Annual report 2004 (PDF, 4141 kB) - Unicredit Bank

Certain derivatives embedded in other financial instruments are treated as separate derivatives
when their risks and characteristics are not closely related to those of the host contract and the
host contract is not carried at fair value.
Changes in the fair value of derivatives held for trading are included in gains or losses from
financial transactions.
The Bank designates prospectively certain derivatives as either a hedge of the fair value
of a recognised asset or liability (fair value hedge). Hedge accounting is used for derivatives
designated in this way provided the following criteria are met:
i) formal documentation of the general hedging strategy, hedged risk, hedging instrument,
hedged item and their relationship is prepared before hedge accounting is applied;
ii) the hedge documentation proves that it is expected to be highly effective in offsetting
the risk in the hedged item at inception and throughout the reporting period;
iii) the hedge is effective on an ongoing basis.
Changes in the fair value of derivatives that qualify as effective fair value hedges are recorded
in the income statement, along with the corresponding change in fair value of the hedged asset
or liability that is attributable to that specific hedged risk.
(l)
Interest income and expense
Interest income and expense are recognised for all interest bearing instruments on an accrual
basis. Interest income includes accrued coupons, discount and premium on all fixed income
instruments.
Income on non-performing loans is also accrued and capitalised into the related loan balance.
Such amounts are considered in estimating the provision for non-performing loans.
(m)
Penalty interest
Penalty interest income is suspended or forgiven and excluded from interest income until
received.
Accrual of penalty interest income is suspended when loans become overdue by more than 90
days, or on other default events of a debtor and is recognised off-balance sheet. Such income
is excluded from interest income until received.
(n)
Fee and commission income
Fixed fee income for arrangement of loans, guarantees and other activities is recognised
immediately, whereas commission is accrued over the period to maturity.
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