Page 120 - EXIM_AR2021

118 FINANCIAL EXIM BANK MALAYSIA
STATEMENTS

Notes to the fiNaNcial statemeNts

2. significant accOUnting POlicies (cOnt’D.)

2.4 Summary of significant accounting policies (cont’d.)
(f) Financial assets (cont’d.)
(vi) Derivative instruments and hedge accounting (cont’d.)

(b) hedge accounting
The Group and the Bank use derivative instruments to manage their exposures to interest/profit rate
and foreign currency risks. In order to manage particular risks, the Group and the Bank apply hedge
accounting for transactions which meet specified criteria.
At the inception of each hedging relationship, the Group and the Bank formally designate and document
the relationship between the hedged item and the hedging instruments, including the nature of the risk,
the risk management objective and strategy for undertaking the hedge and the method that will be used to
assess the effectiveness of the hedging relationship at inception and ongoing basis.
At each hedge effectiveness assessment date, a hedge relationship must demonstrate that it is highly
effective on prospective and retrospective basis for the designated period in order to qualify for hedge
accounting. Hedge ineffectiveness is recognised in the statement of profit and loss.
The Group and the Bank only account for hedge that meets the strict criteria for hedge accounting,
as described below:
Fair value hedge
For designating and qualifying fair value hedges, the cumulative changes in the fair value of a hedge
derivative are recognised in the statement of profit and loss. Meanwhile, the cumulative changes in the
fair value of the hedge item attributable to the risk hedged are recorded as part of the carrying value of
the hedge item in the statements of financial position and the statement of profit and loss.
If the hedging instruments expire or are sold, terminated, or exercised or where the hedge no longer meets
the criteria for hedge accounting, the hedge relationship is terminated. For fair value hedges relating to
items carried at amortised cost, any adjustment to carrying value is amortised through profit or loss over
the remaining term of the hedge using the EIR/EPR method. EIR and EPR amortisation may begin as soon
as an adjustment exists and no later than when the hedged item ceases to be adjusted for changes in its
fair value attributable to the risk being hedged.
If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in
the statement of profit and loss.
The Bank enters into interest/profit rate swaps and cross-currency interest/profit rate swaps that are
used as hedge for the exposure of changes in the fair value of some of its Medium Term Notes/Sukuk.
See Note 9 for more details.
The Bank has incorporated credit risk of counterparties and the Bank’s own credit risk in the fair valuation
of derivatives. These risks on derivative transactions are taken into account when reporting the fair values
through credit value adjustment (“CVA”) and debit value adjustment (“DVA”).