annual report - Hypo Real Estate Holding AG

Group Accounts
Financial liabilities are derecognised when they are extinguished – that is when the obligation is discharged,
cancelled or expires.
Financial guarantee contracts
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse
the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance
with the terms of a debt instrument.
Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee
was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the
higher of the initial measurement, less amortization calculated to recognize in the income statement the fee
income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure
required to settle any financial obligation arising at the balance sheet date. These estimates are determined
based on experience of similar transactions and history of past losses, supplemented by the judgement of
management.
Derivative financial instruments and hedge accounting
Derivatives
Derivatives are used for trading and hedging purposes. They include, in particular, interest rate swaps, crosscurrency
swaps, interest rate options, foreign exchange forwards, interest rate futures and credit derivatives.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are
subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets,
including recent market transactions and valuation techniques, including discounted cash flow models and options
pricing models, as appropriate.
All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of
the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other
observable current market transactions in the same instrument (i.e. without modification or repackaging) or based
on a valuation technique whose variables include only data from observable markets. Where such evidence exists,
the Group recognises profits on day one being the difference between the transaction price and fair value at initial
recognition. Where such evidence does not exist, day one profit is deferred and recognised in the income statement
to the extent that it arises from a change in a factor (including time) that market participants would consider
in setting a price. Straight line amortisation is used where it approximates the above. Subsequent changes in fair
value are recognised immediately in the income statement without reversal of deferred day one profits or losses.
Embedded derivatives
Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic
characteristics and risks are not closely related to those of the host contract and the host contract is not
carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in
fair value recognised in the income statement.
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