ANNUAL REPORT 2008 - Polymer Bank Notes of the World

mid-market prices on 30 December 2008 wereused. Non-marketable securities are valued atcost, while illiquid equity shares are valued atcost subject to impairment.INCOME RECOGNITIONIncome and expenses are recognised in theperiod in which they are earned or incurred.Realised gains and losses arising from the sale offoreign exchange, gold and securities are takento the Profit and Loss Account. Such realisedgains and losses are calculated by reference tothe average cost of the respective asset.Unrealised gains are not recognised as incomebut are transferred directly to a revaluationaccount.Unrealised losses are taken to the Profit and LossAccount if they exceed previous revaluationgains registered in the corresponding revaluationaccount. Unrealised losses in any one securityor currency or in gold are not netted againstunrealised gains in other securities or currenciesor gold. In the event of an unrealised loss on anyitem at the year-end, the average cost of thatitem is reduced to the year-end exchange rate ormarket price.Premiums or discounts arising on purchasedsecurities are calculated and presented as partof interest income and are amortised over theremaining life of the assets.REVERSE TRANSACTIONSReverse transactions are operations wherebythe ECB buys or sells assets under a repurchaseagreement or conducts credit operations againstcollateral.Under a repurchase agreement, securities aresold for cash with a simultaneous agreementto repurchase them from the counterparty at anagreed price on a set future date. Repurchaseagreements are recorded as collateralised inwarddeposits on the liability side of the BalanceSheet and also lead to an interest expense in theProfit and Loss Account. Securities sold undersuch an agreement remain on the Balance Sheetof the ECB.Under a reverse repurchase agreement, securitiesare bought for cash with a simultaneousagreement to sell them back to the counterpartyat an agreed price on a set future date.Reverse repurchase agreements are recordedas collateralised loans on the asset side of theBalance Sheet but are not included in the ECB’ssecurity holdings. They give rise to interestincome in the Profit and Loss Account.Reverse transactions (including security lendingtransactions) conducted under an automatedsecurity lending programme are recorded on theBalance Sheet only where collateral is providedin the form of cash placed on an account ofthe ECB. In 2008 the ECB did not receive anycollateral in the form of cash in connection withsuch transactions.OFF-BALANCE-SHEET INSTRUMENTSCurrency instruments, namely foreign exchangeforward transactions, forward legs of foreignexchange swaps and other currency instrumentsinvolving an exchange of one currency foranother at a future date, are included in the netforeign currency position for the purpose ofcalculating foreign exchange gains and losses.Interest rate instruments are revalued on an itemby-itembasis. Daily changes in the variationmargin of open interest rate futures contractsare recorded in the Profit and Loss Account. Thevaluation of forward transactions in securitiesand of interest rate swaps is based on generallyaccepted valuation methods using observablemarket prices and rates and the discount factorsfrom the settlement dates to the valuation date.POST-BALANCE-SHEET EVENTSAssets and liabilities are adjusted for events thatoccur between the annual Balance Sheet dateand the date on which the Governing Councilapproves the financial statements, if such events220 ECBAnnual Report2008