Financial statements 125
When any entity within the Group purchases the Company’s ordinary shares “treasury shares”, the consideration paid, including any
directly attributable incremental cost is presented as a component within equity, until they are cancelled, sold or reissued.
When treasury shares are subsequently cancelled, the cost of the treasury shares is deducted against either the share capital account
or retained earnings. When treasury shares are subsequently sold or reissued, any realised gain or loss on sale or reissue, net of any
directly attributable incremental transaction costs and related income tax, is recognised in capital reserves.
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 shareholders at the Annual
General Meeting.
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.
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 and associates with a functional currency different from that of the
Company. 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
