Landeskreditbank Baden-Württemberg - L-Bank

carried at the lower of cost or market. That is, while unrealized losses on trading derivatives are recorded in
current income, unrealized gains are not recognized. Hedge accounting is permitted as micro-hedge, portfoliohedge
or macro-hedge (often referred to as a gap hedge). Derivative financial instruments used for hedging
purposes are generally accounted for as off-balance-sheet transactions and, in the case of the bank, are disclosed
in notes to the financial statements. Unrealized gains and losses of both the derivative financial instrument and
hedged items are generally not recorded on the balance sheet or in the income statement. The related income and
expense of a derivative financial instrument, such as interest income related to interest rate swaps, is reported on
a basis consistent with the underlying hedged position pro rata temporis, often resembling synthetic instrument
accounting. Credit-default swaps in the non trading book / investment book provided as credit risk protection are
disclosed as contingent liabilities.
Under U.S. GAAP, all derivative instruments and embedded derivatives are recorded on the balance sheet at
fair value as either assets or liabilities, regardless of any hedge relationship that might exist. Changes in the value
of derivative instruments are recognized in the income statement as they arise, unless they satisfy stringent
criteria for hedge accounting (including designation and high effectiveness), supported by formal documentation.
The accounting treatment of the hedging instruments as well as the hedged items depends on the type of hedge
designation (fair value hedge or cash flow hedge), the offset being in either current income or other
comprehensive income. Also depending on the hedge designation, the carrying value of the hedged item may
need to be adjusted to offset the changes in the fair value of the hedging derivative. Any ineffectiveness resulting
from the hedge relationship is recognized in income.
Loan origination fees
Under German GAAP, the direct costs incurred in the origination of new loans are expensed as general
administrative expense in the period incurred. Loan origination fees received are recognized in the income
statement as commission income upon closing of the transaction unless such fees are determined to be in lieu of
interest. In that case, these fees are deferred and recognized as interest income over the life of the loan (generally
using straight-line amortization).
U.S. GAAP requires that loan origination fees net of certain direct loan origination costs are deferred and
recognized over the life of the related loan as an adjustment of yield using the effective interest method. Loan
commitment fees are deferred, except for certain retrospectively determined fees. Commitment fees meeting
specified criteria are recognized over the loan commitment period; all other commitment fees shall be recognized
as an adjustment of yield over the related loan’s life or, if the commitment expires unexercised, recognized in
income upon expiration of the commitment.
Pension provisions
Under German GAAP, pension obligations are determined using actuarial principles, whereby the ongoing
and future pension obligations and benefit obligations to retired beneficiaries are determined using a certain
valuation benchmark (partial value) in line with tax regulations.
Under U.S. GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period
as determined in accordance with SFAS 87, “Employers’ Accounting for Pensions” which requires readjustment
of the significant actuarial assumptions annually to reflect current market and economic conditions. Under SFAS
87, a pension asset representing the excess plan assets over benefit obligations is disclosed and deferred in the
balance sheet. The pension benefit obligation is calculated by using a projected unit credit method. Actuarial
gains or losses within a 10% “corridor” are disclosed and can be deferred.
Reacquired own debt securities
Under German GAAP, debt securities that are re-acquired with the intention of resale are recorded as assets
at acquisition cost, and subsequently valued at the lower of cost or market. Gains or losses on resale of such
securities are recorded in current income.
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