CFM INDOSUEZ Wealth Management - 2020 Annual Report

67 Hedge accounting General framework As determined by its parent company, CFM Indosuez Wealth Group does not apply the hedge accounting component of IFRS 9, in accordance with the option offered by the standard. All hedging relationships are therefore documented in accordance with IAS 39 until at the latest the date of application of the text onmacro fair value hedges when it is adopted by the European Union. However, the eligibility of financial instruments for hedge accounting under IAS 39 takes into account the principles of classification and measurement of financial instruments under IFRS 9. Under IFRS 9, and taking into account IAS 39 hedging principles, debt instruments at amortised cost and at fair value throughother comprehensive income recyclable to income are eligible for fair value hedging and cash flow hedging. However, since 1 January 2020, a hedge ineffectiveness has been recognised in the IFRS income statement of CFM IndosuezWealthManagement. This ineffectiveness does not concern only rate swaps, and a positive amount of €80,000 was recorded in the income statement at 31 December 2020. Documentation Hedging relationship must adhere to the following principles: • The purpose of a fair value hedge is to hedge against anexposure tochanges in the fair valueof a recognised asset or liability or an unrecognised firmcommitment attributable to the hedged risk(s) andwhichmay affect the profit/loss (for example, hedging of all or part of changes in fair value due to the interest rate risk on a fixed rate loan); • The purpose of a cash flow hedge is to hedge against an exposure to changes in the future cash flows of a recognised asset or liability or a highly likely future transaction attributable to the risk(s) hedged and that can or may (in the event of a planned but unrealised transaction) affect theprofit/loss (for example, hedging of changes in all or part of future interest payments on variable rate debt). In theevent of ahedging intention, the followingconditions must also be met to apply hedge accounting: • Both the hedging instrument and the hedged instrument must be eligible; • Documentationmust be formalised from the outset, including in particular the individual designation and characteristics of the hedged item, the hedging instrument, the nature of the hedging relationship and the nature of the hedged risk; • The effectiveness of the hedgemust be demonstrated from inception and retrospectively, through tests performed at each balance sheet date. For interest rate risk hedges of a portfolio of financial assets or financial liabilities, CFM IndosuezWealth Group favours fair value hedge documentation as permitted by IAS39 adoptedby theEuropeanUnion (the so-calledcarve out version). Notamment: • The Group documents these hedging relationships on the basis of a gross position of derivatives and hedged items; • The effectiveness of these hedging relationships is justified using schedules. Assessment Revaluations of derivatives at fair value are recorded as follows: • fair value hedges: the revaluation of the derivative and of the hedged item up to the hedged risk are recorded in thesamemanner in the incomestatement. Only the ineffective portion of the hedge, if any, is recorded for its net amount in income; • cash flow hedges: the revaluation of the derivative is recognised in the balance sheet in a specific gain and loss account recognised directly in equity recyclable to income for the effective portion, while the ineffective portion of the hedge is, where appropriate, recorded in income. Gains or losses on the derivative accumulated in equity are then recycled to income when the hedged flows are realised. When the conditions for hedge accounting are no longer met, the following accounting treatmentmust be applied prospectively: • fair value hedges: only the hedging instrument continues to be revalued through income. The hedged item is fully recognised in accordance with its classification. For debt instruments at fair value through other comprehensive income recyclable to income, changes in fair value after the termination of the hedging relationship are fully recorded in equity. For hedged itemsmeasured at amortised cost, which were hedged against interest rate risk, the revaluation difference is amortised over the remaining life of the hedged items; • cash flow hedges: the hedging instrument is valued at fair value through profit or loss. The amounts accumulated in equity in respect of the effective portion of the hedge remain in equity until the hedged item affects the profit/loss. For items that were hedged against interest rate risk, the impact onprofit/ loss is recorded as interest is paid. The revaluation difference is therefore amortised over the remaining life of these hedged items.