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Investment property
Derivatives
Leasing
Land and buildings held as investment property to earn rental income and/or for capital
appreciation are classified as investments and recognised at amortised cost. Rental income
from investments is included in net interest income, as is interest paid on related
funding. As a rule, buildings are depreciated over a period of 50 years.
Derivatives are financial instruments which are designed by reference to an underlying
instrument. Derivatives may be interest rate contracts, foreign exchange contracts, equityrelated
and other instruments. Within the “other derivatives” category, the significance
of credit derivatives has grown in the past years. Derivative transactions may be concluded
over the counter (OTC), i.e. directly with the counterparty, or via exchanges. The exposure
is reduced by a margin which must be deposited for exchange-traded contracts
(futures and options) to absorb current price fluctuations.
Derivatives are stated at their fair values. To determine fair values as at the transaction
date, market prices and official quotes (Bloomberg, Telerate) are used. Where such prices
or quotes are not available, recognised and tested models are used for determining current
prices.
In hedge accounting, Bank Austria Creditanstalt distinguishes between fair value hedges
and cash flow hedges. In both cases, changes in the values of the hedged item and the
hedging instrument are recognised in income in the same period.
A fair value hedge provides protection against changes in the fair value of an asset or a
liability. The hedging instrument is stated at its fair value, and any gains or losses on the
hedging instrument are recognised in income. Gains or losses on the hedged item which
are attributable to the hedged risk adjust the carrying amount of the hedged item and
are recognised in income. To qualify for hedge accounting, hedges must be highly effective.
The effectiveness of fair value hedges is measured on an ongoing basis.
Cash flow hedges are used for protecting future (variable) cash flows. They hedge the
exposure to variability in cash flows which result from assets or liabilities or from planned
transactions and have an effect on income. Changes in the fair values of derivatives designated
as hedging instruments are divided into a portion that is determined to be an
effective hedge, and into an ineffective portion. The effective portion of any gain or loss
on the heding instrument is included in the cash flow hedge reserve and recognised in
income in the same period in which the change in the value of the hedged item is recognised
in income. This neutralises the effect on income.
The classification of leases is based on the extent to which risks and rewards incident to
ownership of a leased asset lie with the lessor or the lessee.
Accounting for leases as lessor: assets held under a finance lease (which transfers to the
lessee substantially all the risks and rewards incident to ownership) are accounted for as
receivables, stated as loans and advances at amounts equal to the net investment (present
value). The recognition of interest income reflects a constant periodic rate of return
on the net investment outstanding.
In the case of operating leases, the risks and rewards incident to ownership are not transferred.
The relevant assets are included in property and equipment and in investments
(property) and measured according to the principles applied to such items. Lease income
is recognised on a straight-line basis over the term of the agreement. Bank Austria
Creditanstalt is mainly active as a lessor under finance leases.
Significant accounting principles 121