FINANCIAL STATEMENTS 3Consolidated financial statements as of December 31, 2017 5.11 Current and non-current financial liabilities 5.11.1 Change in indebtedness Accounting policies Financial liabilities Financial liabilities include borrowings, other forms of financing, bank overdrafts, derivatives and accounts payable. IAS 39 “Financial instruments: recognition and measurement” describes how financial assets and liabilities must be measured and recognized. Measurement and recognition of financial liabilities With the exception of derivatives, all loans and other financial liabilities are measured at amortized cost using the effective interest method. Recognition of liabilities at amortized cost In accordance with IFRS, redemption premiums on bonds and debt issuance expenses are deducted from the nominal value of the loans concerned and incorporated into the calculation of the effective interest rate. Application of the amortized cost method to liabilities hedged at fair value Changes in the fair value of (the effective portion of) swaps used as fair value hedges are balanced by remeasurement of the hedged risk component of the debt. Given that the characteristics of derivatives and items hedged at fair value are similar in most instances, any ineffective component carried to hedging profit or loss will be minimal. If a swap is canceled before the due date of the hedged liability, the amount of the debt adjustment will be amortized over the residual term using the effective interest rate calculated at the date the hedge ended. Measurement and recognition of derivatives As the parent company, Klépierre takes responsibility for almost all Group funding and provides centralized management of interest and exchange rate risks. This financial policy involves Klépierre in implementing the facilities and associated hedging instruments required by the Group. Klépierre hedges its liabilities using derivatives and has consequently adopted hedge accounting in accordance with IAS 39: > hedges to cover balance sheet items whose fair value fluctuates in response to interest rate, credit or exchange rate risks (fair value hedge); > hedges to cover the exposure to future cash flow risk (cash flow hedges), which consists of fixing future cash flows of a variable-rate liability or asset. The Klépierre portfolio meets all IAS 39 hedge definition and effectiveness criteria. The adoption of hedge accounting has the following consequences: > fair value hedges of existing assets and liabilities: the hedged portion of the asset/liability is accounted for at fair value in the balance sheet. The gains or losses resulting from changes in fair value are recognized immediately in profit or loss. At the same time, there is an opposite corresponding adjustment in the fair value of the hedging instrument, in line with its effectiveness; > cash flow hedges: the portion of the gain or loss on the fair value of the hedging instrument that is determined to be an effective hedge is recognized directly in equity and recycled to the income statement when the hedged cash transaction affects profit or loss. The gain or loss from the change in value of the ineffective portion of the hedging instrument is recognized immediately in profit or loss. Recognition date: trade or settlement IFRS aims at reflecting the time value of financial instruments as closely as possible by ensuring that, wherever possible, instruments with a deferred start date are recognized on the trade date, thus allowing calculation of the deferred start date. However, this principle cannot be applied to all financial instruments in the same way. For example, commercial paper is often renewed a few days before its due date. If these instruments were recognized at their trade date, this would artificially inflate the amount concerned between the renewal trade date of a paper and its effective start date. 94 KLÉPIERRE 2017 REGISTRATION DOCUMENT