FirstCaribbean International Bank (Bahamas) Limited

Notes to Consolidated Financial StatementsFor the year ended October 31, 2009(Expressed in thousands of Bahamian dollars)2. Accounting Policies (Continued)2.4 Summary of Significant Accounting Policies (continued)(8) Offsetting financial instrumentsFinancial assets and liabilities are offset and the net amount reported in the consolidated balance sheet when there isa legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realizethe asset and settle the liability simultaneously.(9) Derivative financial instruments and hedge accountingThe Bank makes use of derivative instruments to manage exposure to interest rate, foreign currency and credit risks,including exposures arising from forecast transactions. In order to manage particular risks, the Bank applies hedgeaccounting for transactions that meet the specified criteria.The Bank’s criteria for a derivative instrument to be accounted for as a hedge include:i) At inception of the hedge relationship, the Bank formally documents the relationship between the hedged item andthe hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge andthe method that will be used to assess the effectiveness of the hedging relationship;ii) Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrumentis expected to be highly effective in offsetting the designated risk in the hedged item. Hedges are formally assessedeach quarter. A hedge is regarded as highly effective if the changes in fair value or cash flows attributable to thehedged risk during the period for which the hedge is designated are expected to offset in a range of 80% to125%. For situations where that hedged item is a forecast transaction, the Bank assesses whether the transactionis highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidatedstatement of income. The hedge is expected to be highly effective in offsetting the risk in the hedged itemthroughout the reporting period; and;iii) The hedge is highly effective on an ongoing basis.Derivatives are initially recognized in the consolidated balance sheet at their fair value based on settlement date. Fairvalues are obtained from discounted cash flow models, using quoted market interest rates. All derivatives are carriedas assets when fair value is positive and as liabilities when fair value is negative.The method of recognizing the resulting fair value gain or loss depends on whether the derivative is designated asa hedging instrument, and if so, the nature of the item being hedged. The Bank designates certain derivatives aseither: (1) hedges of the fair value of recognized assets or liabilities (fair value hedge); or (2) hedges of highly probablecash flows attributable to a recognized asset or liability (cash flow hedge). Hedge accounting is used for derivativesdesignated in this way provided certain criteria are met.(1) Fair value hedgesChanges in the fair value of derivatives that are designated and qualify as fair value hedges and that prove to behighly effective in relation to hedged risk, are recorded in the consolidated statement of income in ‘Net tradingincome’, along with the corresponding change in fair value of the hedged asset or liability that is attributable tothat specific hedged risk.If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets thecriteria for hedge accounting, the hedge relationship is terminated.For hedged items recorded at amortized cost, using the effective interest rate yield method, the difference betweenthe carrying value of the hedged item on termination and the face value is amortized over the remaining termof the original hedge. If the hedged item is derecognized, the unamortized fair value adjustment is recognizedimmediately in the consolidated statement of income.28