In the normal course of events, purchases and sales of financial assets are accounted for on settlement day. This does not apply to derivatives, which are accounted for on the trading day.

The Linde Group conducts regular impairment reviews of the following categories of financial assets: loans and receivables, available-for-sale securities and held-to-maturity investments. The following criteria are applied:

(a) significant financial difficulty of the issuer or obligor;

(b) breach of contract, such as a default or delinquency in interest or principal payments;

(c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that would not otherwise be considered;

(d) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

(e) the disappearance of an active market for that asset because of financial difficulties;

(f) a recommendation based on observable data from the capital market;(g) information about significant changes with an adverse effect that have taken place in the technological,economic or legal environment of a contracting party; or

(h) a significant or prolonged decline in the fair value of the financial instrument.

According to IAS 39 Financial Instruments: Recognition and Measurement, securities must be categorised as assets held for trading (at fair value through profit and loss), available for sale or held to maturity. The Linde Group does not hold any securities for trading. Available-for-sale securities are generally stated at fair value. Unrealised gains and losses, including deferred tax, are recognised separately in equity until they are realised. If the fair value cannot be reliably determined, securities are reported at cost. Held-to-maturity financial assets are measured at amortised cost using the effective interest rate method or at their recoverable amount, if lower. If the fair value of available-for-sale securities or financial assets falls below cost, the loss is recognised in profit or loss.

Under IAS 39, Financial Instruments: Recognition and Measurement, all derivative financial instruments are reported at fair value on the trading day, irrespective of their purpose or the reason for which they were acquired. Changes in the fair value of derivative financial instruments, where hedge accounting is used, are either recognised in profit or loss or, in the case of a cash flow hedge, in equity under Cumulative changes in equity not recognised through the income statement.

In the case of a fair value hedge, derivatives are used to hedge the exposure to changes in the fair value of assets or liabilities. The gain or loss from remeasuring the derivative at fair value and the gain or loss on the hedged item attributable to the hedged risk are recognised immediately in profit or loss.

In the case of a cash flow hedge, derivatives are used to hedge the exposure to future cash flow risks from existing underlying transactions or forecasted transactions. The hedge-effective portion of the changes in fair value of the derivatives is initially disclosed under Cumulative changes in equity not recognised through the income statement. A transfer is made to the income statement when the hedged underlying transaction is realised. The ineffective portion of the changes in fair value is recognised immediately in profit or loss.

If the requirements for hedge accounting are not met, the change in fair value of derivative financial instruments is recognised in profit or loss.

In the case of hedges of a net investment in a foreign operation, derivatives are used to hedge the exposure to translation risks arising from investments in a foreign functional currency. Unrealised gains and losses arising from these hedging instruments are accounted for in equity until the company is sold.

In accordance with IAS 39 Financial Instruments: Recognition and Measurement, embedded derivatives which are components of hybrid financial instruments are separated from the host contract and accounted for as derivative financial instruments, if certain requirements are met.

For more information about risk management and the impact on the balance sheet of derivative financial instruments, see Note [31].

Financial debt is reported at amortised cost on settlement day. Differences between historical cost and the repayment amount are accounted for using the effective interest rate method. Financial liabilities which comprise the hedged underlying transaction in a fair value hedge are stated at fair value in respect of the hedged risk.