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ceeds to the group entity that set them up. All costs and interest on the borrowing are borne by the sponsoring
group entity. These SEs are deemed to be extensions of the sponsoring entity, and hence, their functional
currency is the same as that of the sponsoring entity.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates
of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement. Changes in the fair value of monetary securi-
ties denominated in foreign currency classified as available for sale are analysed between translation differences resulting
from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation
differences related to changes in amortised cost are recognised in the income statement, and other changes in carrying
amount are recognised in other comprehensive income.

Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or
loss are recognised in the income statement as part of the fair value gain or loss. Translation differences on non-monetary
financial assets, such as equities classified as available for sale, are included in other comprehensive income.
(c) Group companies

The results and financial position of all the group entities (none of which has the currency of a hyper-inflation-
ary economy) that have a functional currency different from the presentation currency are translated into the
presentation currency as follows:

[i] assets and liabilities for each balance sheet presented are translated at the closing rate at the date of
that balance sheet;
[ii] income and expenses for each income statement are translated at average exchange rates (unless
this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the rate on the dates of the
transactions); and
[iii] all resulting exchange differences are recognised in other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive
income.

3.6 Operating income

(a) Interest income and expense
Interest income and expense for all interest-bearing financial instruments are recognised within “inter-
est income” and “interest expense” in the consolidated income statement using the effective interest
method.

The effective interest method is a method of calculating the amortised cost of a financial asset or a
financial liability and of allocating the interest income or interest expense over the relevant year. The ef-
fective interest rate is the rate that exactly discounts the estimated future cash payments and receipts
through the expected life of the financial asset or liability (or, where appropriate, a shorter year) to the
net carrying amount of the financial asset or liability. When calculating the effective interest rate, the
Group estimates future cash flows considering all contractual terms of the financial instruments but
not future credit losses.

The calculation of the effective interest rate includes contractual fees paid or received, transaction
costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction
costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a finan-
cial asset or liability.

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Annual Report & Accounts 2017