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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and fair value adjustments
arising on the acquisition of a
foreign entity are treated as assets
and liabilities of the foreign entity
and translated at the closing rate.
Derivative financial
instruments and hedging
Derivative financial instruments
including
foreign
exchange
contracts, equity options and equity
futures are initially recognised
in the consolidated statement of
financial position at fair value and
subsequently remeasured at their
fair value. Fair values are obtained
from quoted market prices in active
markets, discounted cash flow
models, and options pricing models
as appropriate. All derivatives are
carried as assets when fair value is
positive and as liabilities when fair
value is negative.
Changes in the fair value of
derivatives held for trading are
included in trading income.
On the date a derivative contract is
entered into, the Group designates
derivatives as either (a) a hedge of
fair value of a recognised asset or
liability (fair value hedge); or (b) a
hedge of highly probable future cash
flows attributable to a recognised
asset or liability, a forecast
transaction or a firm commitment
(cash flow hedge). At present the
Group does not hedge future cash
flows. Hedge accounting is used for
derivatives provided certain criteria
are met.
The Group’s criteria for a derivative
instrument to be accounted for as a
hedge include:
(a) Formal documentation of the
hedging instrument, hedged item,
hedging objective, strategy and
relationship is prepared before
hedge accounting is applied; (b)
the hedge is documented showing
that it is expected to be highly
effective in offsetting the risk in
the hedged item throughout the
reporting period; and (c) the hedge
is highly effective on an ongoing
basis.
Changes in the fair value of the
effective portions of derivatives that
are designated and qualify as fair
value hedges and that prove to be
highly effective in relation to hedged
risk, are recorded in the consolidated
statement of income, along with the
corresponding change in fair value
of the hedged asset or liability that is
attributable to that specific hedged
risk.
If the fair value hedge no longer
meets the criteria for hedge
accounting, an adjustment to the
carrying amount of a hedged
financial instrument is amortised in
the consolidated statement of
income over the period to maturity.
The adjustment to the carrying
amount of a hedged equity security
remains in retained earnings until
the disposal of the equity security.
Certain derivative transactions,
while providing effective economic
hedges under the Group’s risk
management policies, do not
qualify for hedge accounting under
the specific rules in IAS 39 and are
therefore treated as derivatives held
for trading with fair value gains and
losses reported in the consolidated
statement of income.
Income from investments
with Islamic institutions and
investments in financings
Income from investments with
Islamic institutions and investments
in financings, which are included in
the IAS 39 category “Loans and
Receivables”, are both contractually
determined and quantifiable at the
commencement of the transaction,
are accrued on the effective return
method basis over the period
of the transaction. Where income is
not contractually determined or
quantifiable, it is recognised when
reasonably certain of realisation or
when realised. Once a financial
asset or a group of similar financial
assets has been written down as a
result of an impairment loss,
income is thereafter recognised
using the rate of return used to
discount the future cash flows for
the purpose of measuring the
impairment loss.
Fee and commission income
Fees and commissions are generally
recognised as income when earned.
Origination fees for financings which
are probable of being drawn down,
are deferred and recognised
over the term of the financing as an
adjustment to the effective yield.
Structuring fees, commission and
fees arising from negotiating or
participating in the negotiation of an
Islamic transaction for a third party,
are recognised on completion of the
underlying transaction.
Asset management fees related to
investment funds are recognised
over the period the service is
provided and are recorded in fund
management and services income
when capable of being reliably
measured.
Management advisory and technical
service fees are recognised based
on applicable service contracts
usually on a time-apportioned basis
and are recorded in other income.
Distribution to Massaref
account holders
Massaref accounts are included in
the IAS 39 category of “Other
Financial Liabilities” which are
measured at amortised cost and the
resulting expense charged to the
consolidated statement of income
as a distribution to Massaref
account holders represents the
share of the Group’s income from all
sources which is due to customers
of the Group under contractual
arrangements in force.
Sale and repurchase
agreements
Securities sold subject to a linked
repurchase agreement (repos) are
recognised in the consolidated
statement of financial position and
are measured in accordance with
related accounting policies for
trading or investment securities. The
counterparty liability for amounts
received under these agreements is
included in customer investment
accounts. The difference between
the sale and repurchase value is
accrued over the period of the
contract and recorded as expense in
the consolidated statement of
income.
Securities purchased underagreement
to resell (reverse repos) are not
recognised in the consolidated
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Dar Al-Maal Al-Islami Trust
Annual Report 2011