Page 129 - EXIM-Bank_Annual-Report-2023

Management Discussion and Analysis Ensuring Sustainability Commitment to Lead Upholding Accountability Financial Statements 127

Notes to the fiNaNcial statemeNts

2. MATErIAL ACCouNTING PoLICy INForMATIoN (cont’d)
2.4 Summary of material accounting policy information (cont’d)

(f) Financial assets (cont’d)
(vi) Derivative instruments and hedge accounting

(a) Derivative instruments
The Group and the Bank enters into derivative contracts such as interest/profit rate swaps, cross currency
interest/profit rate swaps and forward contracts. Such derivative financial instruments are initially
recognised at fair value on the date on which a derivative contract is entered into and subsequently
re-measured at fair value. Fair values are obtained from quoted market prices in active markets,
including recent market transactions and valuation techniques, as appropriate. All derivatives are carried
as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value
of any derivatives that do not qualify for hedge accounting are recognised immediately in the statement
of profit or loss.

(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 risk, the Group and the Bank apply hedge accounting
for transactions which meet specified criteria.
At the inception of each hedge 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 or 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 is recognised in the statement of profit or 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 or 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.