Bahamas - FirstCaribbean International Bank

Notes to the Consolidated Financial Statements
October 31, 2007
(expressed in thousands of Bahamian dollars)
2. Summary of significant accounting policies (continued)
2.10 Impairment of non-financial assets
The Bank assesses at each reporting date or more frequently if events or
changes in circumstances indicate that the carrying value may be impaired,
whether there is an indication that a non-financial asset may be impaired. If
any such indication exists, or when annual impairment testing for an asset
is required, the Bank makes an estimate of the asset’s recoverable amount.
Where the carrying amount of an asset (or cash-generating unit) exceeds its
recoverable amount, the asset (or cash-generating unit) is considered impaired
and is written down to its recoverable amount.
For assets, excluding goodwill, an assessment is made at each reporting date
as to whether there is any indication that previously recognised impairment
losses may no longer exist or may have decreased. If such indication exists,
the recoverable amount is estimated. A previously recognised impairment
loss is reversed only if there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was
recognised. If that is the case, the carrying amount of the asset is increased
to its recoverable amount. Impairment losses relating to Goodwill cannot be
reversed for subsequent increases in its recoverable amount in future periods.
2.11 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
balance sheet when there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or realise the asset
and settle the liability simultaneously.
2.12 Derivative financial instruments and hedge accounting
The Bank makes use of derivative instruments to manage exposure to interest
rate, foreign currency and credit risks, including exposures arising from
forecast transactions. In order to manage particular risks, the Bank applies
hedge accounting for transactions that meet the specified criteria.
The Bank’s criteria for a derivative instrument to be accounted for as a hedge
include:
i) At inception of the hedge relationship, the Bank formally documents
the relationship between the hedged item and the hedging instrument,
See Auditors’ Report Page 56.
ii)
iii)
including the nature of the risk, the objective and strategy for undertaking
the hedge and the method that will be used to assess the effectiveness of
the hedging relationship;
Also at the inception of the hedge relationship, a formal assessment is
undertaken to ensure the hedging instrument is expected to be highly
effective in offsetting the designated risk in the hedged item. Hedges are
formally assessed each quarter. A hedge is regarded as highly effective
if the changes in fair value or cash flows attributable to the hedged risk
during the period for which the hedge is designated are expected to
offset in a range of 80% to 125%. For situations where that hedged item
is a forecast transaction, the Bank assesses whether the transaction is
highly probable and presents an exposure to variations in cash flows that
could ultimately affect the consolidated statement of income. The hedge
is expected to be highly effective in offsetting the risk in the hedged item
throughout the reporting period; and;
The hedge is highly effective on an ongoing basis.
Derivatives are initially recognised in the balance sheet at their fair value
based on settlement date. Fair values are obtained from discounted cash flow
models, using quoted market interest rates. All derivatives are carried as assets
when fair value is positive and as liabilities when fair value is negative.
The method of recognising the resulting fair value gain or loss depends on
whether the derivative is designated as a hedging instrument, and if so, the
nature of the item being hedged. The Bank designates certain derivatives
as either: (1) hedges of the fair value of recognised assets or liabilities (fair
value hedge); or (2) hedges of highly probable cash flows attributable to a
recognised asset or liability (cash flow hedge). Hedge accounting is used for
derivatives designated in this way provided certain criteria are met.
(1) Fair value hedges
Changes in the fair value of derivatives that are designated and qualify
as fair value hedges and that prove to be highly effective in relation to
hedged risk, are recorded in the consolidated statement of income in
‘Net trading income’, along with the corresponding change in fair value
of the hedged asset or liability that is attributable to that specific hedged
risk.
If the hedging instrument expires or is sold, terminated or exercised, or
where the hedge no longer meets the criteria for hedge accounting, the
hedge relationship is terminated.
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