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

(c)
Foreign currencies
The consolidated financial statements are presented in Czech crowns (“CZK”) which
is the measurement currency of all companies within the Group.
Foreign currency transactions are translated into the measurement currency at the exchange
rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the translation of monetary assets and
liabilities denominated in foreign currencies, are recognised in the income statement.
All resulting foreign exchange gains and losses are recognised in net trading income.
(d)
Derivative financial instruments
Derivative financial instruments including foreign exchange forwards, forward rate
agreements (FRA), currency and interest rate swaps and credit derivatives are initially
recognised in the balance sheet at cost (including transaction costs) and subsequently
are remeasured at their fair value. Fair values are obtained from quoted market prices
and discounted cash flow models. Positive fair value of derivatives is recognized as an asset
and negative fair value of derivatives is recognized as a liability.
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 with unrealised gains and losses reported in income
statement.
Changes in the fair value of derivatives held for trading are included in net trading income.
On the acquisition date, the Group designates certain derivatives as 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 certain criteria are met.
The Group’s criteria for a derivative instrument to be accounted for as a hedge include:
a) Formal documentation of the hedging instrument, hedged item, hedging objective,
strategy and relationship is prepared before hedge accounting is applied;
b) The hedge is documented showing that it is expected to be highly effective in offsetting
the risk in the hedged item throughout the reporting period; and
c) The hedge is effective on an ongoing basis.
Changes in the fair value of the effective portion of derivatives that are designated and qualify
as fair value hedges and that prove to be highly effective in relation to the hedged risk, are
recorded in the income statement, along with the corresponding change in the fair value
of the hedged asset or liability that is attributable to that specific hedged risk.
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