75 AGL Energy Limited Annual Report 2012 The amount recognised as a provision is the best estimate of the  consideration required to settle the present obligation at the end of  the reporting period, taking into account the risks and uncertainties  surrounding the obligation. Where a provision is measured using the  cash flows estimated to settle the present obligation, its carrying  amount is the present value of those cash flows. The unwinding of  the discount on the provision is recognised in the income statement  as part of finance costs. The consolidated entity enters into a variety of derivative financial  instruments to manage its exposure to interest rate, foreign  exchange rate and energy price risks arising in the normal course  of business. The use of derivatives is subject to policies, procedures  and limits approved by the Board of Directors. Further details of  derivative financial instruments are disclosed in Note 53. When some or all of the economic benefits required to settle a  provision are expected to be recovered from a third party, a  receivable is recognised as an asset if it is virtually certain that  reimbursement will be received and the amount of the receivable  can be measured reliably. Present obligations arising under onerous contracts are recognised  and measured as provisions. An onerous contract is considered to  exist where the consolidated entity has a contract under which the  unavoidable costs of meeting the obligations under the contract  exceed the economic benefits expected to be received under it. A provision for environmental restoration is recognised when there  is a present obligation as a result of exploration, development and  production activities having been undertaken, and it is probable  that an outflow of economic benefits will be required to settle the  obligation. The estimated future obligations include the costs of  removing facilities and restoring the affected areas. The provision for future restoration costs is the best estimate  of the present value of the expenditure required to settle the  restoration obligation at the end of the reporting period, based  on current legal requirements and current technology. Future  restoration costs are reviewed annually and any changes in the  estimate are reflected in the present value of the restoration  provision at the end of each reporting period. The initial estimate of the environmental restoration provision  relating to exploration, development and production facilities is  capitalised into the cost of the related asset and depreciated/ amortised on the same basis as the related asset. Changes in the  estimate of the provision for environmental restoration are treated  in the same manner, except that the unwinding of the effect of  discounting on the provision is recognised as a finance cost rather  than being capitalised into the cost of the related asset. A restructuring provision is recognised when the consolidated  entity has developed a detailed formal plan for the restructuring  and has raised a valid expectation in those affected that it will  carry out the restructuring by starting to implement the plan  or announcing its main features to those affected by it. The  measurement of a restructuring provision includes only the direct  expenditures arising from the restructuring, which are those  amounts that are both necessarily entailed by the restructuring  and not associated with the ongoing activities of the entity. Financial guarantee contracts are recognised as a financial liability  at the time the guarantee is issued. The liability is initially measured  at fair value and subsequently at the higher of the amount  determined in accordance with AASB 137  Provisions, Contingent  Liabilities and Contingent Assets  and the amount initially recognised  less cumulative amortisation, where appropriate. (aa) Financial guarantee contracts Restructuring Fair value hedges Embedded derivatives Environmental restoration Onerous contracts (ab) Derivative financial instruments and hedging Derivatives are initially recognised at fair value at the date  the derivative contract is entered into and are subsequently  remeasured to their fair value at the end of each reporting period.  The resulting gain or loss is recognised in profit or loss immediately  unless the derivative is designated and effective as a hedging  instrument, in which event the timing of the recognition in profit  or loss depends on the nature of the hedge relationship.  The consolidated entity designates certain derivatives as either  hedges of the fair value of recognised assets or liabilities or firm  commitments (fair value hedges), hedges of highly probable  forecast transactions or hedges of foreign currency risk of firm  commitments (cash flow hedges) or hedges of net investments  in foreign operations. The consolidated entity currently does not  have any net investment hedges. Derivatives that do not qualify  for hedge accounting are required to be accounted for as  trading instruments.  At the inception of the hedge relationship, the consolidated entity  documents the relationship between the hedging instrument and  hedged item, along with its risk management objectives and its  strategy for undertaking various hedge transactions. Furthermore,  at the inception of the hedge and on an ongoing basis, the  consolidated entity documents whether the hedging instrument  is highly effective in offsetting changes in fair values or cash flows  of the hedged item. A derivative with a positive fair value is recognised as a financial  asset; a derivative with a negative fair value is recognised as a  financial liability. A derivative is presented as a non-current asset  or a non-current liability if the remaining maturity of the  instrument is more than 12 months and it is not expected to  be realised or settled within 12 months. Other derivatives are  presented as current assets or current liabilities. 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 the host  contracts and the host contracts are not measured at fair value  through profit or loss. Changes in the fair value of derivatives that are designated and  qualify as fair value hedges are recognised in profit or loss  immediately, together with any changes in the fair value of the  hedged asset or liability that are attributable to the hedged risk.  The change in the fair value of the hedging instrument and the  change in the hedged item attributable to the hedged risk are  recognised in the line of the income statement relating to the  hedged item. Hedge accounting is discontinued when the consolidated entity  revokes the hedging relationship, when the hedging instrument  expires or is sold, terminated, or exercised, or when it no longer  qualifies for hedge accounting. The fair value adjustment to the  carrying amount of the hedged item arising from the hedged risk  is amortised to profit or loss from that date.