Notes to the Financial Statements (continued)  1.  Statement of Significant Accounting Policies (continued)  (r) Payables (u) Derivative Financial Instruments (s) Foreign Currency Transactions  (v) Contributed Equity  (w) Borrowing Costs  (x) Earnings Per Share (t) Interest-Bearing Liabilities Foreign exchange contracts are recognised at the  date that the contract is entered into. Except for  specific hedges, all resulting exchange differences on  settlement or restatement are recognised as revenues  or expenses in the Statement of Financial Performance in the current year. The consolidated entity enters into forward exchange  contracts where it agrees to buy specified amounts of  foreign currencies in the future at a predetermined  exchange rate. The objective is to match the contract  with anticipated future cash flows from purchases in  foreign currencies, to protect the consolidated entity  against the possibility of loss from future exchange  rate fluctuations. Liabilities for trade creditors and other amounts are  carried at cost which is the fair value of the  consideration to be paid in future for goods and  services received, whether or not billed to the  consolidated entity.  Payables to related parties are carried at the principal  amount. Foreign currency items are translated to Australian  currency on the following bases:  Exchange differences relating to monetary items are  included in the Statement of Financial Performance,  as exchange gains and losses in the period when  exchange rates change, except where the difference  relates to hedging part of the net investment in a self- sustaining foreign operation, in which case the  differences are transferred to the foreign currency  translation reserve on consolidation.  Ordinary share capital bears no special terms or  conditions affecting income or capital entitlements of  the shareholders. Issued and paid up capital is  recognised at the fair value of the consideration  received by the company.  Any transaction costs arising on the issue of ordinary  shares are recognised directly in equity as a reduction  in share proceeds received.  Borrowing costs are expensed as incurred.  Basic EPS is calculated as net profit attributable to  members, adjusted to exclude costs of servicing  equity (other than dividends) and preference share  dividends, divided by the weighted average number of  ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net profit attributable to  members adjusted for:  Bills payable are recognised when issued at the  amount of the net proceeds received, with the  discount on issue amortised over the period to  maturity. Interest is recognised as an expense on an  effective yield basis.  Interest rate swaps are recognised as a liability,  measured by reference to amounts payable. Net  receipts and payments are recognised as an adjustment to interest expense.  All loans are measured at the principal amount. Interest is recognised as an expense as it accrues. divided by the weighted average number of ordinary  shares and dilutive potential ordinary shares, adjusted  for any bonus element. costs of servicing equity (other than dividends)  and preference share dividends;  the after tax effect if dividends and interest  associated with dilutive potential ordinary shares  that have been recognised as expenses; and other non-discretionary changes in revenues or  expenses during the period that would result from  the dilution of potential ordinary shares;  The financial statements of all foreign operations  are translated using the current rate method as  they are considered self-sustaining.  Amounts payable and receivable are translated at  the average of the buy and sell rates available on  the close of business at balance date; and  Transactions are converted at exchange rates in  effect at the date of each transaction;  HARVEY NORMAN HOLDINGS LIMITED AND ITS CONTROLLED ENTITIES – ANNUAL REPORT 2003  32 