79 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 the same manner in the income statement. 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 treatment shall be applied on a forward-looking basis, unless the hedged itemdisappears: • fair value hedges: only the hedging instrument continues to be revalued through income. The hedged item is fully recognised in accordancewith 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 items measured at amortised cost, whichwere 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 throughprofit or loss. Theamounts accumulated in equity in respect of the effective portion of the hedge remain in equity until the hedged itemaffects the profit/ loss. For interest ratehedged items, the IncomeStatement is affected gradually, in linewith the payment of interest. The revaluation difference is therefore amortised over the remaining life of these hedged items. Embedded derivatives An embedded derivative is a component of a hybrid contract that meets the definition of a derivative product. This definition applies only to financial liabilities and non-financial contracts. Embedded derivatives must be accounted for separately from the host contract if the following three conditions are met: • the hybrid contract is not measured at fair value through profit or loss; • when considered separately from the host contract, the embedded item has the characteristics of a derivative; • thecharacteristics of thederivative arenot closely related to those of the host contract. Determination of the fair value of financial instruments The fair value of financial instruments is determined by making maximum use of observable inputs. It is shown according to the hierarchy defined in IFRS 13. IFRS 13 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an ordinary transaction between market participants, on the main or most advantageous market at the valuation date. Fair value applies to each financial asset or financial liability individually. As an exception, it can be estimated by portfolio if the risk management and monitoring strategy permits and is appropriately documented. Thus, certain fair value parameters are calculated on a net basis when a group of financial assets and financial liabilities is managed on the basis of its net exposure to market or credit risks. The Group believes that the best indication of fair value is the use of quoted prices in an active market. In the absence of such quotedprices, fair value is determined using valuation techniques that maximise use of relevant observable data and minimise use of unobservable data. When a debt is valued at fair value through profit or loss (by nature or designated), fair value takes account of the issuer’s own credit risk. Counterparty risk on derivatives The Group includes counterparty risk in the fair value measurement of derivative financial assets (Credit Valuation Adjustment or CVA) and, under a symmetrical approach, nonperformance risk for the fair valuemeasurement of derivative liabilities (Debit Valuation Adjustment or DVA or own credit risk). The CVA is used to determine expected losses on the counterparty from the Group’s point of view; the DVA is used to determine expected losses from the Group from the counterparty ’s point of view. CVA/DVA is calculatedon thebasis of anestimateof expected losses based on the Probability of Default and Loss Given Default. The methodology employed maximises the use of input data. It is primarily based onmarket parameters such as registered, listed Credit Default Swaps (CDS) (or Single Name CDS) or index CDS in the absence of any registered CDS for the counterparty. Fair value hierarchy The standard classifies fair value according to three levels based on the observability of inputs used in valuation. • Level 1: fair values corresponding to (unadjusted) prices in active markets Level 1 consists of financial instruments that are directly listed on active markets for identical assets and liabilities that the entity can access at the valuation date. These are principally stocks and bonds listed on activemarkets (such as the Paris Stock Exchange, London Stock Exchange or New York Stock Exchange, etc.) and also investment fund units listed on an active market and derivatives traded on an organised market, in particular futures. A market is deemed active if quoted prices are readily and regularly available froman exchange, broker, dealer, pricing service or regulatory agency, and those prices represent
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