Annual Report & Accounts 2009 - Anglo Irish Bank

The Group documents, at the inception of each hedging transaction, the relationship between hedging instruments and hedged items,
as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged items.
Fair value hedge accounting
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the fair value hedging adjustment cumulatively made to the carrying
amount of the hedged item is, for items carried at amortised cost, amortised to profit or loss over the period to maturity of the
previously designated hedge relationship using the effective interest rate method. For available-for-sale financial assets the fair value
hedging adjustment remains in equity until the hedged item affects profit or loss. If the hedged item is sold or repaid, the unamortised
fair value adjustment is recognised immediately in profit or loss.
Cash flow hedge accounting
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are initially
recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts
accumulated in equity are recycled to the income statement in the same periods as the hedged items affect profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, hedge accounting is
discontinued. Any cumulative gain or loss existing in equity at that time remains in equity and is recognised in profit or loss when the
forecast transaction arises. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in
equity is immediately transferred to the income statement. Interest income and expense on economic hedges that no longer meet the
criteria for hedge accounting are recognised in net interest income.
Hedges of net investments
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is recognised directly in equity; the gain or loss relating to the ineffective portion
is recognised immediately in profit or loss. Gains and losses accumulated in equity are included in the income statement on the disposal
or partial disposal of the foreign operation. Hedges of net investments may include non-derivative liabilities.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments entered into as economic hedges may not qualify for hedge accounting. These derivatives are classified as
held for trading. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised
immediately in profit or loss.
Embedded derivatives
Certain financial instruments contain both a derivative and a non-derivative component. In such cases, the derivative component is
termed an embedded derivative. When the economic characteristics and risks of embedded derivatives are not closely related to those of
the host contract and the host contract is not carried at fair value through profit or loss, the embedded derivative is treated as a separate
derivative. Embedded derivatives separated from the host contract are measured at fair value with changes in fair value recognised in net
trading income.
1.13 Collateral and netting
Collateral
The Group obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the form
of a lien over the customer’s assets and gives the Group a claim on these assets for both existing and future liabilities. The collateral is, in
general, not recorded in the Group’s statement of financial position.
The Group also pays and receives collateral in the form of cash or securities in respect of other credit instruments, such as stock
borrowing or derivative contracts, in order to reduce credit risk. Collateral received in the form of securities is not recorded in the
statement of financial position. Collateral paid or received in the form of cash is recognised in the statement of financial position with a
corresponding asset or liability. These items are typically assigned to loans and advances to banks and deposits from banks accordingly.
Any interest receivable or payable arising is recorded as interest expense or interest income respectively.
Netting
The Group enters into master netting agreements with counterparties whenever possible and, when appropriate, obtains collateral.
Master netting agreements provide that, if an event of default occurs, all outstanding transactions with the counterparty will fall due and
all amounts outstanding will be settled on a net basis.
Financial assets and liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a
currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset
and settle the liability simultaneously.
1.14 Investment contracts
Contracts issued by the life assurance business are unit-linked and do not contain any significant insurance risk. These contracts are all
classified as investment contracts.
Financial assets and investment property held in respect of linked liabilities to customers and related liabilities to customers under
investments contracts are stated at fair value and are separately disclosed in the Group statement of financial position or in the notes
thereto.
Anglo Irish Bank
Annual Report & Accounts 2009
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