notes to the Consolidated Financial Statements (cont’d) After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective  interest rate method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as  through the effective interest rate method amortization process. The effective interest rate amortization is included in finance costs  in the income statement. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing  financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are  substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a  new liability, and the difference in the respective carrying amounts is recognized in the income statement. (iii) Derivative instruments/hedging Fair value hedges Cash flow hedges Hedges of a net investment Derivatives that do not qualify for hedge accounting All derivative instruments, including embedded derivatives, are recorded in the statement of financial position at fair value, on the date a contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting  gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. The Company designates certain derivatives as either: These are hedges of the fair value of recognized assets, liabilities or a firm commitment. Changes in the fair value of derivatives that  are designated as fair value hedges are recorded in the income statement together with any changes in the fair value of the hedged  asset or liability that are attributable to the hedged risk. These are hedges of highly probable forecast transactions. The effective portion of changes in the fair value of derivatives that are  designated as a cash flow hedge is recognized as other comprehensive income in the cash flow hedge reserve. The gain or loss  relating to the ineffective portion is recognized immediately in the income statement. Additionally:  The Company uses forward currency contracts as hedges of its exposure to the foreign currency risk for the purchase of raw materials. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the  Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The  documentation includes identification of the hedge instrument, the hedged item of transaction, the nature of the risk being hedged  and how the entity will assess the effectiveness of changes in the hedging instruments fair value in offsetting the exposure to  changes in the hedged items fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective  in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have  been highly effective throughout the financial reporting periods for which they were designated. Hedges of a net investment in a foreign operation are accounted for in a way similar to cash flow hedges. Gains or losses on the  hedging instrument relating to the effective portion of the hedge are recognized as other comprehensive income while any gains or  losses relating to the ineffective portion are recognized in the income statement. On disposal of the foreign operation, the cumulative  value of any such gains or losses recorded in equity is transferred to the income statement.  The Company uses a loan as a hedge of its exposure to foreign exchange risk on its investment in foreign subsidiary. Refer to  note 22 for more details.  Certain derivative instruments, while providing effective economic hedges, are not designated as hedges for accounting purposes.  Changes in the fair value of any derivatives that are not designated as hedges for accounting purposes are recognized within “Other  finance costs” or “Operating expenses” in the income statement consistent with the underlying nature and purpose, financing or  operating of the derivative instruments. 67 AnnuAl RepoRt 2011 • amounts accumulated in other comprehensive income are recycled to the income statement in the period when the hedged  item will affect profit and loss (for instance, when the forecast purchase that is hedged takes place); • when a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any  cumulative gain or loss in equity remains in equity and is recognized when the forecast transaction is ultimately recognized in  the income statement; and • when a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive  income is immediately recognized in the income statement.