-to-maturity investments; or as available-for-sale financial assets, as appropriate. The Group and Company determines the classification of financial assets at initial recognition and re-evaluates this designation at each financial year end. When financial assets are recognised initially, they are measured at fair value.

Derivative instruments

The Group and Company use derivative financial instruments such as forward currency contracts, cross-currency swaps and interest rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value and subsequently re-measured to fair value at the reported balance sheet date.

The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap and cross-currency swap contracts is determined by reference to market values for similar instruments and specific valuations performed by counterparties at the period end.

For the purpose of hedge accounting, hedges are classified as either:

• fair value hedges where they hedge the exposure to changes in the fair value of a recognised asset or liability;

• cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or a firm commitment in relation to foreign exchange exposure; or

• net investment hedges where they hedge the exposure to variability in the translated net assets of an overseas operation.

Neither the Group nor the Company has entered into any fair value hedges during the year.

Cash flow hedges

In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in other comprehensive income and the ineffective portion is recognised in the consolidated income statement.

When the hedged firm commitment (in relation to foreign exchange exposure) or the highly probable forecast transactions results in the recognition of a non-monetary asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in other comprehensive income are transferred to the consolidated income statement in the same year in which the hedged item affects the net profit and loss, for example when the future sale actually occurs, interest payments are made or when debt matures. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the consolidated income statement for the year.

Hedges of net investments in foreign operations

Where the Group hedges net investments in overseas entities through currency borrowings, the gains and losses on retranslation of those borrowings are recognised in other comprehensive income. If the Group uses derivatives as the hedging instrument, the effective portion of the hedge is recognised in other comprehensive income, with any ineffective portion being recognised in the consolidated income statement whenever applicable. Gains and losses accumulated in other comprehensive income are recycled through the consolidated income statement on disposal of the foreign entity.

In order to satisfy hedge accounting, the Group (or Company) documents in advance the relationship between the item being hedged and the hedging instrument. The Group (or Company) also documents and demonstrates an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge has been and will be highly effective on an ongoing basis. The effectiveness testing is re-performed on a regular basis (being at least half-yearly) to ensure that the hedge remains highly effective.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in other comprehensive income is retained in other comprehensive income until the highly probable forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred to the consolidated income statement for the period.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts, and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement. When the contracts are closely related and hedge accounting is adopted, they are designated at inception and treated as described above.