Derivative hedging instruments

Accounting policies

The use of hedge accounting

The Group applies hedge accounting when all the terms and conditions below have been met:

1) upon setting up the hedge, a hedge relationship, the purpose of risk management by the entity and the hedging strategy were officially established and documented;

2) the hedge is expected to be highly effective;

3) the planned hedged transaction must be highly probable and must be exposed to the variability of cash flows which may, as a result, have an impact on the income statement;

4) the effectiveness of the hedge may be reliably assessed;

5) the hedge is regularly assessed and its high effectiveness is confirmed in all the reporting periods for which the hedge had been designated.

The Group used fair value hedging as at 31 December 2017, whereas as at 31 December 2016 it did not use such hedging.

Discontinuation of hedge accounting:

• hedge instrument expires, is sold, released or exercised – accumulated gains or losses related to the hedging instrument which were recognized directly in other comprehensive income over the period in which the hedge was effective are recognized in a separate item in other comprehensive income until the planned transaction occurs;
• the hedge ceases to meet the hedge accounting criteria – accumulated gains or losses related to the hedging instrument which were recognized directly in other comprehensive income over the period in which the hedge was effective are recognized in a separate item in other comprehensive income until the planned transaction occurs;
• the planned transaction is no longer considered probable – accumulated gains or losses related to the hedging instrument which were recognized directly in other comprehensive income over the period in which the hedge was effective, are recognized in the income statement;
• the hedging relationship ceased to be valid – accumulated gains or losses related to the hedging instrument which were recognized directly in other comprehensive income over the period in which the hedge was effective are recognized in a separate item in other comprehensive income until the planned transaction occurs.

Cash flow hedge

Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognized directly in other comprehensive income in respect of the portion constituting the effective portion of the hedge. The ineffective portion of a hedge is recognized in the income statement in the item “Net gain/(loss) on financial instruments measured at fair value” or “Net foreign exchange gains (losses)”.

Amounts transferred directly to other comprehensive income are transferred to the income statement in the same period or periods in which the hedged planned transaction affects the income statement. Interest and foreign exchange gains/losses are shown in the income statement, in “Net interest income” and “Net foreign exchange gains (losses)”, respectively.

The effectiveness tests comprise the valuation of hedging transactions, net of interest accrued and foreign exchange gains (losses) on the nominal value of the hedging transactions (in case of CIRS transactions).

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.

Fair value hedges

Changes in the fair value of a derivative hedging instrument designated as fair value hedges are recognized in “Net income from financial instruments designated at fair value”, net of the interest component. The interest component is presented in the same line item as interest income on the hedged item, i.e. in “Net interest income”. A change in the adjustment of the measurement of a hedged item at fair value is recognized in “Net gain/(loss) on financial instruments measured at fair value”.

The effectiveness tests comprise the measurement of hedging transactions net of accrued interest.

Hedge effectiveness is verified through the use of prospective and retrospective effectiveness tests. The tests are performed on a monthly basis.

Types of hedging strategies applied by the Group

In 2017, the Group introduced Strategy 7, which concerns cash flow hedging, and Strategy 8, which concerns fair value hedging. These strategies are described above.

Financial information

Calculation of estimates