Annual report 2011 - VTB

VTB BankNotes to the Consolidated Financial Statements – 31 December 2011 and 2010(in billions of Russian Roubles)5. Summary of Principal Accounting Policies (continued)Derivative financial instruments (continued)If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteriafor hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortized cost, using theeffective interest rate method, the difference between the carrying value of the hedged item on termination and theface value is amortized over the remaining term of the original hedge. If the hedged item is derecognized, theunamortized fair value adjustment is recognized immediately in the income statement.Cash flow hedgesFor designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging instrument isinitially recognized through other comprehensive income directly in equity in the cash flow hedge reserve within“Unrealized gain on financial assets available-for-sale and cash flow hedge” caption. The ineffective portion of thegain or loss on the hedging instrument is recognized immediately in the income statement in “Gains less lossesarising from financial instruments at fair value through profit or loss”.When the hedged cash flow affects the income statement, the gain or loss on the hedging instrument is “recycled” inthe corresponding income or expense line of the income statement. When a hedging instrument expires, or is sold,terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain orloss existing in equity at that time remains separately in equity until the forecast transaction occurs. When a forecasttransaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediatelytransferred to the income statement in “Gains less losses arising from financial instruments at fair value through profitor loss”.Regular way transactionsRegular way transactions are purchases or sales of financial assets that require delivery of assets within the periodgenerally established by regulation or convention in the marketplace. All regular way purchases and sales of financialassets are recognized or derecognized on the contractual settlement date which is the date when the asset is to bedelivered to or by the Group. Regular way transactions are not recognized as derivatives because of the shortduration of the commitment to deliver financial assets between the trade and settlement date.Any change in the fair value of the financial assets at fair value through profit or loss to be received during the periodbetween the trade date and the settlement date is recognized in the income statement and for financial assetsavailable for sale is recognized in other comprehensive income for financial assets purchased. For financial assetssold on a regular way basis no changes in fair value are recognized in the income statement or in othercomprehensive income between the trade and settlement date. Assets carried at cost or amortized cost are notaffected by the change in fair value during the period between the trade and settlement date.Promissory notes purchasedPromissory notes purchased are included in financial assets at fair value through profit or loss or in due from otherbanks or in loans and advances to customers or in investment securities held-to-maturity, depending on theirsubstance and are recorded, subsequently remeasured and accounted for in accordance with the accounting policiesfor these categories of assets.LeasesFinance lease – Group as lessor. The Group presents leased assets as lease receivables equal to the netinvestment in the lease in loans and advances to customers. Finance income is based on a pattern reflecting aconstant periodic rate of return on the net investment outstanding and is presented as interest income. Initial directcosts are included in the initial measurement of the lease receivables.Operating lease – Group as lessee. Leases of assets, under which the risks and rewards of ownership areeffectively retained with the lessor, are classified as operating leases. Lease payments under operating leases arerecognized as expenses on a straight-line basis over the lease term and included into operating expenses.Allowances for impairment of financial assetsImpairment of financial assets carried at amortized costImpairment losses are recognized in profit or loss when incurred as a result of one or more events (“loss events”) thatoccurred after the initial recognition of the financial asset and which have an impact on the amount or timing of theestimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Groupdetermines that no objective evidence exists that impairment was incurred for an individually assessed financial asset,whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics andcollectively assesses them for impairment. The primary factors that the Group considers in determining whether afinancial asset is impaired include its overdue status and realizability of related collateral, if any.18