Carrefour - 2017 Registration Document

5 CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 Notes to the Consolidated Financial Statements CARREFOUR | 2017 REGISTRATION DOCUMENT 269 Non-derivative financial liabilities Non-derivative financial liabilities are initially recognised at fair value plus transaction costs and premiums directly attributable to their issue. They are subsequently measured at amortised cost. Non-derivative financial liabilities held by the Group The main non-derivative financial liabilities held by the Group are as follows: borrowings: “Long-term borrowings” and “Short-term ● borrowings” include bonds and notes issued by the Group, finance lease liabilities, other bank loans and overdrafts, and financial liabilities related to securitised receivables for which the credit risk is retained by the Group; suppliers and other creditors (Note 5.4.4); ● consumer credit financing (Note 5.5.2); ● other payables: other payables classified in current liabilities ● correspond to all other operating payables (mainly accrued employee benefits expense and amounts due to suppliers of non-current assets) and miscellaneous liabilities. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to risks arising in the course of business, mainly currency and interest rate risks. Exceptionally, the risk of changes in the prices of certain commodities – mainly diesel – may also be hedged. Derivatives are initially recognised at fair value. They are subsequently measured at fair value with the resulting unrealised gains and losses recorded as explained below. Derivatives designated as hedging instruments (i) Hedge accounting is applied if, and only if, the following conditions are met: at the inception of the hedge, there is formal designation and ● documentation of the hedging relationship; the effectiveness of the hedge is demonstrated at inception. ● The derivatives used by the Group may be qualified as either cash flow hedges or fair value hedges. The Group does not currently hedge its net investment in foreign operations. Cash flow hedges affects profit. The ineffective portion of the change in fair value is recognised in the income statement, under “Financial income and expense”. For instruments qualified as cash flow hedges, the portion of the change in fair value determined to be an effective hedge is recognised directly in “Other comprehensive income” and accumulated in shareholders’ equity until the hedged transaction The main cash flow hedges consist of interest rate options and swaps that convert variable rate debt to fixed rate debt, and forward purchases of foreign currencies that hedge future goods purchases in foreign currency. Fair value hedges Changes in fair value of instruments qualified as fair value hedges are recognised in the income statement, with the effective portion offsetting changes in the fair value of the hedged item. Examples of fair value hedges include swaps set up to convert fixed rate bonds and notes to variable rate. The hedged portion of the underlying financial liability is remeasured at fair value. Changes in fair value are recognised in the income statement and are offset by the effective portion of symmetrical changes in the fair value of the interest rate swaps. Other derivative instruments (ii) Other derivative instruments are measured at fair value, with changes in fair value recognised in profit or loss. Derivative instruments used by the Group include interest rate and currency swaps and vanilla interest rate options. Fair value calculation method The fair values of currency and interest rate instruments are determined using market-recognised pricing models or prices quoted by external financial institutions. Values estimated using pricing models are based on discounted future cash flows for futures and forward contracts or, for options, the Black & Scholes option pricing model. The models are calibrated using market data such as yield curves and exchange rates obtained from recognised financial data services. The fair value of long-term borrowings is estimated based on the quoted market price for bonds and notes or the value of future cash flows discounted based on market conditions for similar instruments (in terms of currency, maturity, interest rate and other characteristics). Fair value measurements of derivative financial instruments incorporate counterparty risk in the case of instruments with a positive fair value, and own credit risk for instruments with a negative fair value. Credit risk is measured using the mathematical models commonly used by market analysts. At December 31, 2017 and 2016, the effect of incorporating these two types of risk was not material.