COMMERZBANK AKTIENGESELLSCHAFT

To our Shareholders Corporate Responsibility Management Report Risk Report Group Financial Statements Further Information 221 277
258 202 Statement of comprehensive income
260 204 Balance sheet
262 206 Statement of changes in equity
264 208 Cash flow statement
266 210 Notes
409 353 Auditors’ report
The application of hedge accounting rules is tied to a number of
conditions. These relate above all to the documentation of the
hedging relationship and also to its effectiveness.
The hedge must be documented at inception. Documentation
must include in particular the identification of the hedging
instrument, the related hedged item or transaction, the nature of
the risk being hedged and how effectiveness of the hedge is
assessed. In addition to documentation, IAS 39 requires the
effectiveness of a hedge to be demonstrated during the entire
term of the hedge in order for hedge accounting rules to be
applied. Effectiveness in this context means the relationship
between the change in fair value or cash flow of the hedged item
and the change in fair value or cash flow of the hedging
instrument. If these changes offset each other almost fully, a
high degree of effectiveness exists. Proof of effectiveness
requires, firstly, that a high degree of effectiveness can be
expected from a hedge in the future (prospective effectiveness);
secondly, when a hedge exists, it must be regularly
demonstrated that it was highly effective during the period
under review (retrospective effectiveness). Both the
retrospective and prospective effectiveness must be within a
range of between 0.8 and 1.25.
Commerzbank uses regression analysis to assess
effectiveness in micro fair value hedge accounting. The changes
in fair value of the hedged transaction and the hedging
instrument are determined by means of historical simulations for
the prospective effectiveness test, while the actual changes in
fair value are used for the retrospective effectiveness test.
Regression analysis is also used for the prospective effectiveness
test in portfolio fair value hedge accounting, while the dollaroffset
method is used for the retrospective effectiveness test.
(6) Currency translation
Monetary assets and liabilities denominated in foreign
currencies and pending spot foreign exchange transactions are
translated at the spot mid rate, and foreign exchange forward
contracts at the forward rate, on the balance sheet date. Realised
income and expenses are normally translated using the spot rate
applying on the date of realisation. Average prices may also be
used to translate income and expenses, provided these prices
are representative, i.e. the price has not undergone major
fluctuations. Hedged expenses and income are translated using
the hedge rate. Expenses and income resulting from the
translation of balance sheet items are recognised in profit or loss
under net trading income.
Non-monetary items such as equity holdings are generally
translated at historic exchange rates, if they are measured at
amortised cost. The hedging instruments are measured at fair
value. Gains and losses on the translation of non-monetary items
are recognised either in equity or profit or loss depending on the
way the net gain or loss is recognised.
Income and expenses in the financial statements of
consolidated subsidiaries and companies accounted for using
the equity method are translated at the exchange rate prevailing
on the transaction date. For simplification purposes a price can
be used for translation which represents an approximation of the
exchange rate on the transaction date, for example the average
price of a period. All differences arising on translation are
recognised as a separate component of equity in the currency
translation reserve. Translation gains and losses from the
consolidation of the capital accounts are also recognised in
equity under the currency translation reserve. On the date such
assets are sold, the translation gains or losses are recognised in
profit or loss under net investment income.
Group Financial Statements