Page 195 - Bank-Muamalat-AR2020

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Our Performance Sustainability Statement Governance Our Numbers Other Information

2. SIGNIFICANT ACCOuNTING POLICIES (CONT’D.)
2.3 Summary of significant accounting policies (cont’d.)

(d) Derivative instruments and hedge accounting
(i) Derivative instruments

The Group and the Bank use derivatives such as profit rate swap and forward foreign exchange contracts.
Derivative instruments are initially recognised at fair value, which is normally zero or negligible at inception
for non-option derivatives and equivalent to the market premium paid or received for purchased or written
options. The derivatives are subsequently re-measured at their fair value. Fair values are obtained from quoted
market prices in active markets, including recent market transactions and valuation techniques that include
discounted cash flow models and option pricing models, as appropriate.

All derivative financial instruments are measured at fair value and are carried as assets when the fair value is
positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in the fair
value of the derivatives are recognised in the statements of profit or loss unless these form part of a hedging
relationship.

(ii) hedge accounting
The Group and the Bank have elected an accounting policy choice under MFRS 9 to continue to apply the
hedge accounting requirements under MFRS 139 on the adoption of MFRS 9 on 1 April 2018.

The Group and the Bank use derivative instruments to manage exposures to profit rate and foreign currency
risks. In order to manage particular risks, the Group and the Bank apply hedge accounting for transactions
which meet specified criteria.

At the inception of the hedge relationship, the Group and the Bank formally document the relationship
between the hedged item and the hedging instrument, including the nature of the risk, the objective and
strategy for undertaking the hedge, and the method that will be used to assess the effectiveness of the hedging
relationship.
(1) Fair value hedge

Where a derivative financial instrument hedges the changes in fair value of a recognised asset or liability,
any gain or loss on the hedging instrument is recognised in the statements of profit or loss. The hedged
item is also stated at fair value in respect of the risk being hedged, with any gain or loss being recognised
in the statements of profit or loss.

If the hedging instrument expires or is sold, terminated or exercised or where the hedge no longer meets
the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at
amortised cost, the difference between the carrying value of the hedged item on termination and the face
value is amortised over the remaining term of the original hedge using the effective profit rate. If the
hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the
statements of profit or loss.