Annual report 2010 - Dexia.com

Notes to the consolidated financial statementsvalue through profit or loss“. Interest income is accrued usingthe effective interest-rate method and is recorded under “Netinterest income“.Trading securities are securities acquired for generating a profitfrom short-term fluctuations in price or dealer's margins, orare securities included in a portfolio in which a pattern ofshort-term profit-taking exists. Dexia initially recognisestrading securities at fair value and subsequently re-measuresthem at fair value. All realised and unrealised gains and lossesare recorded under “Net income from financial instruments atfair value through profit or loss“. Interest earned is recordedunder “Interest income“, and dividends received under“Dividend income“.1.6.3.2. Liabilities held for tradingLiabilities held for trading are subject to the same accountingrules as those for “Loans and securities held for trading“.1.6.3.3. Loans and securities designated at fairvalue through profit or loss (“FVO“)In some cases and if appropriately documented, Dexia candesignate a financial asset, a financial liability or a group offinancial instruments as “at fair value through profit or loss“where:• such designation eliminates or significantly reduces ameasurement or recognition inconsistency that wouldotherwise arise;• a group of financial assets, financial liabilities or both ismanaged and its performance is evaluated on a fair valuebasis, in accordance with a documented risk management orinvestment strategy;• an instrument contains a non-closely related embeddedderivative:- that significantly modifies the cash flows that otherwisewould be required by the contract; or- for which it is not clear, with little or no analysis, that theseparation of the embedded derivative is prohibited.1.6.3.4. Liabilities designated at fair value throughprofit or loss (FVO)For subsequent measurement, these financial liabilities aresubject to the same accounting principles as described earlierunder the heading “Financial instruments measured at fairvalue through profit or loss“.1.6.3.5. Derivatives – Trading portfolioWhen a derivative is not designated in a hedge relationship, itis deemed to be held for trading. The main types of derivativesare the currency and the interest-rate derivatives. Dexia, whichalso makes use of credit derivatives and equity derivatives,initially and subsequently measures all derivatives at the fairvalue obtained from quoted market prices, discounted cashflow models or pricing models, as appropriate. All changes infair value are recognised in the statement of income.Dexia reports derivatives as assets when fair value is positiveand as liabilities when fair value is negative.Dexia treats certain derivatives embedded in other financialinstruments as separate derivatives:• when their risks and characteristics are not closely related tothose of the host contract; and• when the hybrid contract is not carried at fair value withunrealised gains and losses reported in the statement ofincome.1.6.4. Financial investments1.6.4.1 Held-to-maturityDexia classifies the interest-bearing financial assets with fixedmaturity quoted in an active market as held-to-maturity(HTM) when management has both the intent and the abilityto hold the assets to maturity.Dexia recognises such interest-bearing financial assets initiallyat fair value plus transaction costs and subsequently atamortised cost, less any allowance for impairment. Interestis recognised based on the effective interest-rate method andrecorded under “Net interest income“.1.6.4.2 Available-for-saleDexia classifies financial assets intended to be held for anindefinite period of time, but which may be sold in responseto needs for liquidity or changes in interest-rates, exchangerates or equity prices, as available-for-sale (AFS).Dexia recognises financial assets initially at fair value plustransaction costs. Interest is recognised based on the effectiveinterest-rate method and recorded under “Net interestincome“. Dexia recognises dividend income from equitiesunder “Dividend income“.Dexia subsequently re-measures available-for-sale financialassets at fair value (cf. I.7 Fair value of financial instruments).Unrealised gains and losses arising from changes in the fairvalue of financial assets classified as available-for-sale arerecognised within equity under the heading “Gains andlosses not recognised in the statement of income“. Whensecurities are disposed of, or impaired, Dexia recycles therelated accumulated fair value adjustments in the statementof income as “Net income on investments“.1.6.5. Impairments on financial assetsDexia records allowances for impairment losses when there isobjective evidence that a financial asset or group of financialassets is impaired as a result of one or more events occurringafter initial recognition and evidencing (a) a decline in theexpected cash flows and (b) the impact on the estimatedfuture cash flows that can be reliably estimated.1.6.5.1. Financial assets valued at amortised costDexia first assesses whether objective evidence of impairmentexists individually for financial assets. If no such evidenceexists, the financial assets is included in a group of financialassets with similar credit risk characteristics and collectivelyassessed for impairment.Management reportConsolidatedfinancial statementsAdditional information Annual financial statementsAnnual report 2010 Dexia131