COMPASS GROUP PLC DISCLOSURE

Market Risk

20 Financial risk management Significant accounting poli cy Derivative financial i nstruments and hedge accounting The Group uses derivative fi nancial instruments, such as for ward currency contracts and interest rate swaps or options, to hedge the risks associated with changes in foreign exchange rates and interest rates. Such derivative financial instruments are ini tially mea sured at fair value on the contract date and are remeasured to fair value at subsequent repor ting dates. The use of financial deri vatives is governed by the Group’s policies approved by the Board that pr ovide written principles on the use of financial derivatives consistent with the Group’s risk management strategy. The Group does not use derivati ve financial instruments for speculative purposes. The fair value of forwar d currency contracts is calculated by reference to current forward exc hange rates for contracts with similar maturity profiles. The fair value of interest rate swaps is determined by refer ence to market values for similar instr ument s. For the purpose of hedge accounting, hedges ar e classified as either fair val ue hedges when they hedge the exposure to change s in the fair value of a recognised asset or liability or an unrecognised firm commitment, or net investment hedges wher e they hedg e the exposure to foreign currency arising from a net investment in foreign operations. On adoption of IFRS 9 Financial Instruments, the Group elected to continue to apply the hedge accounting guidance in IAS 39 Financial Instruments: Recognition and Measurement. Fair value hedges In relation to fair val ue hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the consolidated income statement. Any gain or l oss on the hedged item attr ibutable to the hedged risk is adjusted against the carrying amount of the hedged it em and recognised in the consolidated income statement. Where the adjustment is to an unrecognised firm commitment, an asset or liability is recognised on the balance sheet . When the hedged transaction occurs, that asset or liability is recognised i n the initial measurement of the acquisition cost and carrying amount of the asset or liabi lity. Where the adjustment is to the carrying amount of a hedged interest - bearing financ ial instrument, the adj ustm