DERIVATIVE FINANCIAL INSTRUMENTS Classification and measurement Derivative instruments are financial assets or liabilities classified by default as derivative instruments held-for-trading, unless they can be deemed to be hedging derivatives. On initial recognition, they are recognised in the balance sheet at their initial fair value on the trade date. They are subsequently recognised at their fair value. At each reporting date, changes in the fair value of derivatives in the balance sheet are recorded: - In income, for derivatives held for trading or fair value hedges; - In recyclable equity, for cash flow hedges or net investments in foreign operations, for the effective portion of the hedge. Hedge accounting General framework In accordance with the Group decision, CFM Indosuez Wealth opts not to apply the “hedge accounting” component of IFRS 9, as permitted by the standard. All hedging relationships continue to be documented in accordance with the IAS 39 rules until, at the latest, the date on which the regulatory text on macrohedging is adopted by the European Union. However, the eligibility of financial instruments for hedge accounting under IAS 39 takes into account the principles of classification and measurement of financial instruments under IFRS 9. Under IFRS 9, and taking account of IAS 39 hedging principles, debt instruments at amortised cost or at fair value through other comprehensive income (items that may be reclassified) are eligible for fair value hedging and cash flow hedging. Documentation Hedging relationship must adhere to the following principles: - the purpose of a fair value hedge is to hedge against an exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment attributable to the hedged risk(s) and which may affect the profit/loss (for example, hedging of all or part of changes in fair value due to the interest rate risk on a fixed rate loan); - the purpose of a cash flow hedge is to hedge against an exposure to changes in the future cash flows of a recognised asset or liability or a highly likely future transaction attributable to the risk(s) hedged and that can or may (in the event of a planned but unrealised transaction) affect the profit/loss (for example, hedging of changes in all or part of future interest payments on variable rate debt). - net investment hedges in foreign operations are intended to provide protection against the risk of adverse changes in fair value associated with the foreign exchange risk of an investment carried out abroad in a currency other than the euro, which is CFM Indosuez Wealth’s reporting currency. In the event of a hedging intention, the following conditions must also be met to apply hedge accounting: - both the hedging instrument and the hedged instrument must be eligible; - documentation must be formalised from the outset, including in particular the individual designation and characteristics of the hedged item, the hedging instrument, the nature of the hedging relationship and the nature of the hedged risk; - the effectiveness of the hedge must be demonstrated from inception and retrospectively, through tests performed at each balance sheet date. For interest rate hedges for a portfolio of financial assets or financial liabilities, the Crédit Agricole group favours documentation of fair value hedging in accordance with the carve-out version of IAS 39 as adopted by the European Union. In particular: - the Group documents these hedging relationships on the basis of a gross position of derivatives and hedged items; - the effectiveness of these hedging relationships is justified using schedules. Assessment Revaluations of derivatives at fair value are recorded as follows: - Fair value hedges: the revaluation of the derivative and of the hedged item up to the hedged risk are recorded in the same manner in the income statement. Only the ineffective portion of the hedge, if any, is recorded for its net amount in income; - Cash flow hedges: the revaluation of the derivative, excluding interest accrued and due, is recognised in the balance sheet with a corresponding entry in a specific account for gains and losses recognised directly in equity for the effective portion, and the ineffective portion of the hedge is recognised in the income statement. Gains or losses on the derivative accumulated in equity are then recycled to income when the hedged flows are realised. - Hedges of net investment in a foreign operation: the change in value of the derivative is recognised in the balance sheet in Translation adjustment - Other comprehensive income (items that may be reclassified) and any ineffective portion of the hedge is recognised in the Income Statement. When the conditions for hedge accounting are no longer met, the following accounting treatment shall be applied on a forward-looking basis, unless the hedged item disappears: - Fair value hedge: only the derivative instrument continues to be remeasured through profit or loss. The hedged item is wholly accounted for in accordance with its classification. For debt instruments at fair value through other comprehensive income (items that may be reclassified), changes in fair value subsequent to the ending of the hedging relationship are recorded in other comprehensive income in their entirety. For hedged items measured at amortised cost, which were hedged against interest rate risk, CFM Indosuez Wealth Management 88
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