UBI Banca Group

• at the start of the hedging transaction the relationship is formally designated and
documented, including the company’s risk management objective and strategy for
undertaking the hedge. This documentation includes identification of the hedging
instrument, the item or transaction hedged, the nature of the risk being hedged, and how
the company will assess the hedging instrument's effectiveness in offsetting the exposures
to changes in the fair value of the item hedged or in the cash flows attributable to the risk
hedged;
• the hedging is expected to be highly effective;
• the planned transaction hedged, for hedging cash flows, is highly probable and presents an
exposure to changes in cash flows that could have effects on the income statement;
• the effectiveness of the hedging can be reliably measured;
• the hedging is measured on an ongoing basis and is considered highly effective for all the
financial years in which it was designated.
5.2.1 Methods for testing effectiveness
A hedge relationship is judged effective, and as such is appropriately represented in the
financial statements, if at its inception and during its life the changes in the fair value or cash
flows of the hedged item attributable to the hedged risk are almost always completely offset by
the changes in the fair value or cash flows of the hedging instrument. This conclusion is
reached when the actual result falls within a range of between 80% and 125%.
The effectiveness of hedging is tested at inception by means of a prospective test and when
annual reports are prepared by means of a retrospective test; the outcome of the test justifies
the application of hedging accounting because it demonstrates its expected effectiveness.
Retrospective tests are conducted monthly on a cumulative basis where the objective is to
measure the degree of effectiveness of the hedging in the reporting period and therefore to
verify whether the hedging has actually been effective in the period.
Derivative financial instruments that are considered hedges from a profit and loss viewpoint
but which do not satisfy the requirements to be considered effective instruments for hedging
are recognised under item 20 “Financial assets held for trading” or under item 40 “Financial
liabilities held for trading” and the profits and losses under the corresponding item 80
“Trading income (loss)”.
If the above tests do not confirm the effectiveness of the hedge, then if it is not derecognised,
the derivative contract is reclassified within derivatives held for trading and the instrument
hedged is again measured according to the criterion applied for its balance sheet classification.
5.3 Measurement criteria
5.3.1 Fair value hedging
Fair value hedging is treated as follows:
• the profit or loss resulting from measuring a hedging instrument at fair value is included
in the income statement under item 90 “Net hedging income (loss)”.
• the profit or loss on the item hedged attributable to the hedged risk adjusts the value in
the accounts of the hedged item and is recognised immediately, regardless of the type of
asset or liability hedged, in the income statement within the aforementioned item.
Hedge accounting is discontinued prospectively in the following cases:
1. the hedging instrument expires or is sold, terminated, or exercised;
2. the hedge no longer meets the hedge accounting criteria described above;
3. the entity revokes the designation.
In case 2, if the assets or liabilities hedged are valued at amortised cost, the higher or lower
value resulting from valuing them at fair value as a result of the hedge becoming ineffective is
recognised through profit or loss, according to the effective interest rate method prevailing at
the time of revocation of hedge.
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