64 Dialog Semiconductor Plc | Annual report and accounts 2012  |  Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2012  2. Summary of significant accounting policies continued Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities  denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to  profit and loss with the exception of differences on monetary items that form part of a net investment in a foreign operation. These are taken directly to  equity until the disposal of the net investment at which time they are recognised in profit or loss. Tax charges and credits attributable to exchange  differences on those monetary items and borrowings are also dealt with in equity. Non-monetary items that are measured in terms of historical cost in a  foreign currency are translated using the exchange rates as at the dates of the initial transaction. Non-monetary items measured at fair value in a foreign  currency are translated using the exchange rates at the date when the fair value is determined. Foreign currency transaction gains and losses are  disclosed separately in the income statement, at each reporting period. Key exchange rates against US dollars used in preparing the consolidated  financial statements were:  Exchange rate at Annual average exchange rate 31 December 2012 31 December 2011 2012  2011 Currency  US$1 = US$1 = US$1 =  US$1 = Pound Sterling  0.62 0.65 0.63  0.62 Japanese Yen  86.20 77.37 79.74  79.71 Euro  0.76 0.77 0.78  0.72 Financial instruments  A financial instrument is any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another. Financial  assets include, in particular, cash and cash equivalents, trade receivables and other loans and receivables, held-to-maturity investments and derivative  and non-derivative financial assets accounted for at fair value through profit or loss, as well as investments available for sale. Financial liabilities generally substantiate claims for repayment in cash or another financial asset. In particular, this includes trade payables, liabilities to  banks and derivative financial liabilities. Financial assets and financial liabilities are offset and the net amount is presented in the balance sheet when, and only when, the entity currently has a  legal right to set off the recognised amounts and intends to settle on a net basis.  Financial assets  Financial assets within the scope of IAS 39 are classified as being at fair value through profit or loss, held-to-maturity investments, loans and receivables  or available-for-sale financial assets, as appropriate. When financial assets are first recognised, they are measured at fair value, plus, in case of  investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets on first recognition and, where allowed and appropriate, re-evaluates this designation at  each financial year end. All regular purchases and sales of financial assets are recognised on the settlement date, which is the date that the Group receives the asset. Regular  purchases or sales are classified as purchases or sales of financial assets that require delivery of assets within the period generally established by  regulation or convention of the market place. At each reporting date, the Group assesses whether a financial asset or group of financial assets is impaired.  Financial assets at fair value through profit or loss  Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair  value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. This  category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as  defined by IAS 39. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective  hedging instruments. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in  fair value recognised in finance income or finance costs in the income statement. 