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Please refer also to Note 39 for further fair value disclosures.
Derecognition A financial liability is derecognised from the balance
sheet when the obligation specified in the contract is discharged, cancelled or expired.
2.15 Loan commitments, Letters of credit and
Financial guarantees Loan commitments
Loan commitments are typically not financial instruments and are not recognised on the balance
sheet. They are disclosed in accordance with FRS 37 and form part of the disclosures in Note 35. Upon a
loan draw-down, the amount of the loan is accounted
for under “loans and receivables” as described in Note 2.8.
Letters of credit Letters of credit are recorded off-balance sheet as
contingent liabilities upon issuance, and the corresponding payables to the beneficiaries and
receivables from the applicants are recognised on- balance sheet upon acceptance of the underlying
documents. Financial guarantees
A financial guarantee is initially recognised in the financial statements at fair value on the date the
guarantee is given. This is generally the amount fee paid by the counterparty. Subsequently, the fee is
recognised over time as income in accordance with the principles in Note 2.7.
Off-balance sheet credit exposures are managed for credit risk in the same manner as financial assets.
Please refer to Note 2.10 on the Group’s accounting policies on specific allowances for credit losses.
2.16 Provisions and other liabilities Provisions for other liabilities of uncertain timing and
amounts are recognised when:
the Group has a present legal or constructive
obligation as a result of past events;
it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
a reliable estimate of the amount of the obligation can be made.
The amount recognised as a provision is the best estimate of the expenditure required to settle the
present obligation at the balance sheet date.
2.17 Share capital and other instruments classified as equity
Ordinary shares, preference shares and other instruments which do not result in the Group having a
contractual obligation to deliver cash or another financial asset, or to exchange financial assets or
financial liabilities with the holder under conditions that are potentially unfavourable to the Group, are classified
as equity. Distributions arising from such instruments are recognised in equity as there is no contractual
obligation to pay distributions on these instruments. Incremental external costs directly attributable to the
issuance of such instruments are accounted for as a deduction from equity.
For ordinary and preference shares, interim dividends are recorded during the financial year in which they are
declared payable. Final dividends are recorded during the financial year in which the dividends are approved
by the Board of Directors. D Other Specific Topics
2.18 Hedging and hedge accounting The Group uses derivative contracts mainly as part of
its risk management strategies for hedging interest rate risk arising from maturity mismatches or for hedging
currency risk arising from currency mismatches and cash flows in foreign currencies.
In some cases, where the strict criteria in FRS 39 are met, hedge accounting is applied as set out in
subsequent paragraphs. At the inception of each hedging relationship, the Group documents the
relationship between the hedging instrument and the hedged item; the risk management objective for
undertaking the hedge transaction; and the methods used to assess the effectiveness of the hedge. At
inception and on an on-going basis, the Group also documents its assessment of whether the hedging
instrument is highly effective in offsetting changes in the fair value or cash flows of the hedged item.
Fair value hedge
The Group’s fair value hedges consist principally of interest rate swaps used for managing the interest rate
gaps that naturally arise from its purchases or issues of debt securities, and where a mismatch in the
measurement between the hedging derivative and the hedged item exists. Such hedges are mainly used in
the “Treasury” and “Others” segments. For a qualifying fair value hedge, the changes in the fair
value of the hedging derivatives are recorded in the income statement, together with any changes in the fair
value of the hedged item attributable to the hedged risk. If the hedge no longer meets the criteria for hedge
accounting, the adjustment to the carrying amount of a hedged item is amortised to the income statement over its
remaining maturity, using the effective interest method.
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Cash flow hedge For transactions with highly probable cash flows,
derivatives are used to hedge against cash flow variability due to exchange rate movements in certain situations.
Cash flow hedge accounting is principally applied in such cases.
The effective portion of changes in the fair value of a derivative designated and qualifying as a cash flow hedge
is recognised in other comprehensive income and accumulated under the cash flow hedge reserve in equity.
This amount is reclassified to the income statement in the periods when the hedged forecast cash flows affect the
income statement. The ineffective portion of the gain or loss is recognised immediately in the income statement
under “Net trading income”. 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 existing in the cash flow
hedge reserve remains until the forecast transaction is recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss in the cash flow hedge reserve is reclassified
from equity to the income statement. Net investment hedge
Net investment hedge accounting is applied to hedged investments in foreign operations which comprise
certain subsidiaries, branches, associates and joint ventures with a functional currency different from that of
the Bank
. Under the Group’s hedging strategy, the carrying amount of these investments could be fully
hedged, partially hedged or not hedged at all. Hedges of net investments in the Group’s foreign
operations are accounted for in a manner similar to cash flow hedges. On disposal of the foreign operations, the
cumulative gain or loss in the capital reserves is reclassified to the income statement as part of the gain or
loss on disposal. Economic hedges which do not qualify for hedge
accounting Some derivatives may be transacted as economic
hedges as part of the Group’s risk management but do not qualify for hedge accounting under FRS 39. These
include swaps and other derivatives e.g. futures and options that the Group transacts to manage interest
rate, foreign exchange or other risks. Such derivatives are treated in the same way as derivatives held for
trading purposes, i.e. realised and unrealised gains and
losses are recognised in “Net trading income”. In some cases, the hedged exposures are designated at fair
value through profit or loss, thereby achieving some measure of offset in the income statement.
Please refer to Note 36.2 for disclosures on hedging derivatives.
2.19 Employee benefits