Page 193 - Bank-Muamalat-Annual-Report-2021

ANNUAL REPORT 2021 191
SUSTAINABILITY STATEMENT OUR 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.